Contingent Business Interruption Insurance: Expect the Unexpected
If your company depends on a key supplier for critical components, you may need additional protection to what standard, small business insurance provides. Contingent business interruption (CBI) coverage is obtained as an extension to existing property policies to provide income that mitigates the cost of an insured loss to a key supplier or customer.
Contingent business interruption insurance is similar to traditional business interruption insurance, but with one key difference business interruption insurance pays for lost earnings after an insured event that temporarily disrupts your business, like a fire, windstorm or other insured loss.
CBI coverage offers similar protection for losses faced by your business after an incident that causes a critical supplier or customer to shut down even for a few days. This could mean a key component supplier that can’t provide products after a factory fire, for instance, or a major customer that’s temporarily unable to accept shipments after an insured loss.
CBI also addresses ongoing expenses that continue during a loss, such as salaries or taxes. Some CBI policies have defined waiting periods, five days of business interruption, for example, during which the supplier is unable to provide components you require. Only after that five day waiting period can a claim can be filed under that CBI policy.
Companies considering CBI coverage should calculate how they’d meet production and financial needs during the period between the loss and when coverage kicks in. If a second supplier is available, CBI may not be needed, lowering overall business insurance costs. If you have a Plan B, CBI may not be needed.
CBI coverage isn’t right for every company, and many small businesses safely rely on standard business owner policies (BOPs) instead. But for companies with specialized needs, a CBI policy provides greater financial security than a BOP offers.
CBI coverage is making in-roads into the small business market as companies of all sizes increasingly depend on global supply chains and leaner component inventories. Consolidation in many industries is also reducing the number of potential suppliers and increasing the risk of contingent business interruption.
How would your company survive in the event a supplier or client was taken out of the picture due to a weather disaster? If you don’t know, you know you need CBI to protect company assets, employees and production levels.
Understand Your Business
The decision to purchase CBI coverage depends, in part, on a thorough understanding of your business’ operations. The coverage is a “must-have” in numerous, common business relationships:
- Your company relies on one or two key suppliers for components that can’t be sourced from alternative vendors. A tire wholesaler, for example, is easier to replace than a microchip manufacturer simply because there are more of them.
- Your company depends on sales made by a key vendor of a finished product that you manufacture and sell.
- You rely on one or a few customers to purchase the majority of your production.
- Your company depends on a neighboring business (known as a leader property) to generate most of your foot traffic.
CBI insurance is designed to protect against physical damage, but doesn’t cover events such as power outages, damages caused by heating or cooling equipment, or losses in which your company owns the production facility that experiences the initial loss. Those losses are covered by a standard BI or property policy.
Keep Careful Records
Unlike a property claim in which calculating the damage is relatively straightforward, a CBI claim can be complicated because the insurance company calculates what your company would have earned if the loss hadn’t occurred. This requires considerably more documentation and analysis than a typical property claim.
It’s important to make sure you company’s records and books are up-to-date and accurate to demonstrate how a key component, product, supplier or re-seller contributes to company earnings. Financial records, contracts and other documents are needed to establish how your company depends on the supplier or customer who’s experienced the loss, and how the interruption has affected your company’s cash flow.
You can’t prepare for everything but you can prepare for the unexpected or unavoidable accident that shuts down a key member of your production chain.
CBI may not keep your company’s doors open but it does keep the company viable when the unthinkable happens to a key supplier or seller of your products.
Be prepared for the unexpected and keep your company afloat with CBI, even when your supply chain is under water.
You never know what tomorrow will bring, but you can be ready for it.