Supply Chain Disruptions

Check Your Commercial Property Insurance Policies

March 17, 2011

In addition to human loss, the tragedies in Japan have severely impacted manufacturing – reports warn of rolling blackouts to conserve power, and several Japanese corporations have announced indefinite closure. Closures are having ripple effects across the world, as many companies rely on a “just-in-time” supply chain. If you have suffered losses due to a supply chain disruption, examine your commercial property insurance policy for business interruption and contingent business interruption coverage. These coverages may help to mitigate your losses when your suppliers cannot deliver because they have suffered a casualty from a risk covered under your policy.

Although just-in-time deliveries permit businesses to maintain minimal inventories, the lack of inventory may cause a shutdown in production when the supply chain is disrupted. Factories outside of Japan that rely on Japanese-made components are already feeling the impact. For example, Toyota has announced it will slow production at some U.S. plants to conserve parts due to the inability of its suppliers to make or ship product.

Businesses looking to mitigate their losses should examine their commercial property policies for business interruption and contingent business interruption coverage. This coverage is sometimes referred to as “business income from dependent properties” coverage. Contingent business interruption pays for covered losses caused by the inability of a supplier to deliver supplies or products. Typically, contingent business interruption coverage only insures against losses if a risk insured under the insured’s policy causes the disruption to the supplier.

If the crisis in Japan has disrupted your company’s operations, review your commercial property policy for contingent business interruption coverage. Even if earthquakes and/or flooding may be excluded causes of loss under your policy, coverage may exist if other covered causes of loss have contributed to the disruption. For example, many policies afford coverage for disruptions caused by the orders of civil authorities in reacting to a disaster.

If you have suffered losses due to a disruption in your supply chain, pay close attention to the notice provisions in your policy. Carefully review the documentation required by the insurer to prove your claim. Of course, if you have questions about your policy or contingent business interruption coverage in general, you should consult a lawyer who specializes in these issues.

McGuireWoods LLP Insurance Recovery Practice

Our insurance coverage team represents policyholders in insurance disputes across the country. We also advise clients on risk management and insurance strategies. For more information on how we work with policyholders to protect their rights and maximize recoveries, click here.

Please note that to help ease the human suffering, McGuireWoods LLP is matching partner and employee contributions to the Red Cross.

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