RETAIL INDUSTRY 2021 YEAR IN REVIEW

Thanks to a confluence of unrelated events, including pandemic, ice storms, wildfires and drought, consumer goods like furniture, groceries, toys and electronics, among other things, and their component parts, have been increasingly difficult to obtain. Despite growing demand for these products and materials, businesses have been unable to meet manufacturer and end consumer needs due to the ongoing global supply chain disruption.

Supply chain disruptions can have immediate and long-term ramifications. In some instances, it can take years for a company to fully recover from a supply chain disruption, and the potential financial implications can be staggering. While many businesses may already have protection against these losses, for those that do not, the supply chain disruption of 2021 should serve as a wakeup call to develop an effective risk management solution.

One such solution is insurance, and many businesses may already have this protection among the wide-ranging coverages that comprise their existing all-risk commercial property and business income insurance policies. Below we explore how these coverages can help mitigate present and future supply chain risks.

The Risks

The global supply chain consists of interrelated industries of manufacturing, transportation and logistics that manufacture and move component parts and finished products from their points of manufacture to end consumers. The global supply chain management market size value was $15.85 billion in 2019 and is projected to reach $37.41 billion by 2027.¹

Global and local supply chains can be affected by natural disasters, transportation failures, geopolitical instability, price hikes and cyberattacks, among myriad other things. Before the COVID-19 pandemic, the leading cause of supply chain disruption was unplanned IT outages. However, a combination of factors during the last year, including the COVID-19 pandemic, natural disasters and extreme weather such as the ice storms in Texas, droughts in Asia and wildfires in California, has affected suppliers’ and transporters’ ability to keep up with demand, resulting in significant supply chain disruptions that have affected countless industries.

These supply chain disruptions have underscored the importance that policyholders be mindful of how unforeseen risks can cause disruptions that lead to massive business losses and extra expenses. For example, Amazon warned that its entire fourth-quarter profit could be wiped out by a surge in the cost of labor and fulfillment.² Apple said it lost $6 billion in sales because it cannot meet consumer demand.³ Ultimately, for any company, significant supply chain disruptions can reduce revenue, cut into market share, threaten production and distribution, inflate costs and eventually affect the company’s bottom line

Fortunately, insurance may provide coverage for supply chain-related claims.

The Relevant Insurance Coverages

Contingent Business Interruption Coverage

In the wake of a supply chain-related loss, policyholders should review their commercial property and business income insurance policies as a potential source of coverage. These policies often include, among other potentially applicable coverages, coverage specifically applicable to financial loss caused by a disruption in the insured’s upstream and downstream supply chain. This coverage is typically referred to as contingent business interruption (CBI) coverage.

Generally, CBI protects against lost profits resulting from an interruption of the insured’s business that results from an 10 HuntonAK.com event affecting the property of a supplier or customer of the insured business. CBI requires that the event that causes the disruption be a covered cause of loss under the policy. The microchip shortage that has been ongoing since early 2021 is a good example. According to investigative reports, the microchip shortage can be traced back to at least four key events: the deep freeze in Texas that forced closure of several microchip factories, a fire at a Japanese microchip factory, a drought in Taiwan that limited access to water needed to produce microchips and the COVID-19 pandemic. If any of these causes is a covered cause of loss under the insurance policy of the affected business, its CBI coverage should apply to the resulting business income loss.

CBI coverage can also apply to losses caused by damage to a “dependent property,” which is one on which the policyholder relies to operate its business, such as a distribution center. For example, if a policyholder’s business is disrupted because a hurricane damages a supplier’s factory and the supplier cannot deliver its goods or a fire destroys the policyholder’s distribution center and prevents the policyholder from selling its products, CBI may apply to cover the resulting loss. Likewise, CBI may apply if the damage occurs to property of another that the insured business relies upon to attract customers to the insured’s business.

As with any insurance coverage, policyholders should carefully review their policies to understand the scope of their CBI coverage as these coverages can vary greatly between different policy forms. In particular, policyholders should consider whether there is a waiting period before coverage kicks in and whether coverage requires a complete cessation of the policyholder’s operations or whether a partial interruption or slowdown is enough. If, for example, there is a long waiting period in the policy, the policyholder is responsible for lost profits until the waiting period expires and coverage incepts.

In addition, policyholders should look to which suppliers trigger coverage—some policies only cover damage suffered by direct suppliers or customers, while others include indirect suppliers or customers. Different policies also provide different sublimits depending on the type and tier of a supplier. For example, if your company is part of a complex supply chain, you are more likely to need coverage that includes a high sublimit for indirect suppliers. But if you are at the early stages of a supply chain, your company would be better served by coverage that extends to downstream customers.

Policyholders also should carefully examine any potentially applicable exclusions, including, for example, virus exclusions and extreme temperature exclusions. Collectively, and individually, these provisions can substantially transform the scope of coverage following a supply chain disruption.

Extra Expense Coverage

In addition to covering losses of business income, first-party all-risk policies typically cover the increased operating expenses that a policyholder incurs in order to continue its business despite a disrupting event. Some examples of these “extra expenses” include the added costs to receive goods for sale or replacement goods and increased transportation, labor and logistical costs.

To facilitate coverage for extra expenses, as with any other claim, policyholders should keep accurate and contemporaneous records of the extra expenses incurred to support a potential claim.

Supply Chain Coverage

The increased risks posed by today’s global supply chain have also led to specialty “supply chain insurance.” Though there is not yet any “standard” form for “supply chain insurance,” this coverage is designed generally to provide an “all risks”-type coverage that will reimburse a policyholder for lost profits and related costs that are caused by the disruptions in the supply chain. Like the CBI coverages discussed above, this policy type is designed to provide coverage even if the insured business has not suffered any physical damage. In addition, these coverages are readily customizable to include coverage for losses caused by events such as government-related disruptions, social unrest, pandemics, labor issues, production process issues and financial issues.

As we embark on 2022, we do so under the continued strain caused by 2021’s supply chain disruptions. Companies that experienced losses in 2021 should consult their insurance and assess coverage for existing losses. For companies without available coverage, they should consult their insurance professionals about adding supply chain and contingent coverages to their renewing policies. In all cases, however, policyholders should understand what coverage they have available and, when loss occurs, consult with an insurance professional to ensure that all available coverage is utilized for maximum recovery.

FOOTNOTES

1 https://www.businesswire.com/Global-Supply-Chain-Management-Market-2020-to-2027-by-ResearchAndMarkets.com

2 https://www.bloomberg.com/news/articles/2021-10-28/amazon-projects-holiday-sales-that-suggest-pandemic-boom-is-over

3 https://apnews.com/article/technology-business-earnings-apple-incdd75298b973ecdbae1f9ba45aa