Policyholder strategy in the event of a loss in the event of a disruption in the supply chain

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As governments lift lockdown restrictions on COVID-19 and economies begin to reopen, consumer demand for the products has skyrocketed. Amid soaring demand, companies are struggling to meet consumer needs due to continued disruption in the global supply chain. The disruption stems from many factors, including the lingering effects of COVID-19 mitigation strategies that have reduced the production of goods, as well as a shortage of warehouse workers and truck drivers. Insurance is a key component of supply chain risk management. Policyholders who depend on a supply chain can use insurance to protect against supply chain risks. Here, we explore supply chain risks and how insurance can mitigate those risks.

Supply chain risks

The main causes of supply chain disruptions are natural disasters, transportation failures, geopolitical instability, price hikes and cyber attacks. However, as the COVID-19 pandemic has shown, managing supply chain risks requires policyholders to be aware that there are many other, sometimes unpredictable, risks that can lead to massive business losses and additional expenses. . Supply reductions often result in increased costs for businesses to purchase the inputs needed to keep operating. They can also lead to the partial or total closure of businesses that lack the resources or assets to operate. Fortunately, different lines of insurance can cover supply chain related claims.

Contingent business interruption coverage

If a supply chain loss occurs, policyholders should review their commercial property policies as a source of coverage. In particular, policyholders should view their Potential Business Interruption (“RCC”) coverage as an important line of defense.

CBI generally protects lost profits caused by a covered business interruption at a supplier’s business site caused by damage to its property. CBI coverage may also apply to losses caused by damage to “dependent property”, which may include transactions that the policyholder relies on to operate their business, such as a distribution center. For example, the CBI may apply if an insured suffers a loss because a hurricane damages a supplier’s plant and the supplier cannot deliver their goods or if a fire destroys the company’s distribution center. insured and prevents the insured from selling its products.

Policyholders should be aware, however, that different policy forms offer different amounts and scope of CBI coverage. It is important, as always, for policyholders to review the wording of the policy when purchasing CBI coverage. For example, policies differ on the levels of providers triggering coverage; some policies only cover damages suffered by direct suppliers, while others include indirect suppliers. There may also be different sub-limits for different types and levels of providers. In addition, policyholders should consider potentially applicable exclusions, including (as the Covid-19 pandemic has shown) those related to losses that insurers can claim due to a “virus” and those related to losses that insurers can claim due to alleged “extreme temperatures”. “, as was experienced following the deep freeze in Texas in February 2021.

Coverage of additional expenses

In addition to CBI coverage for business losses, many property insurance policies cover “additional costs” that a policyholder incurs for a covered event. Additional cost coverage may also apply where the policyholder incurs additional costs due to damage to a supplier’s property. Additional expenses may include, for example, additional costs to receive goods for sale or replacement goods, as well as increased costs of transportation, labor and logistics. As with any other claim, when incurring additional expenses due to a supply chain event, policyholders should keep accurate and up-to-date records of the additional expenses incurred to justify a potential claim.

Supply chain coverage

The growing risks posed by today’s global supply chain have also led to a specialized type of insurance: “supply chain insurance”. While there is no “standard” form for “supply chain insurance”, this insurance is available in the form of “all risks” type coverage. In addition to covering disruption caused by material damage to a supplier or dependent property, supply chain insurance can be customized to cover losses caused by a wide range of events, including related disruptions. in government (regulatory action), social unrest (riots), pandemic – associated losses (virus), labor issues (strikes), production process issues (supplier assembly line malfunction ) and financial problems (solvency of the supplier).

Take away food

As the holiday season approaches, supply chain industry players have warned that current supply chain problems are expected to continue as consumer demand increases. Transportation Secretary Pete Buttigieg has acknowledged that despite the administration’s efforts to address supply chain bottlenecks, it will take time to get supply chains back to normal. And this is in addition to the usual supply chain risks posed by natural (hurricane) and man-made (geopolitical incidents) events. Given these risks, policyholders should understand how to manage the unique risks associated with supply chain claims and have a plan to maximize their coverage options in the event of a loss.

Related HAK presentation: Can’t find microchips? Insurance can help relieve pain

Copyright © 2021, Hunton Andrews Kurth LLP. All rights reserved.Revue nationale de droit, volume XI, number 294


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