The Best Protection

 BEST PRACTICES 01Avoid risks to your operations from suppliers’ losses.

By Luke Foley

Hurricane Harvey rocked Texas. Devastating monsoon rains swept India, Nepal and Bangladesh. A deadly earthquake hit Mexico City. And a record-breaking typhoon landed in China. 

These are just some of the natural disasters that created destruction around the world in 2017. And regardless of where you are headquartered, your business operations were likely at risk during several of the year’s catastrophic weather events if you have a global supply chain. 

Although international supply chains have created critical advantages for businesses, they have also led to an increasingly complex set of risks. What happens to your operations if a third-party supplier gets flooded, a critical shipping channel is closed, or a vendor is shut down by a cyberattack? 

While cyberattacks create far less visible destruction than extreme weather, their effects can still be devastating and costly. The FBI estimates that more than 4,000 ransomware attacks are deployed every day. And the average cost of a data breach is $3.6 million, according to IBM research. 

The smallest interruption in your supply chain – from attacks on a supplier’s network to a localized weather event – can create a devastating ripple effect on your business operations. This is   why many business leaders are considering contingent business interruption (CBI) insurance as a way to mitigate the growing risk surrounding suppliers, distributors and receivers. 

A standard CBI policy covers the financial loss that is realized when your property is damaged and business operations cease for a period of time. The insurance expands that protection to cover your losses if damage to a direct supplier, distributor or receiver negatively impacts your business operations. 

But insurance is never a one-size-fits-all solution. It is important to know that not all risks can even be insured against. Here are a few things to keep in mind to best protect your business, determine appropriate coverage and minimize risks: 

1) Review your supply chain. Before you can mitigate risk, you must first determine exactly when and how shortfalls are likely to occur. Which suppliers are located in areas prone to natural disasters? Which products would be hard to replace with a secondary supplier, if needed? And, what are the maximum financial losses your business would realize if one of your key suppliers paused operations? A clear understanding of the risks posed by all your suppliers and distributors is critical to determine correct coverage and develop a robust contingency plan. Yet a full 66 percent of businesses have only limited visibility into their supply chains, according to the 2016 Supply Chain Resilience Report. 

2) Plan for emergencies. Develop a preparedness plan based on the risks identified in your supply chain. This plan should outline the steps that must be taken to maintain or quickly resume operations, including a network of approved secondary suppliers and distributors. In advance, contracts can be established with secondary suppliers and distributors for contingency purposes. These pre-negotiated contracts can often be set at much lower rates as opposed to when a company is forced to seek suppliers’ or distributors’ services post-loss – when they have no leverage.

3) Check the wording and limits of your CBI. Once you’ve developed a contingency plan, it’s important to ensure your insurance will adequately cover your losses. CBI coverage can vary widely, so review policies to see exactly what is covered and for how much. Some policies exclude coverage if the third-party’s damage is due to windstorms or flooding, for example. Others will only cover loss if the policyholder is also insured for that specific type of damage. The coverage also may only be scheduled for domestic dependent properties. If your suppliers are outside the United States, it’s imperative that your coverage will be provided for international locations. Most importantly, the coverage limits should be determined by the risks specific to your business operations. 

Planning for and mitigating the risks associated with your suppliers, distributors and receivers is certainly complex – but you don’t have to do it alone. Your insurance broker should work closely with you as a true risk management partner, helping you to identify potential shortfalls, select the right coverage and develop a complete contingency plan to protect your business operations from the unexpected.

Luke Foley is a producer at Graham Company, one of the country’s largest insurance brokers.

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