February 2013: Contingent Business Income

To what extent is your business reliant on other businesses and what would be the impact–especially financially–on your operations if that third party had to cease operations due to a covered loss at their premise?

  • Would your production be reduced or ceased if a primary supplier was unable to provide you with necessary material(s) for your product?
  • How long would it be before your revenue was impacted if you were unable to obtain a needed service from a supplier?
  • Is your product or a key component of your product manufactured solely by one manufacturer? Have you solidified a relationship with another manufacturer that could quickly take over the manufacturing so you can fill orders?
  • Is a significant percentage of your sales to a particular customer? Would you be left with overstock if that key customer cancelled an order due to unexpectedly ceasing their operations–either temporarily or permanently–because of a covered loss at their premise?
  • Is a large portion of your customer base due primarily to your proximity to another business? How quickly would your revenue be significantly impacted if that other business was closed for an extended time period due to a covered loss?
  • Have you asked your suppliers what their contingency plan is to assure there is minimal interruption in your operations should they experience a loss at their property?

Your standard Business Income & Extra Expense coverage on your property package policy would not provide protection for the above scenarios as it covers only the income lost and extra expenses incurred due to a covered loss at your location. Depending on your need, Contingent Business Income coverage could provide this needed protection.

What is Contingent Business Income?
Contingent Business Income & Extra Expense, often referred to as Dependent Property Business Income & Extra Expense, would provide reimbursement of your lost profits and extra expenses incurred from an interruption of business at the premise of a recipient, supplier, manufacturer, or lead business.

The cause of the business interruption at the other location must be from a cause of loss that would have been covered had it happened to your property. Coverage is then only for the “period of restoration”–the time it should take the dependent property to restore their operations–after a defined waiting period (deductible).

Contingent Properties
When considering your supply chain, close analysis should be made of the following four business relationships – all of which Contingent Business Income & Extra Expense can be purchased for if there is a threat to your revenue should one suffer a loss at their premise:

Contributing Location–A supplier of parts, material, or services that you depend upon almost exclusively to complete your product or provide your service.

Manufacturing Location–A non-related manufacturer that you depend on to provide your product for delivery to your customers.

Recipient Location–A business that purchases/accepts a bulk of your products, goods, or services.

Leader Location–A business (i.e anchor store, sports or entertainment venue, etc.) that draws customers to your business due to its close proximity.

Your business continuity plan should systematically evaluate your interdependence with these businesses to determine the possible impact that their operations ceasing can have upon your operations. Once identified, then a strategy needs to be defined to respond to both short- and long-term disruptions. These strategies must then be clearly communicated to all levels of your organization that would handle the execution of each.

Proactively managing your supply chain continuity is important not only because of the cost of an immediate disruption but also the consequences of such on stakeholder confidence and reputational damage.

Why Consider Contingent Business Income?
Key factors driving Contingent Business Income coverage to be an increasing vital part of a business’ insurance program are:

  • leaner work forces resulting in increased out sourcing
  • introduction of new regulatory requirements
  • increased natural disasters resulting in large scale losses and numerous inoperable businesses
  • potential terrorism attacks affecting the global supply chains

The insurance industry estimates that in 2011 it paid out billions in Contingent Business Income claims as a result of the numerous catastrophic losses that occurred–Japan earthquake, Thai flooding, and domestic weather phenomenons. A survey by Zurich Financial Services Groups reported that 85% of companies polled experienced at least one supply chain disruption in 2011 with adverse weather as the main cause for 51% of the respondents.

If you conduct a thorough analysis of your supply chain, can you confidently state that your revenue is not at risk should a loss occur at a third party premise that you are dependent upon?

The Time of Need
A restaurant was in a strip mall that also had a movie theater. The theater was the main draw of people to the mall. The movie theater suffered a fire and closed for 6 months at which time he only partially resumed its theater capacity. While closed, people went to a movie theater 10 minutes away and dined closer to that theater as well. The restaurant experienced a significant decrease in their sales while the theater was closed.

Manufacturer “A” had an exclusive contract to provide brake pads for a motorcycle line. Their final product was reliant upon a component provided from manufacturer “B”. Manufacturer “B” suffered a total loss due to a hurricane resulting in the complete halting of their operations and inability to provide the needed component.

A retail store obtained its inventory from a specific supplier’s warehouse. That warehouse had a significant pipe burst damaging most of the stored inventory the day before delivery of a major holiday inventory to the store. The supplier was unable to provide the inventory from an alternative warehouse source due to the holiday demand. The store suffered a significant reduction in holiday sales and revenue loss.

80% of a massage therapist’s revenue was derived from clients referred by a health club in the same complex. The portion of the complex that housed the health club closed for six months due to a fire. The therapist experienced a significant reduction in revenue as a result.

How We Can Help You…
As your Trusted Advisor, through partnership with your insurance carrier, we can help develop the most effective manner to analyze your level of dependency on other businesses and identify strategies. To futher solidify your risk management approach, we can then provide you with the Contingent Business Income coverage options to consider. Please contact us to arrange a time to to review your specific needs.

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