The tragic human and economic impacts of the Baltimore bridge collapse will unfortunately continue to unfold in the weeks ahead.  These impacts will reach well beyond Baltimore.  However, Companies should use this catastrophe as an important reminder of the need to evaluate their total cost of risk, and the plan to manage this cost through avoidance, planning/mitigation, insurance, and/ or risk transference.   The Graham Company uses its proprietary P2RIME® process to advise clients on such issues, and this bridge catastrophe highlights some key issues that should be considered when engaged in such an analysis.

First, the cost of risk here goes well beyond the injury, damage and death caused by this disaster. For example, port workers will remain without work while the port remains inoperative.   When companies are in a shut down for any reason, employees may go without paychecks.  They may be forced to find new jobs. Therefore, the total cost of risk can include the decreased productivity and profit created by the loss of labor when operations resume, as well as the costs related to hiring and training new workers.  A proper evaluation of business interruption coverage limits can be a critical strategy to mitigating this total cost of risk.  Companies should regularly evaluate their cash ‘burn rate’ for meeting continuing expenses during a shut down, including the costs of “ordinary payroll”, to ensure their coverage limits match their cash needs during a period of shutdown.     

Second, the total cost of risk also includes the impacts created by the idle ship cargo that now will not reach the intended destinations on time, if at all.  These supply chain impacts will be felt well beyond Baltimore.  This is one reason why The Graham Company often highlights for clients, as one of its “additional coverage considerations”, what is called “Trade Disruption Insurance” or ‘supply chain’ coverage.  

This coverage protects the insured against a disruption to its supply chain, even where there is no physical loss or damage to the supply assets themselves.  The disruption triggering coverage may be caused by political events (including embargo or terrorism) or physical events (such as the closure of a navigable waterway or port).   Trade Disruption Insurance covers the resulting financial impacts, such as the loss of business income or the extra expenses incurred to mitigate the supply chain disruption.  The idea that this coverage addresses issues that are too infrequent or too remote is false.  Covid-19, the Red Sea crisis, and even the slowed traffic access through the Panama Canal due to climate change related water levels provide at least three other major supply chain impacts in our recent history.  These supply chain impacts expand the cost of risk.        

The delay in the delivery of raw materials, semi-finished goods or finished merchandise can trigger contractual breaches, the need to cover missing goods with more expensive items, and/or delay costs to a client that will then be borne by your company.  Trade Disruption Insurance can be a solution for mitigating the added costs related to supply chain disruptions, along with the income lost when customer contracts are not fulfilled on time.  This coverage can be critical if your operations involve the sale of seasonal goods or products, or where ‘time is of the essence’ for contractual delivery, performance, and/or the use of these goods.  Each policy is customized to the insured’s needs, and requires detailed underwriting information about the insured’s supply chain.         

In closing, a company’s total cost of risk is a mission critical analysis that should be regularly performed to understand both insurable and non-insurable risks, and the path to mitigating them.  Catastrophes like the bridge collapse should be an important reminder about need for this analysis. Please do not hesitate to contact us at www.grahamco.com if you have questions or need assistance with evaluating your total cost of risk solutions.