If your property insurance policy includes supply chain coverage, what does that really mean? Policy language isn’t standardized across all insurers. The depth and breadth of coverage within each policy varies. Insurers even disagree on what to call it; in addition to supply chain, they use terms such as dependent property, contingent time element and contingent damage.
How do you know whether you have the right coverage? It’s time to demystify supply chain insurance.
RESTRICTIONS, BREADTH AND EXTENSIONS
First, it is important to understand what this type of coverage is meant to do. Supply chain coverage is meant to protect you from loss if something happens on someone else’s property that negatively affects your business.
For example, if you manufacture widgets, you may depend on a supplier for parts to make those widgets. If your supplier has a fire and cannot deliver the parts you need, you lose business. If your property insurance includes supply chain coverage, your losses will be covered. Maybe.
Policies often include restrictions. Geographical territory is a common, important type of restriction to consider. If your policy’s stated territory is limited to the U.S. only, for example, but your supplier’s fire-damaged plant is located in South America, your losses won’t be covered. Catastrophic peril restrictions (e.g., losses due to flood, earthquake, etc.) are also common.
In addition to understanding your policy’s restrictions, it is important to understand the breadth of your coverage—that is, where your coverage ends. In the manufacturing example, you may have Tier 1 level (direct) suppliers, Tier 2 level (indirect) suppliers, and so on. The question is, are your losses covered if your supplier’s supplier has a fire and cannot ship the parts your direct supplier needs to fill your order? At the other end of your supply chain, what happens if your customer’s customer is shut down and your direct customer cancels an order, leaving you with inventory you cannot sell?
Most policies provide coverage for direct losses. Some provide protection from indirect losses. Few offer true end-to-end supply chain coverage.
Even if your policy specifies end-to-end supply chain coverage and excludes any relevant restrictions, your policy still may have gaps. For example, if you have a contractual agreement to deliver 100 widgets every Monday to your customer, but the fire at your supplier prevents you from meeting your obligation, your policy will not pay the penalties you owe for missing your delivery dates.
For protection, your policy would need to include a contractual penalty extension within the supply chain coverage. Other common types of extensions include civil and military authority (if you are ordered to close or denied access) and ingress/egress (if damage to someone else’s property prevents entrance or exit from your business).
This information isn’t all-encompassing, nor does it constitute legal advice. It does, however, illustrate some of the considerations in designing a property policy that offers true supply chain protection:
- Watch for restrictions. Consider not only the geographical territory in which you operate, but also the territories in which your suppliers and customers operate. “Global” coverage is the most comprehensive territory coverage. Also consider the impact other types of restrictions, such as catastrophic perils, which could have an impact on your reimbursement for losses.
- Understand your breadth of coverage. Make sure you understand at what points in your supply chain your coverage begins and ends. Is the policy a true, end-to-end supply chain policy, or does it end with direct suppliers and customers only?
- Close gaps with extensions. Look for coverage gaps, such a contractual penalties, and put extensions into place to protect yourself as needed.
Keep in mind that if the protection you need can’t be secured as part of the supply chain coverage in your property policy, options such as standalone supply chain policies exist.
If you would like help reviewing your property insurance coverages or assessing your supply chain risks, please contact your Hylant client executive or Ryan King of Hylant’s Property Practice at 248-822-2230.