Why You Might Need Contingent Business Interruption Coverage

No man is an island, they say. And neither is a business. As Hurricane Sandy and Winter Storm Nemo demonstrated, businesses today are increasingly interdependent. Contingent business interruption insurance can protect you when a covered loss affects a “contingent business location.”

Most businesses have some business income (also known as “business interruption”) insurance. If you have a business owner policy (BOP), a policy that packages the basic property and liability coverages together, you have basic business income coverage. This coverage reimburses the insured property owner for income lost when your business shuts or slows down due to property damage from an insured cause of loss on your insured premises.

Most policies also contain “civil authority” clause. This will cover you for up to two weeks’ of lost income when a “civil authority prohibits access to the described premises due to direct physical loss of or damage to property, other than the described premises, caused by or resulting from any covered cause of loss.” As an example, if police barred access to your street due to a fire at a neighboring building, your policy would provide coverage.

But, as Hurricane Sandy demonstrated, the economic impact of a disaster can be felt far and wide. What if a fire burns a major supplier’s plant and you can’t obtain parts? Or storm damage causes a shutdown for a major client, forcing you to delay a delivery of goods or services?

Contingent business interruption insurance, also known as “dependent property insurance,” provides coverage for these types of losses. You can buy contingent business interruption coverage as an endorsement, or addition, to your property policy or business package policy. It reimburses you for lost profits and extra expenses resulting from a business interruption at the premises of a customer or supplier, when the interruption is caused by a peril covered by your property policy. You can buy “blanket” coverage, which covers all customers and suppliers, or you can buy specific coverage for properties you name in the policy.

Contingent business interruption coverage does not cover you for losses due to:

1. interruptions in utility service or electrical power from off-premises,
2. the actions of civil or military authorities,
3. lack of ingress or egress,
4. changes in temperature caused by damage to heating or cooling equipment or
5. damage at another location owned by your company. Contingent business interruption coverage also has a “time deductible” that begins after the covered property damage or loss occurs. Usually expressed as hours (such as 24 or 48), the insurer will not cover income lost during this time.

Do You Need Contingent Business Interruption Coverage?

Contingent business interruption coverage makes most economic sense for a business that:

• Depends on a single supplier or a few suppliers for materials or merchandise. For example, a computer manufacturer may rely on one supplier for most of its memory chips.
• Depends on a few major customers or clients to buy their products or services.
• Depends on another nearby business to generate traffic. For example, smaller retail stores in a mall depend on a few major “anchor stores” to draw customers to the mall.