Maximizing Insurance Coverage Due To Supply Chain Disruptions

Previously published in New York Law Journal

Business interruption losses caused by supply chain disruptions are rising as manufacturers increasingly rely on factories around the globe to supply necessary components for their products. Two significant examples of supply chain disruptions in 2011 that caused widespread losses for manufacturers were the earthquake/tsunami in Japan and the massive flooding in Thailand. Factories that manufacture critical components for the automobile and technology industries were unable to provide their customers with necessary components. With supply disrupted, manufacturers were forced to stop or limit their operations.

Contingent Business Interruption (CBI) insurance coverage may be available to pay for a company's losses due to such supply chain disruptions. However, CBI coverage is complicated and requires a thorough understanding of the policy and related issues, such as applicable deductibles, the scope of the business interruption, the calculation of loss, and potential applicability of exclusions. This article provides an overview of what you need to know in order to maximize recovery from a property insurance program after business is interrupted due to a supply chain disruption.

Many companies use just-in-time supply systems, significantly increasing the importance of CBI coverage when supply chains are disrupted. While such systems benefit the company when operating at full capacity, any disruption may result in an enormous loss when a company cannot acquire materials it needs to meet its production capacity. A significant downturn in supply almost always results in increased costs to acquire the materials needed to continue operating and can even result in partial or complete shutdown of facilities lacking the resources to operate.

Companies suffering supply chain losses often do not realize that they may be protected by their insurance program, even if the company itself has not suffered any damage to its own property. Counsel familiar with the nuances of this insurance coverage can provide valuable advice to a company seeking to maximize its recovery for loss from a disruption in its supply or distribution chain. Experienced counsel can give the company the best chance to prove its loss during the claim adjustment process, or, potentially, during litigation if the company's claim is rejected by its insurance company.

Types of Coverage

Most companies purchase first-party property insurance policies that protect against loss from fire or other destruction of their own property. These policies often include business interruption coverage, which insures against loss when the insured's "business is partially or totally interrupted as a result of a covered property damage."1 Such coverage generally requires that the loss...