In today’s interconnected world, many businesses rely on complex supply chains. If one of your key suppliers or customers suffers a loss that disrupts their operations, the ripple effect could significantly harm your business. To guard against such a scenario, some businesses purchase contingent business interruption (CBI) insurance coverage. But while CBI insurance can help mitigate supply chain risks, it’s important to understand this product’s coverages and limitations.
What Is CBI Insurance?
CBI insurance is typically purchased as an extension to business interruption insurance, a popular add-on to a commercial property or business owner’s policy (BOP). Business interruption insurance covers lost income and extra expenses that result from the interruption of your operations due to physical damage or loss of your insured property caused by a covered peril, such as fire, wind, theft or hail. CBI insurance extends that protection to include losses you incur due to covered physical damage or loss to the property of an outside company that you depend on.
CBI insurance can pay for lost revenue during the interruption, fixed expenses like payroll, rent, mortgage and utility payments, and extra costs you incur due to the interruption.
Who Needs CBI Insurance?
CBI insurance may be strongly advised for a company that depends on a single or very few manufacturers or suppliers for most of its materials or merchandise. Say, for instance, you sell office furniture and most of your products come from one supplier. If that supplier’s property were to be severely damaged by a fire, your inventory and revenue could drop significantly. Similarly, if you depend heavily on one or only a few customers to purchase your products, your income could take a significant hit if a major customer suffered a devastating loss and could no longer buy your products. CBI coverage may also help protect a business that depends heavily on a neighboring business, known as a “leader property,” to attract customers. For instance, small stores in a strip shopping center may rely on an anchor supermarket for foot traffic.
You need to understand how much other businesses affect your operations to determine appropriate CBI coverage and limits.
What Triggers CBI Coverage?
While every policy is different, CBI coverage is typically triggered by physical damage to the property of a supplier, customer or leader property that causes an interruption to your business. For coverage to exist, the physical loss must be caused by a peril that is covered under the BOP or commercial property policy. While some CBI policies will provide coverage only for events that impact specifically named supply chain partners, others will provide blanket protection for all suppliers and customers on which the insured depends.
A total shutdown at the customer or supplier property is not necessary to trigger coverage. All that is required is that an insured loss occurs at a location covered under the policy and causes your business to lose money.
CBI Insurance Limitations
Like all types of insurance, CBI insurance has exclusions and limitations. When a policy only covers claims involving named suppliers and customers, a claim will be denied if the third party in question is not on the list. Further, the policy may specify geographic limits for covered suppliers and customers. In addition, there is typically a waiting period of 48 or 72 hours before CBI coverage kicks in.
CBI coverage will only be triggered if the lost income resulted from direct physical damage or loss to third-party property caused by covered perils, which typically exclude floods, earthquakes and certain other perils. Coverage is not triggered by events that do not involve physical damage, such as a bankruptcy or labor strike at your vendor or problems with your vendor’s supplier.
To successfully submit a claim, you must be able to demonstrate a clear link between the covered third-party damage and your lost income. CBI claims are generally complex and are often disputed by insurance companies.
If your business insurance company has denied or is challenging your claim, contact Schwartz, Conroy and Hack, PC for assistance. We have the expertise and tenacity to make insurance companies keep the promises they make to you and your business.
