13 Sep 2023
by Angus Osborne-White

Many organisations have used the same global supply chains for decades, but now their vulnerabilities have been brought into focus by the impacts of the COVID-19 pandemic, the Suez Canal blockage, the Ukraine war, high-profile cyber security breaches, and climate-related disruptions.

Organisations have long been aware of these risks. However the confluence of prominent events, extreme weather and extensive media coverage — particularly of pandemic-related business interruption claims — has increased demand to insure off-premises risks that are largely outside an organisation’s control. This has highlighted the value of CBI coverage that had limited uptake previously.

Supply chain vulnerability

Many organisations are reliant on key suppliers overseas that operate in economies more vulnerable to extreme weather events, or geopolitical and economic turbulence, increasing exposure to supply chain disruption exposures.

As risk managers look harder at their supplier networks, their greatest concerns should be the unique items used by their organisations. These include single source items that cannot be sourced easily from alternative suppliers or geographic regions.

Risk for unique items is increased where lack of supply chain transparency means they are not easily identified. One example might be where components are procured by suppliers’ suppliers (tier two) or at an earlier stage of supply.

These risks are especially pertinent in heavily regulated industries, where lengthy due diligence and regulatory processes would be required to bring the alternative supplier on board.

The onus is on risk managers to identify where they can best transfer the risk by using insurance or other methods of risk management, such as dual sourcing supply.

The insurance option

Businesses are more actively seeking CBI insurance that covers both damage and non-damage risks. Some larger organisations have the bargaining power to negotiate more specific coverages and bespoke policy wordings with underwriters who have to ensure they are properly considering clients’ risks in the context of COVID-19. For small and medium-sized businesses, the challenge is to be more aware of the CBI extensions available under standard package policies.

Balancing the cost and scope of coverage is a key consideration.  While it may be possible to secure the breadth of coverage required, this may come at a considerable premium cost, or there may be extremely stringent conditions attached to the policy. The risk manager must establish whether the cost of the risk justifies the cost of the cover.

Policy wording ambiguity

The COVID-19 BI disputes that went to court showed up issues with ambiguity in policy wordings. For example, one of the major challenges for SME insurance buyers was clarity on what is covered and what is excluded. In non-damage, denial of access wordings, one can find reference to ‘emergency’, ‘disturbance’ and ‘commotion,’ all words that mean different things to different people.

Even a phrase as simple as ‘in the vicinity of’ can cause confusion. Specifying it as ‘within a five-mile radius’ would clear up the ambiguity. It is important for the buyer to be clear about how the policy will respond to a claim.

At Crawford we have heard calls for insurers to adopt more consistent core vocabulary to help address the ambiguity and provide greater policy clarity. But this is only part of the answer. Differences in wordings enable insurers to offer different products to clients to meet their specific risk management needs. This is necessary for the industry to remain responsive and relevant.

Similarly, core wording can be ambiguous because the meaning of the same word can vary significantly in different products. Subtle variations in the intentions of the underwriters determine the exact meaning.

Other examples of what we have seen create uncertainty over policy intent include restrictions. It can be difficult to understand whether a restriction on a business’s operations is to prevent loss of life or injury, or just to enable the emergency services to do their post-incident work.

The common theme is that the clearer the underwriter’s intentions, the less there is to dispute at the time of a claim, and the more expediently the claim can be managed.

A collaborative coverage approach

Brokers have a useful role to play. They can ensure clients understand subtleties, interpreting what wordings mean within the context of the policy, and clarifying how the policy is likely to respond in different claims scenarios.

Loss adjusters, with their practical experience of the claims management process, can also offer critical insights to CBI buyers. They can interpret wordings and stress-test scenarios in which the policy may be triggered.

In inflationary times, insureds also need to review their sums insured regularly to manage the risk of under-insurance, which could lead to a proportionate reduction of a claim payment. Adjusters can give informed advice on putting an up-to-date monetary value on risk exposures.

At Crawford, we work closely with our policyholders, brokers and insurers to manage the increasing complexities associated with contingent business interruption risks. Only through close collaboration between all key stakeholders can businesses ensure that in the event of a disruption the policy will respond as planned.

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