Just one brief business interruption can be incredibly costly for an organization, often leading to serious reputational damages or long-term closures. Standard business interruption policies are vital in these instances, providing protection against a variety of common interruptions, including natural disasters, equipment damage and vandalism.
But what happens when one of your suppliers or customers experiences an interruption that derails your operations? To help address this concern, contingent business interruption (CBI) insurance is crucial.
Benefits of Contingent Business Interruption (CBI) Insurance
- Coverage beyond standard business interruption policies—Unlike traditional business interruption insurance that compensates the policyholder for a loss resulting from damage to its own property, CBI insurance lets businesses transfer the risk of certain losses to the property of a third party.
- Reimbursement for a number of expenses—When in place, CBI insurance can help employers cover ongoing expenses—like payroll and rent—should the insured’s revenue stream be impacted by interruptions at a third party. In many cases, it is not necessary that the customer or supplier be totally shut down to trigger CBI insurance.
- Protection for a variety of scenarios—In the policy itself, the covered third-party property may be specifically named, or the coverage may simply blanket all customers and suppliers. There are a variety of scenarios where this type of coverage is useful:
- When an insured business depends on a single supplier or a handful of suppliers for materials
- When a business relies on a single or a few key customers to purchase goods or services
- When a business depends on a nearby attraction or neighboring commercial operation for customers
Claims Scenario: We Didn’t Start the Fire—And it Doesn’t Matter
The company: A custom cabinetry firm that sources high-quality materials from a local vendor.
The challenge: An organization that specializes in custom cabinets recently experienced a major interruption after its primary supplier—a nearby lumberyard—experienced a large-scale fire that wiped out all of its stock.
Because the cabinetry company relied solely on this vendor, business came to a halt and a number of orders had to be postponed until a new supplier could be secured. Not only did this lead to lost revenue, but it left a bad impression on a number of customers—harming the cabinetry company’s reputation.
CBI insurance in action: A single break in an organization’s supply chain can lead to long-term losses—especially for organizations that rely on a handful of suppliers.
In these instances, CBI insurance is crucial, as it allows organizations to stay open, even when an interruption occurs at the premises of a third party. CBI insurance can help employers cover ongoing expenses—like payroll and rent—should the insured’s revenue stream be impacted by interruptions at a third party. In many cases, it is not necessary that the customer or supplier be totally shut down to trigger CBI insurance.
Claims Scenario: Losing Customers is Not Amusing
The company: A restaurant located next to a theme park.
The challenge: A local restaurant is conveniently located near a popular amusement park. Due to this proximity, the restaurant has experienced high levels of foot traffic and revenue flow from tourists visiting the area.
Recently, the theme park announced it would be shutting down for renovations. As a result, the restaurant has seen a significant decline in reservations. The owners have serious concerns related to cash flow now that a trusted source of customers is no longer available.
CBI insurance in action: It’s not uncommon for businesses to experience a boost in customers from neighboring attractions. However, should these attractions disappear, companies may find it difficult to continually generate buzz and maintain a steady customer base.
CBI insurance can help in these instances, responding to an interruption that directly affects an insured’s ability to secure customers. In the case of the restaurant above, CBI insurance can help cover expenses while they search for new clientele or even a better location.
To truly understand your CBI insurance needs, it’s important to assess your exposures. CBI exposures will differ depending on the industry you operate in, but are most common in manufacturing, retail, hospitality and professional services.
Learn More About CBI Insurance
Prior to meeting with your insurance broker and securing coverage, ask yourself the following:
- If there is a temporary production stoppage at one or more of my suppliers, can my business survive? How long?
- How much of my company’s operations rely on another entity?
- Do I have alternative suppliers in place should an interruption occur?
- Do I rely on one or a few customers to purchase the bulk of my products? Do I rely on a neighboring business to attract customers to me?
To get started or to learn more about CBI insurance, contact one of the risk consultants at Valent Group today.
Information abstracted from Zywave’s “CIA-Contingent Business Interruption Insurance” article.