Hurricane Matthew battered Florida, Georgia and the Carolinas in early October, inflicting up to $6 billion in losses across the Southeast. It was a devastating storm but, if your business is located in Colorado, you had nothing to worry about, right?
Well, not entirely.
Companies nowadays are doing more business with suppliers and vendors far from home, sometimes even overseas.
Whether you’re operating a craft beer brewery or an aerospace plant, globalization means transactions that cross state lines and national borders are an everyday part of business life.
Global trade treaties might have fallen out of favor with some recently, but world trade was back to its pre-economic crisis level as early as 2010 and has been growing by 10% annually ever since.
What this really means is that, as we become more interconnected, we also are increasingly interdependent. So hurricanes that strike thousands of miles away are as close to home as, say, a tornado that tears through a town just east of Denver.
A brewer that relies on a hops farmer in Kansas understands this vulnerability well, as does the aerospace maker that relies on shipments from a polymers operation in Asia, a region of the world where typhoons, tempests and tropical storms regularly inflict havoc.
The JIT factor
Natural disasters aren’t the only worry. The increasing complexity of supply chains makes business more efficient but also more susceptible to interruption. For example, “zero stockholding” and “just in time” manufacturing means companies reduce their inventory costs by keeping inventories as low as possible. But what happens when there’s no buffer to offset a disruption in production?
Consolidation also has created a new risk in that there are now fewer suppliers in certain industries. The auto industry, for example, today has fewer than two dozen major suppliers vs. hundreds of such companies in the early 2000s.
How does insurance help?
When disaster strikes at home, there’s Business Interruption coverage, a line which protects us from losses that occur on our premises and disrupt our ability to conduct business. Companies also are increasingly turning to what’s known as Contingent Business Interruption coverage, which helps them stay on their feet when disaster befalls a vendor or even a key customer.
CBI and Contingent Extra Expense coverage reimburse companies for lost profits and the expenses that result from that interruption of business on that vendor’s or client’s premises, not their own.
CBI makes sense for your business depending on how you answer a few key questions.
How much of your company’s operations rely on another entity? How easily could you find a new vendor if yours is forced to close down in the wake of some disaster or if their equipment suffers massive failure? How quickly could you get back to normal if you lost a key source of raw material?
CBI doesn’t cover events like power outages, military invasions or losses that arise from damage to heating or cooling equipment. But few of the largest corporations in the U.S. go without it and increasingly, middle market and smaller businesses are finding it invaluable, too.
Morgan P. Mahoney is a CCIG Insurance Advisor. Reach him at morganm@thinkccig.com or 720-330-7926.
Read: Directors and Officers Insurance: Your Last Line of Defense
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