Just one brief business interruption can be incredibly costly for an organization, often leading to serious reputational damages or long-term closures. Standard business interruption policies are vital in these instances, providing protection against a variety of common interruptions, including natural disasters, equipment damage and vandalism.
But what happens when one of your suppliers or customers experiences an interruption that derails your operations? To help address this concern, contingent business interruption (CBI) insurance is crucial.
What is CBI Insurance?
Unlike traditional business interruption insurance that compensates the policyholder for a loss resulting from damage to its own property, CBI insurance lets businesses transfer the risk of certain losses to the property of a third party. CBI insurance is an optional extension of business interruption insurance that reimburses lost profits and extra expenses resulting from an interruption of business at the premises of a customer or supplier. Coverage is typically triggered by physical damage to a customer’s or supplier’s property, or to property on which the insured company depends.
In the policy itself, the covered third party property may be specifically named, or the coverage may simply blanket all customers and suppliers. There are a variety of scenarios where this type of coverage is useful:
- When an insured business depends on a single supplier or a handful of suppliers for materials. In these instances, CBI insurance can help the insured stay afloat should they experience a break in the supply chain.
- When a business relies on a single or a few key customers to purchase goods or services. For instance, if a natural disaster affects your primary customers and they are no longer able to purchase your goods, CBI insurance can provide coverage for lost revenue.
- When a business depends on a nearby attraction or neighbouring commercial operation for customers. For instance, if your business is located next to an amusement park that attracts new customers to your store and that park closes down, CBI insurance can respond in kind and help keep your doors open.
When in place, CBI insurance can help employers cover ongoing expenses—like payroll and rent—should the insured’s revenue stream be impacted by interruptions at a third party. In many cases, it is not necessary that the customer’s or supplier’s property be totally shut down to trigger CBI insurance.
CBI coverage is provided for a covered loss during the “period of restoration.” This is a time frame specified by the insurer and relates to the reasonable amount of time it should take for the affected property to repair any damages and resume normal operations.
Evaluating Your CBI Needs
To truly understand your CBI insurance needs, it’s important to assess your exposures. CBI exposures will differ depending on the industry you operate in, but are most common in manufacturing, retail, hospitality and professional services.
Prior to meeting with your insurance broker and securing coverage, ask yourself the following:
- If there is a temporary production stoppage at one or more of my suppliers, can my business survive? How long?
- How much of my company’s operations rely on another entity?
- Do I have alternative suppliers in place should an interruption occur?
- Do I rely on one or a few customers to purchase the bulk of my products? Do I rely on a neighbouring business to attract customers to me?
To get started or to learn more about CBI insurance, contact us today.