Contingent Business Interruption insurance protects a business from income losses resulting from disruptions in the operations of key external partners—such as suppliers, manufacturers, or customers.
What happens if you operate a 100% online business and your data cloud provider suffers a major outtage due to a fire? Or if your business is reselling furniture and your key supplier’s premises are severely damaged by a hurricane? This article explains what contingent business interruption insurance is all about and how it differs from other business interruption (BI) coverage.
What is contingent business interruption insurance?
Contingent Business Interruption (CBI)—also known as dependent business interruption—is insurance that covers a business’s loss of income due to disruptions at a third-party provider, such as a key supplier, vendor, or customer. This coverage protects against financial losses when a key external partner’s operations are interrupted by a covered peril (like fire or natural disaster). For example, if an online store’s credit card processor goes down, the store may be unable to process payments and will lose revenue. CBI is all about mitigating supply chain risk. It’s important to remember that CBI does not cover loss from direct damage to the insured’s own property. That is where your property insurance comes in.
CBI insurance typically applies in these scenarios:
- Supplier interruption – A manufacturer can’t produce goods because a critical parts supplier’s facility was damaged by a hurricane.
- Customer interruption – A major customer’s operations are halted due to a flood, reducing your sales.
- Lead property interruption – A major nearby business draws traffic to your location (e.g., an anchor tenant in a mall); if they close due to a fire, your foot traffic drops.
Depending on the policy wording, CBI insurance may also apply in situations such as:
- Service interruption – Your logistics provider suffers a major system outage due to a lightning strike, causing full service disruption and impacting your operations.
- Contingent transportation disruption – A fire at a major shipping port delays your imports, disrupting production or sales.
- Event-based dependencies – A hotel loses bookings because a nearby stadium event is canceled due to tornado damage.
Businesses depend on third-party service providers, such as vendors and suppliers, to make an income. CBI provides a safety net that can help businesses recover quickly from any unexpected events and continue to thrive.
How do CBI and BI insurance compare?
Contingent Business Interruption insurance protects a business from income losses resulting from disruptions in the operations of key external partners—such as suppliers, manufacturers, or customers. It does NOT cover interruptions caused by damage to the insured company’s own property. Those losses are the domain of Business Interruption (BI) insurance. Let’s look at how CBI and BI insurance compare.
Coverage:
CBI insurance covers losses resulting from disruptions to a business’s supply chain or the operations of a key customer or supplier. For example, if a manufacturer’s primary supplier experiences a fire and cannot provide the necessary raw materials to the manufacturer, the manufacturer may be able to recover losses through CBI coverage.
On the other hand, BI insurance covers losses resulting from physical damage to a business’s own property. Examples here include damage from a fire or a natural disaster. The coverage applies expenses like rent, payroll, and other costs associated with running the business while repairs are being made. Business interruption insurance coverage provides financial protection to businesses against supply chain disruptions, natural disasters, and other unforeseen events that can cause a loss of revenue.
Timing:
Both CBI and BI coverages are subject to waiting periods and restoration periods. A waiting period is the amount of time that must pass before the coverage goes into effect. The current standard for waiting period is 12 hours. During this period, the business is responsible for any losses it incurs. A restoration period is the amount of time it takes for the business to resume normal operations after a disruption. The restoration period can range from a minimum of 90 days to a maximum of 180 days, depending on the terms and conditions of the insurance policy. Coverage typically ends when the business is fully restored.
Additional coverage:
In addition to CBI and BI coverage, extra expense coverage may also be available. This coverage can help businesses pay for additional expenses they may incur while trying to restore operations. For example, renting temporary office space or equipment. Note that extra expense coverage provides an additional layer of protection and is not a substitute for CBI or BI coverage.
As with all insurance, specific terms and conditions of CBI and BI coverage can vary depending on the insurance policy and the insurance provider. Take the time to read your policy wording carefully and ask questions.
What triggers contingent business interruption coverage?
Whether or not a loss will be considered for CBI insurance coverage depends on the details of the situation. Here are some key criteria that need to be met for CBI coverage. Look to your policy wordings for the details on how these criteria apply to you and your situation:
Physical damage to dependent property
The loss must arise from direct physical damage (from a covered peril) to a supplier’s, customer’s, or partner’s property. Depending on the specific policy, coverage may also be triggered by a cyber event impacting a technology vendor or utility provider.
Covered peril
Contingent business interruption is a ‘named perils‘ coverage. This means that the insurance covers only loss incurred as a result of the perils (for example, fire or flood) that are specifically listed (named) in the policy wordings.
Covered third party
In order for a loss to be considered for coverage, the third party that suffered the physical property damage causing the insured’s loss must qualify for coverage. Not all CBI policies cover service providers, for example, or indirect dependencies. Likewise, if the policy requires named dependents, is the impacted third party listed on the policy?
Dependency on third party
In order for contingent business interruption coverage to apply, there must be a dependent relationship between the insured and the third party causing the loss. That is, the insured was ‘dependent’ on the supplier, customer, etc. and therefore the loss was unavoidable. Moreover, the loss directly resulted from the incident. The insured may be required to provide documentation proving their reliance on the third party.
Income loss during the restoration period
The physical damage to the dependent third party must be the cause of the insured’s income loss. And that CBI will only cover the loss incurred during the time reasonably needed to repair the third party’s damaged property and resume operations. Again, CBI coverage typically requires detailed proof of the dependency and the impact on income.
CBI in a property policy
Contingent business interruption coverage is typically available as an add-on to a commercial property insurance policy. Contingent Business Interruption (CBI) on a property insurance policy helps compensate for lost income or extra expenses a business may incur as a result of a supplier or customer’s property damage. In other words, the CBI coverage would compensate the company for the resulting revenue loss or expenses if a supplier or customer’s property damage affects their operations.
For example, a manufacturing company gets most of its inputs from a certain supplier. However, a fire outbreak made the supplier’s factory suffer catastrophic damage. The supplier could no longer provide the raw materials the manufacturing plant needed to continue in business. All operations at the manufacturing plant were abruptly halted. If this manufacturing plant has CBI coverage in property form, the policy would provide compensation for the resulting revenue loss or extra expenses incurred to find an alternate supplier.
CBI coverage is often added as an endorsement to a property policy, rather than being a standalone policy. The specific terms and conditions of the coverage can vary depending on the policy and insurer.
CBI in a cyber policy
You can also purchase contingent business interruption as an add-on to a cyber insurance policy where it’s not already included in the wording. This coverage is different from the CBI coverage available with a property insurance policy. With a cyber policy, the contingent business interruption component covers income loss suffered as a result of a third-party IT vendor experiencing a cyber incident. This is ‘dependent’ interruption coverage, as the business depends on the IT service provider to operate.
For example, a five-star hotel relied on a third-party booking system to manage reservations and process its payments. Their system was infected by malware. As a result, the system was down for several days. The hotel was unable to take new bookings, process payments, or manage existing reservations. It resulted in a huge loss of revenue months later. Guests who would have stayed at the hotel during the outage booked elsewhere.
Without contingent business interruption coverage, the hotel would be left to bear the financial burden of lost income. However, the hotel had this coverage in their cyber policy. The policy covered the hotel’s lost profits and extra expenses incurred to mitigate the loss.
The scope of this type of coverage can vary significantly between insurers and policies. Some insurers may only offer coverage for specific technology suppliers, while others may include all suppliers. There may also be sub-limits and supplier schedules that further define the scope of coverage. It’s essential to carefully review policy terms and negotiate coverage as needed. This ensures adequate coverage of the business’s specific risks.
What to watch for when buying CBI coverage
Always ask about the following when buying CBI coverage or re-examining the coverage that you already have.
- Named or unnamed third parties. Some policies require that the insured’s dependent suppliers, customers etc. be named on the policy. Any not listed are then excluded from coverage. Other policies cover any dependent third party that meets the policy’s qualification criteria. This broader coverage is generally more expensive. Ascertain what type of policy wording you have and ensure that your key dependencies will indeed be covered by the policy that you buy.
- Named perils. What perils are covered and which are excluded from coverage? Some excluded perils may be available by endorsement (an add-on that you purchase)
- Type of dependents. Do the categories of dependents covered by the policy align with your business’s key dependents – suppliers, customers, service providers, etc.
- Direct or indirect dependencies. Does the policy offer cover if it’s your supplier’s supplier that suffers the disruption due to property damage? Not all policies do.
Understand your CBI exposure
In today’s interconnected business environment, organizations rarely operate in complete isolation. Every business, big or small, depends on a variety of external organizations to remain functional and profitable. From suppliers and customers to partners and vendors, each of these entities plays a crucial role in ensuring the smooth operation of a business. Supply chains have become complex, crossing borders, often involving multiple tiers. When one of these key entities experiences a sudden shutdown or disruption, it can have a cascading effect on other businesses that depend on them. Exacerbating the situation, just-in-time production means that on-site inventories are low. So low that even a very short stoppage of incoming materials can have a significant financial impact.
The following characteristics align with increased vulnerability to a contingent business interruption. Do one or more of these apply to your business?
- High dependency on a few key suppliers or customers
- Complex supply chain involving long distance, multiple countries, multiple tiers
- Just-in-time production with low or no inventory buffer to cushion supply delays
- Reliance on critical infrastructure providers e.g., logistics, cloud
- Lack of alternative vendors or routes
- Time-sensitive or seasonal revenue where even a short shutdown during peak earning season can have a devastating effect.
- Contractual obligations or penalty clauses where delays and missed deadlines result in financial penalties and lost contracts.
Business owners need to have adequate insurance coverage to protect them against the financial losses that may result from the disruption of a critical business supplier, partner or customer. If any of the situations describe your business, then it’s time to take a serious look at CBI insurance.
Key Takeaways
- Contingent business interruption insurance (CBI) provides financial protection to businesses against supply chain disruptions.
- CBI addresses loss due to third-party property damage, whereas BI covers damage to the insured’s own property
- CBI is a named perils coverage
- In a property policy, CBI covers losses incurred as a result of damage to property of third parties affecting business operations.
- In a cyber policy, CBI covers losses due to disruption to third-party IT vendors.
