Businesses can confidently work with suppliers, vendors and customers around the globe by implementing a comprehensive insurance coverage plan designed to mitigate losses from the global supply chain’s unique exposures.

Robust global supply chains are vital to many businesses’ ordinary operations. Monitoring and managing cross-border risks that may impact these supply chains are critical to enhancing and safeguarding their functionality and reliability, as a single point of failure can bring operations to a grinding halt and lead to severe financial and reputational losses. 

Insurance can mitigate cross-border risks arising out of geo-political and government-related disruptions (such as war, corruption or expropriation), social unrest and cyber vulnerabilities. Different insurance products respond to these risks in different ways. For example, contingent business interruption coverage generally responds to mitigate lost profits resulting from an interruption of business caused by physical damage to a supplier’s property, while cyber insurance generally protects against the costs of digital threats, such as ransomware attacks, phishing or hacking. 

Contingent Business Interruption

Contingent business interruption (“CBI”) coverage protects against lost profits resulting from the “physical damage” to property of a key supplier, vendor or customer. For coverage to apply, the policyholder typically must rely on supplier, vendor or customer’s business to operate the policyholder’s own business. A common example is a distribution center because the policyholder’s business depends on the warehouse receiving, storing and distributing its products to consumers or retailers. In this case, any disruption to the distribution center’s operations—such as disruptions caused by physical damage to the center—is likely to hurt the policyholder’s profits, and CBI may respond and allow the policyholder to recover the lost profits.

Unlike traditional business interruption insurance, CBI protects the policyholder against losses caused by damage to the property of others rather than physical damage to the policyholder’s own property. In the cross border context, CBI insurance may respond to physical damage to a key supplier’s warehouse as a result of social unrest, such as riots or rebellions. To maximize protection, policyholders should thus review policy forms for endorsements (and exclusions) that may include physical damages resulting from geo-political and government-related disruptions or social unrest.

Cyber

Cyber insurance protects a business against the costs of cybercrime and digital threats. It covers first-party losses, such as business interruption, restoration and crisis communications and third-party losses, such as data breaches, network interruptions and breach notification expenses. As cyber-attacks increase, businesses are likely to experience more supply chain disruptions. As an example, the shipping and transportation industries rely on digital systems that may be susceptible to ransomware attacks. These attacks delay, or in some cases, halt the movement of goods across international borders, causing businesses within the supply chain to incur significant costs and lose revenue. But cyber insurance generally covers risks that affect or originate from the policyholder, so supply chain risks (which often originate in a third-party’s business or operations) might not be covered. Thus, businesses should evaluate how their cyber policies interact with their business interruption insurance (and other insurance products) to maximize coverage for losses resulting from cyberattacks and other digital threats.

Directors and Officers

Directors and officers (“D&O”) insurance can also mitigate losses arising out of supply chain issues by protecting a company against alleged wrongful acts by the company’s directors and officers. This type of coverage may be implicated where shareholders, employees or other interested parties sue the company for wrongful acts in managing the company, including instances where the company delivers disappointing results because of disruptions to the supply chain. Policyholders should take note, however, that D&O policies often exclude losses for catastrophic hazards, meaning war, environmental damage and acts of terrorism may not be covered. Supply chain disruptions may also make it difficult for a business and its directors and officers to fulfill their contractual obligations, and while D&O policies might include breach of contract exclusions, coverage may remain where the liability would exist even in the lack of a written contract. Accordingly, companies with business operations susceptible to supply chain risks should carefully review their D&O policies and ensure that the coverage is tailored to the company’s operational needs and that exclusions are sufficiently narrow.

Supply Chain Insurance

Supply chain insurance (“SCI”) is a specialty “all-risk” type of insurance that responds to losses caused by supply chain disruptions, such as political risks, labor disputes, cyberattacks, infrastructure closures, regulatory action and natural disasters. SCI also is customizable, so coverage can be tailored to the specific types of risks applicable to the policyholder’s business. For this reason, unlike most commercial policies, SCI may cover losses beyond those resulting from physical damage (e.g., transportation disruptions caused by a global pandemic) depending on the specific policy language. In sum, supply chain and international trade professionals should consider purchasing SCI to close potential coverage gaps and mitigate losses from cross-border risks.

As the global economy continues to expand, so do supply chain vulnerabilities. Businesses can confidently work with suppliers, vendors and customers around the globe by implementing a comprehensive insurance coverage plan designed to mitigate losses from the global supply chain’s unique exposures. Accordingly, policyholders should evaluate how their CBI, cyber, D&O and SCI policies interact to maximize coverage when loss occurs.

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Originally published on December 4, 2024 online with Supply & Demand Chain Executive. Reproduced with permission. Further duplication without permission is prohibited. All rights reserved.