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NEW YORK—Supply chain risks are increasingly not being covered by firms' contingent business interruption coverage, warned a speaker at Business Insurance's Risk Management Summit®.
John D. Dempsey, managing partner at Wilton, Conn.-based Dempsey Partners L.L.C., was among speakers at a panel on supply chain risk management Thursday. The Iceland volcano, for instance, which disrupted European air travel in 2010, would not have been covered because it did not cause physical damage of the type that would have been insured either through direct business interruption coverage or the contingent coverage that covers suppliers, Mr. Dempsey said.
Similarly, an insect infestation that caused damage to crops in California's Central Valley probably would not trigger coverage because its destruction would not be considered physical damage, said Mr. Dempsey.
“One of the limitations of coverage” today is policy exclusions, Mr. Dempsey said. For instance, the Japanese quake last March “didn't cause that much damage” to the Fukushima nuclear power plant. But the subsequent tsunami caused a lot of damage to the facility. What if a company in the affected region had quake damage, but not flood coverage? he asked. There is a question of whether losses would be covered.
Furthermore, what if the flood caused a fire and explosion? “Is that covered?” he asked. There is also the question of coverage for disruption caused by roads damaged in the catastrophe.
Another issue that arises with respect to coverage is who is a customer and who is a supplier. While that may seem a simple question, in fact it has become a focus of litigation in the U.S., and in the “real world" there is “disagreement about that,” said Mr. Dempsey. Words defining “supplier” and “customer” are often modified in a policy. Some policies also will apply only to the first-tier supplier, but not further down the chain. Others, though, have language that would provide this coverage, he said.
Another coverage issue is that of a supplier who is not damaged, but is not producing because a supplier of one of its components is not delivering. “Where does that fit into the policies as they're constructed today?” asked Mr. Dempsey. “Read you policies,” he said, and if the language applicable to your supply chain is narrow, and could be broadened, “I recommend you do it,” he said.
While some contingent business interruption endorsements have the broadest coverage, others have “absolutely terrible, narrow” coverage, he said. “Read what you have,” he said.
Other speakers at the panel included Edward D. Erickson, vp, product and business development, at Intrapoint, Inc., based in Moffett Field, Calif.; Anita Househam, policy and legal adviser, human rights and labor, at the United Nations Global Compact Office in New York; and David J. Closs, a professor in the Department of Supply Chain Management, the Eli Broad Graduate School of Management, at Michigan State University in East Lansing, Mich. A case study was presented by Patrice N. Knight, vp, operations global supply, at IBM Corp. in Hopewell Junction, N.Y. The session was moderated by Business Insurance managing editor Matt Scroggins.
A series of natural catastrophes that disrupted supply chains around the world in the past year have shown that business interruption is an ongoing risk for manufacturers.