January 10, 2018
Contingent Business Interruption: Protecting Your Manufacturing Facility
This year, the United States witnessed firsthand the destruction severe weather events can have on homes, businesses and local economies. The National Oceanic and Atmospheric Administration reported that 15 extreme weather events in 2017 – including flooding, freezing, cyclones and wildfires – caused losses exceeding $15 billion. This number doesn’t even include the devastating damages from Hurricanes Harvey, Irma and Maria. Clearly, 2017 is already shaping up to be one of the costliest years on record when it comes to losses from weather-related events.
For manufacturing companies, the risks associated with catastrophic events go far beyond the damage caused to a facility. For instance, many manufacturers rely on parts and raw materials from external suppliers. If a supplier’s factory is temporarily shut down or if a key shipping channel is closed as a result of damage caused by a catastrophic event, this could prevent a facility from receiving components needed to effectively produce a product on time.
Unfortunately, the smallest interruption in the supply chain can incapacitate a facility’s operations for a significant period of time – and even put the company out of business. To help mitigate this risk, many manufacturing facilities purchase Contingent Business Interruption (CBI) insurance. CBI insurance is designed to cover the loss of income resulting from property damage at supplier or receiver locations, rather than damage directly to your facility.
When considering CBI insurance, understanding the specific risks that could disturb your operation is essential. According to a recent study, 42 percent of businesses have only limited visibility into their supply chain. To properly reduce risk, it’s important to holistically evaluate all domestic and international suppliers across all tiers from the bottom-up, understanding where potential shortfalls could occur if there is a suspension in activities.
Natural disasters cannot be prevented and often strike without warning. Therefore, preparedness is key to preventing business interruption losses. Once you have evaluated how different supplies contribute to your business, creating a contingency plan will help ensure your facility can maintain operations should there be a disruption in your supply chain. This includes having backup providers on hand and maintaining ample product reserves. While some raw materials can easily be obtained from multiple sources, this isn’t always the case.
No two insurance policies are created equal and contingent business interruption is no exception, so it’s imperative to work closely with your insurance broker to guarantee policy language broadens coverage for your operational risks. Even minor downtime in your supplier network can affect daily revenue. Your insurance broker can help to map out the complex supply network to accurately estimate maximum financial impact – which is critical to guarantee proper coverage limits are in place, preparing you for a worst case scenario.