Authors: Larissa J. Gallagher Michael Burg
Contingent Business Interruption (CBI) is an often overlooked but critically important property insurance coverage. In most cases, the coverage is an extension to the business income coverage part of a property insurance policy. In short, CBI provides important protection against loss of net income, continuing expenses and extra expenses resulting from a shutdown of a key supplier a customer.
CBI coverage terms and conditions vary significantly between insurers, and the coverage is subject to significant nuances. Critical analysis by an insurance broker with knowledge of the insured's supply chain and operations is critical to developing and negotiating the necessary coverage.
Note that Contingent Business Interruption is commonly referred to as Contingent Time Element or Dependent Property. The terminology may differ by insurer, but the intent is generally consistent.
Exposure and environment
It's no secret that supply chains have become increasingly complex in the past 25 years. As supply chains become more complex, they are subject to more disruptions that result in significant financial impact. Consider the following drivers of supply chain complexity:
- Increased reliance on international suppliers
- Tighter supply chain tolerances
- Increased frequency and severity of natural disasters, including but not limited to floods, hurricanes, wildfire and tornadoes
- Rise in geopolitical uncertainty
While supply chain complexity and the frequency and severity of disruptions have been building for some time based upon the above points, the COVID-19 pandemic has profoundly impacted global supply chains. Key drivers of the current supply chain challenges include:
- Sharp increases in demand
- Government intervention — mandated closures and lockdowns
- Continued labor force shortages
The ongoing war in Ukraine has only further challenged already strained supply chains.
As the supply chain becomes increasingly vulnerable and prone to disruption, contingent business interruption becomes more important than ever.
Coverage terms and conditions vary greatly between ISO standard forms, proprietary insurer forms and manuscript broker or insured forms.
However, in general terms, CBI coverage responds when direct physical loss of damage to a dependent property (supplier or customer) caused by a covered cause of loss on the insured's policy results in suspension of or reduced operations at the insured's covered location.
Example of a CBI covered event
- The insured is a manufacturer of knit goods.
- Synthetic wool is a key raw
- A supplier of synthetic wool based in Kentucky suffers a fire, which shuts down their operation.
- The insured suffers a suspension of operations because they cannot obtain materials from their supplier and sustains loss of net income as a result.
- Fire is a covered peril in the insured's property policy, and Kentucky is within the coverage territory.
Example of a not-covered event
- The insured is a manufacturer of knit
- Synthetic wool is a key raw
- A supplier of synthetic wool based in Kentucky is faced with a labor force strike shutting down their operations.
- The insured suffers a suspension of operations and loss of net income as a result.
When the conditions are satisfied, the policy pays for loss of net income, necessary continuing expenses and extra expenses incurred during the period of restoration. The period of restoration is generally defined as the reasonable amount of time necessary for the dependent property — i.e., the supplier or customer — to return to normal operations.
The devil is in the details. Too often inadequate time and energy are spent reviewing and understanding the contingent business interruption coverage provided within a property insurance policy. The coverage is often subject to limitations and exclusions that may result in an unexpectedly uncovered claim.
A few key items — many of which are negotiable with insurers — to look for as you evaluate contingent business interruption cover include:
Named vs. unnamed dependent properties. CBI coverage may specifically identify dependent properties subject to coverage. More commonly, however, the cover is provided on an unnamed or blanketed basis applying to all qualifying dependent properties. In certain cases, a hybrid approach is used by providing a lower sublimit to unnamed dependent properties and a higher limit to specifically scheduled dependent properties.
Sub-limited coverage. CBI coverage is generally sub-limited to amounts well below the broader business interruption or time element coverage. The sub-limits are often quite low and not commensurate with the loss exposure. If the insurer will not agree to provide the appropriate limits on an unnamed (blanket) basis, consider scheduling key-dependent properties with higher specific limits.
Coverage territory. CBI coverage generally follows the coverage territory identified in the broader property insurance policy. If the policy coverage territory is the United States, insureds will not have coverage for contingent business interruption losses arising out of dependent properties internationally. This limitation is concerning, given the global nature of the supply chain.
Certain insurers with a U.S. only coverage territory have a broadened territory clause to extend CBI coverage on a worldwide basis.
Direct vs. indirect dependent properties. CBI coverage is often limited to direct dependent properties — direct suppliers and customers. In reality, a contingent business interruption loss could be realized when an indirect — or second-tier — supplier or customer is impacted by a shutdown.
If your policy is limited to direct dependent properties, and you have key tier two or beyond suppliers or customers, request that your insurer schedule coverage for those key indirect dependent properties.
Excluded perils. CBI coverage is predicated upon the loss being caused by a peril insured against in the insured's property policy. If the insured's policy excludes flood, earthquake or high-hazard windstorm (as examples), contingent business interruption coverage would not be available for losses caused by these excluded perils.
A manufacturer with a single plant in Wisconsin may not see exposure to earthquake loss, but their supplier in California certainly does.
Furthermore, we do see certain insurers excluding defined perils within the CBI coverage even when the coverage exists elsewhere in the policy. Pay attention to these exclusions and the extent of the coverage grant.
Mitigating supply chain risk
This coverage provides a great opportunity for risk transfer. There are, however, key actions manufacturers should take to mitigate supply chain and contingent business interruption risk. These strategies include, but are not limited to, the following:
- Evaluate the strengths and weaknesses of the supply chain — focus on the vulnerabilities.
- Identify and address limited source suppliers — find alternative suppliers where feasible.
- Calculate the contingent business income and extra expense related to key suppliers and customers.
- Consider geographical aggregation of suppliers and customer — eg., multiple suppliers exposed to a single windstorm event.
- Develop business continuity plans that contemplate supply chain disruption.
- Conduct tabletop exercises to prepare for action if a key supplier or customer is down for an extended period.
Managing a contingent business interruption claim
Too often insureds and brokers lack awareness of CBI coverage. This lack leads to bonafide claims not being filed with the insurance carrier and money being left on the table. Key considerations in the event of a CBI event include:
- Engage your insurance broker as soon as possible.
- Work with your insurance broker to understand the coverage, including any limitations and exclusions.
- Begin calculating and documenting the loss as soon as possible.
- Determine whether coverage is provided for professional fees to engage the support of a forensic accountant.
- Lean upon your broker to advocate for the most favorable claim outcome.
CBI coverage is a key component of the property insurance policy for manufacturers. This has never been more the case given the ongoing supply chain issues impacting manufacturers and the global economy more broadly.
Too often CBI insurance is treated as a "throw-in coverage" and not provided the appropriate attention. The details matter and can be the difference between a covered claim and an uninsured loss.