Is Your Insurance Coverage Right for a Tight Supply Chain?

Is Your Insurance Coverage Right for a Tight Supply Chain?

Disrupted supply chains are an increasingly critical issue in the COVID-era economy. With inflation, longer transportation times, labor shortages across multiple industries, and supply-demand imbalances in many markets, it has become much more difficult to produce and deliver goods on a predictable schedule. Particularly for portfolio companies in physical markets (manufacturing, construction, transportation), there are some basic insurance and risk management implications to consider given the market dynamics:

Sales/Cost Exposures: Many policies are priced based on gross sales or total costs. With the supply chain driving inflation, if you are expecting your sales or costs to significantly exceed initial estimates, you may be able to work with your broker to negotiate a reduced rate on your audit. If planning for a new policy term, you may also consider changing to a units-based audit basis rather than a dollar-based audit basis. This can help offset the potential impact of inflation.

Insured Property Values: Supply chain issues have led to higher inventories and higher unit costs. Your Business Personal Property/Inventory values may be based on a historical norm, but if you are carrying higher levels of inventory or if your costs or selling prices have increased, you may need to review your insured values.

Financial Losses: Whether you’re in the construction, manufacturing, or transportation business, your customers rely on you to perform your work on time. If you fail to meet scheduled delivery or completion dates, your customers may seek to hold you responsible for delays. The best way to manage this is to limit your liability with effective contracts, but under certain circumstances professional liability insurance may provide some protection.

Cargo Insurance: You may be sending or receiving shipments under new arrangements – changing from ship to air, or from long-distance truck to rail. You may also have changed shipping format and be shipping in greater bulk. If you have made changes to your logistics, ensure your cargo/property in transit policy is still providing the right coverage.

Dependent Business Interruption: If you are reliant on a single supplier for any critical inputs, a loss at their facility can have a direct impact on your business. Dependent or Contingent Business Income coverage will pay to offset your costs or lost income in the event of an insurable loss at a key supplier. Review your supplier relationships and ensure that you are covered for the potential impact if you lose access to a critical source.

Your portfolio companies have had to adapt as the market has changed. Insurance policies are typically flexible enough to absorb normal-course changes in operations, but when market dynamics shift as dramatically as they have in recent months, a closer review of your insurance polices and estimated exposures can be helpful.

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