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Contingent and Business Interruption Coverage
Published  03/8/2012 | Commercial Lines

If Your Business Is Dependent On Suppliers, Contingent Business Interruption Insurance May Have You Covered

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          Disaster Preparation and Recovery

Although U.S.-based businesses may not be physically affected by natural disasters in other parts of the world, they may be financially affected if they are subject to losses due to interdependencies with oversea suppliers.
 
Damage to Japanese manufacturing facilities, roads, railroads and ports resulted in unfulfilled supplies of products and component parts following the Fukushima quake in March 2011. As a result, American companies scrambled to find alternate suppliers, some of whom charged higher prices.
 
Business owners who depend heavily on suppliers should have Contingent Business Interruption (CBI) insurance and Contingent Extra Expense coverage. CBI often covers losses that occur far away from the physical location of the business owner’s properties. CBI and contingent extra expense coverage reimburse lost profits and extra expenses resulting from an interruption of business at the premises of a customer or supplier. Business owners can get protection against a set list of suppliers or purchase blanket coverage protecting any supplier’s shutdown. Some companies do not offer blanket worldwide unnamed cover so insureds should check with their insurer.
 
CBI insurance, also known as Contingent Business Income insurance or Dependent Properties insurance, is usually triggered by physical damage to a customer’s or supplier’s property or to property on which the insured company depends to attract customers. Contingent Business Interruption excludes flood and earthquake. Those coverages must be added and typically carry a sublimit and specific deductibles.
 
What If a Disaster Happened In the U.S.?
While Contingent Business Interruption insurance is important for a business that depends on suppliers, businesses also need to remember the need for Business Interruption insurance. A business that has to close down completely while its premises are being repaired may lose out to competitors. A quick resumption of business after a disaster is essential.
 
Business Interruption insurance compensates you for lost income if your company has to vacate the premises due to disaster-related damage that is covered under your property insurance policy. Business Interruption insurance covers the profits you would have earned, based on your financial records, had the disaster not occurred. The policy also covers operating expenses, like electricity, that continue even though business activities have come to a temporary halt.
 
Make sure the policy limits are sufficient to cover your company for more than a few days. After a major disaster, it can take more time than many people anticipate to get the business back on track. There is generally a 48-hour waiting period before Business Interruption coverage kicks in.
 
Extra Expense insurance is also important as it reimburses your company for a reasonable sum of money that it spends, over and above normal operating expenses, to avoid having to shut down during the restoration period. Usually extra expenses will be paid if they help to decrease business interruption costs. In some instances, extra expense insurance alone may provide sufficient coverage, without the purchase of Business Interruption insurance.
 
Earthquakes and floods are not covered under a standard businessowners policy (BOP). These coverages must be purchased separately in order for both Business Interruption and Contingent Business Interruption insurance to apply.

Courtesy of the Insurance Information Institute