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Contingent Insurance on Suppliers, Customers Being Severely Limited in Some Cases

Whereas business interruption insurance covers lost profits and continuing expenses as a result of physical damage to a policyholder's own facilities, contingent business interruption insurance covers such losses stemming from damage to the premises of a supplier or customer. Large companies typically have both types of insurance as part of their property insurance policies; smaller companies may not have the contingent business interruption extension.

As supply chains have grown more complex, contingent business interruption insurance has become more important. Companies continue to outsource and offshore operations, source materials from overseas, and use just-in-time practices to remove the slack from their supply chains. As a result, “the ripple effect can be quite significant” anytime there’s an incident or disruption that affects supply chains, says Duncan Ellis, U.S. property practice leader at insurance brokerage Marsh.

But in the wake of the 2011 disasters, which revealed how concentrated supply chain risk has become in some industries — scores of U.S. manufacturers relied on the same handful of suppliers — insurers reined in their contingent business interruption coverage. “They reduced the limits, and in many cases they further restricted coverage for natural catastrophes,” says Richardson. “When it comes to earthquake or flood, they have made the limits much smaller, or even excluded [the coverage] outright without more information.” Generally, he says, “we’re seeing limits of, say, half a million dollars to $25m per carrier, compared with several million dollars to upward of $50m a few years ago.”

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