In our previous blog post, we discussed the role that supply chain disruption has played in the ongoing coronavirus pandemic. In this post, we’d like to focus specifically on the insurance solutions that can supplement the risk management approaches we previously discussed.
As we mentioned in a previous post, different kinds of insurance policies cover different kinds of claims arising from pandemic, yet none of the standard policies cover them particularly well in most situations. Business Interruption Coverage, typically included in Property Insurance, would seem to be the most directly pertinent to supply chains, but in reality can only be triggered by direct physical damage to a covered property. Furthermore, the damage must be from a covered cause – in other words, if your business is disrupted by a flood, and flood is not covered, then the policy will not cover any losses from Business Interruption regardless.
A Contingent Business Interruption Endorsement does cover losses resulting from damage or destruction to non-owned property. However, certain kinds of losses, including those relating directly to pandemic, tend to be excluded. In addition, this kind of coverage is not specifically tailored for supply chains, and covers claims relating only to those that directly meet the following descriptions:
- Suppliers of parts, materials, or services necessary for production or provision of services
- Buyers of provided goods or services
- Providers that manufacture products for delivery under a contract of sale
- Drivers of business to the area
Ultimately, the only kind of insurance coverage that could broadly cover losses relating to supply chain disruption is insurance specifically tailored to provide this coverage. Like Business Interruption Coverage, Supply Chain Disruption Coverage is available from several worldwide insurance companies as an endorsement on their Property Insurance Policies (and is also sometimes included in more uncommon Trade Disruption Insurance Policies). While certain exclusions may still apply, Supply Chain coverage usually covers losses resulting from disruptions several steps down the supply chain, rather than just from immediate suppliers and providers.
The analysis of your supply chain that is needed for underwriting this kind of coverage can be extensive and expensive. However, as we suggested in the previous post, this analysis can expose vulnerabilities and help to fix weaknesses before they generate a claim. As such, the cost of analyzing your supply chain is justified, regardless of whether Supply Chain insurance is a realistic option for your business.
Supply Chain coverage was less common before the coronavirus pandemic, and while demand for it will no doubt increase, pricing and underwriting for such broad and unpredictable risk is difficult. It remains to be seen whether it will be readily and affordably available in the years to come.
