Contingent business interruption is property insurance coverage that may compensate your business for a loss of income and expenses if your business is shut down because of the shut down of a third party, such as a supplier, that you rely on to operate.
Learn more about this coverage and examples of contingent business interruption claims involving an electric vehicle manufacturer and home energy auditor/energy efficiency company, below…
What Is Contingent Business Interruption?
Standard business interruption insurance (also called “business income insurance”) protects your business against direct physical loss or property damage to a covered property or location by a covered peril, such as a fire or theft) that causes your business to shut down.
Business interruption is a “time element” coverage, as opposed to a physical property damage coverage, meaning that it pays for lost income for a period of time during a specified period (the “period of restoration“).
Contingent business interruption, aka “CBI“, also referred to as “contingent business income” or “dependent business income” insurance, protects your business if it is interrupted due to a 3rd party’s covered business interruption.
For example, your business may need CBI in the following situations:
- Your business depends on a single supplier for raw materials
- Your business is overly reliant on a supplier or manufacturer for merchandise
- Your business relies on a single client/customer for most of your revenue
- Your business relies on a neighboring business to attract customers
In each of the above situations, your business relies on a 3rd party business to operate… And if that 3rd party business is shut down, your business may suffer.
Contingent business interruption is designed to protect your business from financial loss in the event that a key supplier or business partner that you’re reliant on is closed for a period of time (the “period of restoration”) because of a claim of physical damage due to a covered peril in your property insurance policy.
Period Of Restoration
Coverage for contingent business interruption is provided during the “period of restoration” (i.e. the amount of time it takes for the dependent business to make repairs as needed and get back up and running.)
Unfortunately, not all insurance policies define “period of restoration” in the same way… As such, some insurance policies may terminate coverage earlier than others.
A broad definition of “period of restoration” would be for the period that begins immediately after the covered loss and ends on the earlier of the date when property should be reasonably repaired, rebuilt or replaced or when business is resumed… In other words, according to IRMI, the insurance company “will pay the actual loss of business income the insured sustains during the necessary suspension of its operations during the period of restoration.“
However, ideally, business interruption coverage should not be terminated completely if a business is able to resume partial operations while still working towards a full recovery.
In other words, pay attention to the definitions of the terms “period of restoration” and/or “suspension of operations” with respect to it being partial or total.
CBI can also cover your business for the “extra expense” it may need to incur to replace a supplier with a more expensive part… Extra expense coverage pays for a company’s non-ordinary expenses after a business interruption due to a covered peril.
For instance, if the business interruption caused you to need to move to a new supplier, lease or buy equipment to remedy the interruption, hire new employees, consultants or pay overtime, etc.
For extra expense coverage to kick in, the peril must be covered and the expenses must be above and beyond the business’s normal operating costs.
Extended Business Interruption
Extended business interruption contemplates coverage for a period of time after a business has resumed, but before business has returned to the level it was before the covered loss.
For instance, a catering restaurant that is shut down for 6 months because of a fire might be able to resume business but its clientele may not return immediately because they’ve found alternative places to go… An “extended business interruption” coverage may provide extra protection in such a situation.
Contingent Business Interruption Claim: Energy Efficiency Contractor Example
Fictional energy efficiency contractor, ABC Energy Efficiency, provides home energy savings evaluations, energy audits and retrofit services.
After an energy audit, homeowners with inefficient homes hire ABC to have their homes insulated, get LED light bulbs, tighten up windows, etc.
To differentiate itself, ABC Energy Efficiency specializes in using mineral wool insulation, aka “rockwool” insulation, which is a special type of insulation that is high in recycled content, very durable, fireproof, water proof, mold-resistant, vermin proof, etc.
ABC touts its use of mineral wool and the associated benefits so that customers often choose it over other contractors… ABC has a full pipeline of installations with deposits in hand for the coming year.
Unfortunately, the mineral wool insulation manufacturer that ABC Energy Efficiency relies on had a fire at its North American plant which damaged the machinery and so they are shut down for 6 months while they get the equipment fixed and the operation back up and running.
If ABC Energy Efficiency has contingent business interruption insurance coverage in their property policy they may be able to get reimbursed by their insurance carrier for the lost income and expenses, such as payroll or rents, that they need to incur while they’re not able to install the mineral wool insulation at residential homes.
Contingent Business Income Claim: EV Manufacturer Example
An electric vehicle manufacturer relies on certain types of 3rd party microchips in the manufacturing process of its vehicles.
A fire causes the 3rd party microchip plant to shut down temporarily, such that the EV manufacturer is unable to obtain the chips it needs to manufacture its vehicles.
If the EV manufacturer needs to curtail production (resulting in fewer vehicles being produced than normal), this could lead to a contingent business interruption claim.
Perhaps the EV manufacturer has a backup chip supplier that it can go to, but the backup supplier is charging a premium for the chips… This could cause a business interruption claim
Contingent Business Interruption and COVID-19
As there have been many disruptions to businesses during COVID over the past 24 months, many people are asking about business interruption relative to COVID-19.
However most of these disruptions to supply chains, businesses, etc. were due to government lockdowns, legislative mandates and behavioral changes, which won’t trigger most business interruption policies.
To trigger a contingent business income claim the loss must be caused by direct physical loss or damage by a covered peril at a listed property, or in the case of CBI, to a property you depend on that suffers a covered form of property insurance claim.
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