Know Your Weakest Link: Overseas Catastrophes Underline Importance Of Supply Chain Coverage For U.S. Businesses

Recent Earthquakes Impacted Production At Sony, Honda, Toyota And Renesas Factories In Japan, Banana Export Trade In Ecuador

FOR IMMEDIATE RELEASE
New York Press Office: (212) 346-5500; media@iii.org

 

NEW YORK, April 21, 2016 — The recent earthquakes in Japan and Ecuador highlight the wide-ranging impact of catastrophic events, particularly on global supply chains. While businesses outside Japan and Ecuador have not suffered direct physical damage, some could incur losses due to disruptions in their supply chains. Companies can protect themselves from similar disruptions by purchasing supply chain insurance, according to the Insurance Information Institute (I.I.I.). 

 

While too early to tell what impact these earthquakes will have on U.S. businesses, Ecuador is the largest exporter of bananas in the world, exporting bananas and plantains to over 50 countries, including the United States. Japan is home to manufacturing plants for Sony, Honda, Toyota, and Renesas Electronics, which produces microcontroller chips for automobiles. It is likely the impact will be nowhere as large as the 2011 quake and tsunami disasters, which resulted in supply chain problems so extensive that Japanese automakers’ production was halted even in the U.S. This is because many auto manufacturers in Japan now have contingency plans in place, which may well avert the extensive interruptions, especially from second- and third-tier suppliers. U.S. businesses can do the same.

 

There are two types of insurance that can help shield businesses from disruptions to their global—or local—supply chains.

 

1. Contingent Business Interruption Insurance

Unlike regular business interruption coverage, which is triggered by loss of or damage to the policyholder’s own insured property, contingent business interruption coverage (CBI) is triggered by damage to the property of third parties—typically,  the policyholder’s suppliers or customers.

 

To file a claim under CBI coverage two basic requirements must be met. First, the damage must have been suffered by a supplier or customer of the policyholder. Second, the damage must meet the same criteria as required by the policyholder’s own property insurance. So, for example, if a supplier’s factory is destroyed in an earthquake, the policyholder would only be covered if the business already had earthquake insurance for its own property. Similarly, if a supplier’s factory is destroyed in a tsunami, the business would only be covered if it already had flood insurance.

 

2. Supply Chain Insurance

Supply chain insurance provides far broader coverage than CBI insurance for business interruption caused by disruptions to your supply chain. In addition to covering disruptions caused by property damage to your suppliers’ or downstream customers’ businesses, supply chain insurance can cover losses caused by a wide range of events, including:

 

  • Natural disasters
  • Industrial accidents
  • Labor issues (strikes, shortages, etc.)
  • Production process problems
  • Political upheaval, war, civil strife
  • Riots or other disruptive civic action
  • Closure of roads, bridges or other transportation infrastructure
  • Public health emergencies (e.g., pandemics requiring quarantine)
  • Regulatory action
  • Financial issues (e.g., solvency, cash flow problems)

 

Suppliers in less politically stable nations or in places with more vulnerable infrastructure may be more prone to disruption.

 

Companies often have multiple tiers of suppliers, yet often only cover the first tier. As a result, more insurers are moving towards offering multi-tier coverage—where the whole supply chain is insured. Check whether your insurer offers this type of coverage.

 

“Insurance is a critical component of managing supply chain risk, but don’t make it your first line of defense,” said Loretta Worters, a vice president with the I.I.I. “To limit your company’s exposure first assess your supply chain and identify risks and weaknesses, balancing supply chain logistics with risk management and identifying back-up suppliers and vendors.”

 

Businesses should establish contingency plans and include supply chain disruption in their business continuity plan. “Know your weakest links in the supply chain and what can be done to help manage that risk,” added Worters.

 

RELATED LINKS

Article: Covering Losses with Business Interruption Insurance; How to Protect Your Global Supply Chain;

Understanding Commercial Package Policies

Facts and Statistics: Earthquakes and Tsunamis

Video: The I’s on Insurance: (Not so Risky) Business

 

RESOURCES

Small Business Administration

Insurance Institute for Business & Home Safety

 

The I.I.I. has a full library of educational videos on its You Tube Channel. Information about I.I.I. mobile apps can be found here.

 

THE I.I.I. IS A NONPROFIT, COMMUNICATIONS ORGANIZATION SUPPORTED BY THE INSURANCE INDUSTRY.

Insurance Information Institute, 110 William Street, New York, NY 10038; (212) 346-5500; www.iii.org

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