It might be inconceivable to small business owners that a disaster hundreds or thousands of miles away could shut them down. But the earthquake and tsunami in Japan have interrupted shipments of parts and finished goods to companies in the U.S., and sent many of them to call their insurance carriers.
These companies bought policies known as contingent business interruption insurance, or CBI. These policies will reimburse a company for its expenses and lost profits when it can't operate because a disaster has struck a supplier. It's a type of insurance that companies of all sizes can discover too late that they should have bought. One with foresight, ON Semiconductor Corp., said last week it was working with its insurers to recover losses because its supply chain had been disrupted by March 11 quake.
WHAT IS CONTINGENT BUSINESS INTERRUPTION INSURANCE?
First, let's define business interruption insurance. It pays a company's expenses like rent and salaries when the business is shut down by a disaster such as a tornado or fire. Or when there's a power outage. It is usually part of a standard business owner's policy.
Contingent business interruption insurance kicks in when your supplier can't operate and therefore you can't operate. Even if your company hasn't suffered any damage, if you're unable to conduct business normally because of your vendor's problems, this kind of coverage will pay your expenses. The disaster could, like the Japan quake, be thousands of miles away or in another country.
Loretta Worters, a vice president at the Insurance Information Institute, says CBI often applies only in the case of a disruption from a direct supplier. If the company that is shut down is a vendor to another company that in turn supplies your business, you may not be reimbursed under your policy. When you buy the insurance, you need to be sure about when you can and cannot recover your losses.
EARTHQUAKES, FLOODS AND MORE
Not every supply disruption is automatically covered when you buy CBI. Worters says that disruptions due to earthquakes and floods might not be covered unless a company buys CBI with that kind of coverage. That's not surprising, because companies that buy insurance for their property have to get separate policies for earthquake and flood damage. Worters says companies should check with their insurance brokers or carriers to see if their CBI includes such disasters.
Companies with suppliers in any earthquake-prone area like Japan or California should consider buying the additional coverage. Most business owners should also consider coverage for disruptions caused by flooding. Even companies that aren't in areas at risk for floods can find themselves shut down by rising waters. It only takes a few days of torrential rains to get a flood going. And a flood can shut a company down for weeks or months.
Worters says a shutdown due to nuclear contamination is not covered under CBI. So if a Japanese company can't operate because it has been contaminated by fallout from the damaged Fukushima nuclear plant, its customers would not be reimbursed.
PAY ATTENTION TO THE DETAILS
Worters points out that CBI policies usually have what's known as a time deductible. That means an insurance company won't pay for losses for a set amount of time after a shutdown, such as 48 or 72 hours. So any losses your company suffers during that time, you'll have to absorb.
You might also need to specify your suppliers in your policy. Worters said that some insurers don't offer blanket worldwide coverage. That can be a problem if you sign up with a new supplier, but don't update your policy. So CBI can need more frequent attention than you might expect to give your insurance coverage.