Business Interruption Considerations

Generally, we think of business interruption being an event that causes damage to the business premises, resulting in some level of interruption to normal operations.  That interruption of business activity likely causes a negative impact to sales and resulting profits.  The interruption can also increase expenses for the business. 

However, a significant interruption to normal business operations could occur due to a loss event at an adjacent or nearby property.  For example, streets could be closed to allow emergency vehicle access, or smoke from an ensuing fire could enter the premises making conditions intolerable for regular business operations.  The immediate area may be closed to traffic for a period of days and when the area is opened, it may be slower than normal for customers to reestablish their patronage, for example.

Another type of business interruption to consider is the effect of global supply chain management and the flow goods and information between entities from country to country.  When a loss or other interruption to the flow of key goods occurs from a supplier, the resulting loss to the receiving entity is called a contingent business interruption loss. Loss Control Professionals must understand the interdependencies in the supply chain to assist in managing vulnerabilities from disruptive events. With dependent processes between suppliers and manufacturers located on different continents and in different time zones, the vulnerability could be significant.

If an event occurs at a key component supplier, the entity’s normal processing may be interrupted.  Determining potential contingent business interruption is essentially the same calculation as business interruption. It is equal to the reduced profits plus ongoing expenses to maintain operations.  The breadth of exposure to contingent losses is related to the insured’s dependence on a single supplier such that if that supplier experienced an event that impacted the flow of products, the insured’s ability to do business would be greatly compromised.

If an event occurs at a key component supplier, the entity’s normal processing may be interrupted.  Determining potential contingent business interruption is essentially the same calculation as business interruption. It is equal to the reduced profits plus ongoing expenses to maintain operations.  The breadth of exposure to contingent losses is related to the insured’s dependence on a single supplier such that if that supplier experienced an event that impacted the flow of products, the insured’s ability to do business would be greatly compromised.

The challenge of identifying which parts to source globally and which to rely on local manufacturing is very real.  Examine the insured’s supply chain by transferring it to a flow chart.  This exercise can be insightful in determining vulnerabilities.  Knowing the vulnerabilities assists the loss control professional in recommending one or more risk control techniques that will mitigate contingent business interruption loss potential.

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