What Is Contingent Business Interruption Insurance?
Contingent business interruption (CBI) coverage is not typically available as a standalone insurance policy. Instead, CBI insurance is an extension of business interruption insurance that expands the coverage beyond your own company, encompassing lost profits and extra costs that result from a customer- or a supplier-related business interruption.
Of course, things can get a bit confusing because business interruption insurance is an add-on to property insurance, and CBI is a rider attached to the business interruption coverage, so you’re looking at a sort of daisy-chain of commercial insurance coverages.
With this in mind, it may not surprise you to hear that these coverages are most often purchased as part of a business owner’s policy (BOP) or a commercial package policy (CPP)—forms of insurance specifically intended to bundle multiple policies into one more-convenient policy.
Who Needs CBI Coverage?
Contingent business interruption insurance is only really necessary for companies that rely heavily on a supply chain—but if that description fits you, it’s coverage that you probably do need. Especially if your business depends on just one supplier for materials or just a few suppliers, CBI is a really smart acquisition.
Some other situations where you may want to consider contingent business interruption coverage include relying on:
- Limited manufacturers to produce your merchandise
- Few recipient businesses to purchase most of your products
- Neighboring businesses to bring in customers
In short, ask yourself the following question: “Does my business rely on other companies to be able to operate?” If the answer is yes, it’s probably time to at least take a long look at acquiring CBI coverage.
What Does Contingent Business Interruption Insurance Cover?
In general, CBI insurance covers your business operations if another company that your business relies on has to shut down for a temporary period. CBI is very similar to standard business interruption coverage except that it covers other companies going down instead of your own.
To get a bit more specific, there are three general categories that CBI coverage breaks down into:
- Vendor-based interruption: If the supplies you need to produce your products come from a limited group of vendors, CBI can cover your business losses if there’s a break in your supply chain.
- Customer-based interruption: If your key clients cannot purchase your goods as a result of an interruption to their business, your CBI policy can supplement your lost revenue until they’re back up and running.
- Proximity interruption: If your business relies on nearby attractions or businesses to generate foot traffic, a CBI policy can cover the impact that an interruption to one of those entities could have.
What Does CBI Insurance NOT Cover?
Although contingent business interruption insurance does cover a fairly broad range of potential claims, there are certain areas where CBI coverage will not help you. This is by no means a comprehensive list, but in general your CBI policy will not cover the following claim types:
- Utility service interruptions
- Off-site power interruptions
- Customer access interruptions
- Downstream business interruptions
- Interruptions resulting from damaged heating/cooling systems
For more information on what specific types of claims are excluded by your contingent business interruption policy, consult with your insurance provider.
How Does Contingent Business Interruption Coverage Work?
Rather than a simple cause-and-effect model, contingent business interruption coverage pays out benefits if a series of events take place. You can think of CBI coverage as working in four layers, and the conditions of all of those layers must be met if a claim is going to be covered.
To begin with, there needs to be some sort of physical damage for CBI coverage to kick in. If that first condition is met, your claim then needs to fit all four of the following conditions:
- The physical damage must be to a form of property that is covered under the policy, AND…
- There must be damage to a supplier or customer’s property, whether covered specifically or with a blanket policy, AND…
- The damage must be caused by a peril covered under the policy, AND…
- The damage must cause an interruption to the business operation.
If all of the preceding conditions are met by the claim, then the CBI insurance will cover a business interruption loss for the indemnity period specified in your policy.
What Are the Disadvantages of CBI Insurance?
First off, it’s incredibly complicated. We’ve done our best in this article to make everything easy to understand, but don’t let us distract you from the fact that contingent business interruption insurance is one of the most complex and layered business insurance policies we’ve dealt with on a regular basis.
Beyond that issue, there are some tricky spots that can cause snags with CBI policies that could result in your claim not being covered. For example, consider the following disadvantages. Could one of them apply to your business?
- With CBI insurance, you must submit proof of the loss quite soon after it takes place, which can be problematic—or downright impossible—if there’s an ongoing interruption with an indefinite end.
- Interruption losses of any kind can be difficult to quantify, but that’s even more true when you’re dealing with an interruption to someone else’s business.
- It can be difficult to prove an interruption-based loss to begin with, and if you’re going to be successful in doing so, you’ll need to document your claim in extreme detail.
How Can You Mitigate Supply Chain Risk?
Of course, insurance coverage isn’t the only way to mitigate risk factors associated with your supply chain. If you follow these relatively simple steps, you will go a long way toward safeguarding your business against supply chain interruptions and also possibly reduce your premiums with your CBI insurance provider.
- Identify potential weak spots in your supply chain
- Identify replacement or substitute suppliers/vendors
- Create viable contingency plans for supply chain interruptions
If your business relies heavily on the production of other companies to sustain itself, it might be a good idea to acquire contingent business interruption insurance as an extension of your business interruption policy.
When any one link on the supply chain experiences an interruption—whether on the customer or supplier side of your business—it can have significant consequences for your company as well.