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Business interruption insurance policies have changed little over the past several years, but the risks associated with the coverage in the United States and the requirements for obtaining capacity have altered substantially, experts say.
Nowhere is this more apparent than with contingent business interruption coverage, which has taken on much greater importance for many businesses as an increasing number of organizations have stepped up their reliance on outside suppliers to manufacture and ship goods and provide services, they say.
Underwriters are seeking to restrict contingent business interruption coverage as more policyholders' revenues and incomes are exposed to the risk of suppliers or customers shutting down as a result of a covered peril, experts say.
And in order to get a better handle on that exposure, underwriters are demanding more and better information from buyers. Buyers that have a solid understanding of their supply chain risks are in a better position to obtain the contingent business interruption coverage that they need, experts say.
"This whole thought of supply chain management is becoming more and more on top of risk managers' lists of concerns," said Gary Love, vp-operations underwriting manager for Factory Mutual Insurance Co. of Johnston, R.I., which does business as FM Global. "We've seen that happen as well because it really does lead to a different exposure where facilities are not under the direct control of the client...yet they are relying on (the facilities) for income streams."
As a result of the increasingly risky supply chain business environment, underwriters are seeking a better quantification of a buyer's exposure and, in some cases, are restricting coverage, experts say.
For years when underwriting business interruption coverage, insurers looked at what loss a policyholder would suffer if it went down and threw in contingent business interruption coverage without paying much attention to that exposure, said Ed Joyce, a policyholder attorney with Heller Ehrman L.L.P. in New York.
"It's hard to get a handle on what you're going to suffer when somebody else is down, and the way to tighten that up is to restrict the language and make X amount of dollars only available for that type of claim," Mr. Joyce said.
Unfortunately, for businesses that may have greater exposure to one of their suppliers halting production than if their own operations go down, today's contingent business interruption sublimits are "much smaller" than the overall business interruption limits, he said.
Indeed, other experts agree that sublimits are often imposed today on contingent business interruption risks, but as Mr. Love of FM Global noted for risks "with detailed risk information on specific supplier or customer locations, the sublimits may be removed."
"Underwriters will always do a deeper dive and ask more poignant questions after they have been burned in a claim; it is the underwriters' cycle of life," said Lance J. Ewing, vp-risk management for Harrah's Entertainment Inc. in Memphis, Tenn.
As a result of hurricanes Katrina and Rita, underwriters "want to ensure that they fully understand the risks of both the policyholder and the customers and suppliers that feed the policyholder products and services," he said.
In addition to restricting limits, several underwriters are seeking to restrict coverage for a businesses' entire supply chain risk, experts say.
"We used to be able to get the coverage for any customer pretty much multiple streams down. What we're seeing now is more restrictions in the wording relating to direct suppliers and direct customers," said Jill Dalton, managing director for Marsh Inc.'s property practice in New York.
But, Suzanne Douglass, New York-based managing director for property for Willis North America, said, "If you identify who you really are exposed to, there is willingness on the part of the underwriters to look at (indirect suppliers and customers) and underwrite them individually and give you higher limits."
"Underwriters simply want to know what's at risk," Ms. Douglass said. "They just get exposed over and over again without understanding what that exposure is, especially after the 2005 hurricanes when you looked and saw many clients nowhere physically near the Gulf Coast, but later put in contingent business interruption claims because they had suppliers in the Gulf Coast."
Experts agree that information is key to obtaining contingent business interruption coverage.
"You need to know your business. It's a simple thing to say, but there are some customers that have overseas supply chains that do not know their exposures," said Al Tobin, New York-based managing director and head of the national property practice at Aon Corp.
"If a majority of your profits could be impacted by a loss of a single supplier, that's not good," he said. "Clients are having to answer more and more difficult questions regarding contingent business interruption if they want to get the limits they think are appropriate."
How bad could it be?
"What the buyers have to do now is determine for themselves what the worst case scenario is for their key locations," said John Dempsey, a partner with loss accounting firm Dempsey, Myers & Co. L.L.P. of Wilton, Conn.
"When you think about say a pharmaceutical company that may produce a bioengineered product in the Far East, then ships it to three other locations for finishing, and then ships it to five other locations for packaging, and then ships it to 12 distribution centers--that supply chain has significant risks built into it," Mr. Dempsey said. If the initial location has a loss, the entire system is going to be idle. However, if one of the stops along the way has a loss, the exposure may be less significant because the drug maker has backup contingency plans in place.
"Without explaining that to underwriters, the story won't be told," he said.
Indeed, FM Global's Mr. Love said it has become "more and more critical" for clients to know how their partners operate their facilities and what types of contingency plans the partners have in place.
Like other underwriters, FM Global has made changes to its contingent business interruption policy--which it now calls "dependent time element" coverage--to reflect the trends in supply chain management.
The goal of the coverage is to try to treat each facility as if it is owned by the policyholder, Mr. Love said.
FM Global's dependent time element policy covers losses related to a supplier's location that suffers a service interruption, indirect suppliers and customers, he said.
In some cases, "suppliers, customers, manufacturers and even outsourced locations that feed or attract business may have to be listed on a schedule," said Harrah's Mr. Ewing. Middle market and smaller companies with limited suppliers are "much more able to negotiate" that list. For Harrah's, which has more than 21,000 vendors and a database of more than 40 million customers, a blanket form is "the better way to go," he said.