Catastrophes: Before You Have a Loss and Need Help, Scrutinize Your Coverage

Recent natural disasters like Hurricanes Harvey and Irma have put southern businesses and their widespread losses in the headlines. Yet no matter where a business is located, there are countless other events that can create equally devastating losses and damage.

Hacker-directed malware and ransomware, explosions, fire, equipment failures, and a myriad of other hazards can leave a business in hardship. Consider these recent and real examples:

• The failure of a custom-built hydraulic press at a manufacturing facility disrupted production for a matter of weeks and adversely affected the sales cycle, resulting in a reduction of incoming orders well after the completion of repairs.
• A chemical processing facility experienced an explosion that resulted in permanent closure.
• A grain elevator in central Wisconsin exploded, resulting in significant damage and the loss of life of several employees.
• A warehouse/logistics provider lost the ability to use its facility after the roof was destroyed in a storm.
• Excessive rainfall caused flooding in southeast Wisconsin and northeast Illinois this past summer, resulting in property damage and disrupted manufacturing operations.

Manufacturers and distributors like these are especially vulnerable for obvious reasons. For many, the physical losses are compounded by a loss of sales and accompanying profits. When the workplace is damaged, there’s no work-at-home option for manufacturing employees. Likewise, products are tangible—not contained on a laptop.

Many manufacturing processes rely on high voltage, volatile chemicals, unique equipment, or extreme temperatures. Similarly, many distributors rely on a network of facilities that can be compromised if a single node becomes unavailable.

These business types’ reliance on vendors and/or customers requires physical coordination and logistics, without which production and profits are lost.

One way manufacturers and distributors can mitigate these unique hazards is to better understand their insurance coverage and potentially make changes—before suffering a loss.

Better Business Coverage

There are many forms of business coverage, from property and liability coverage for property damage to coverage for equipment failure to even cyber coverage. These coverages by themselves, however, provide no compensation to the extent that a company’s operations are impaired following the event. Instead, they trigger business interruption coverage, contingent business interruption coverage, and/or extra expense coverage only if such coverages are part of a manufacturer’s insurance program—and they should be!

• Business interruption coverage complements a manufacturer’s coverage for property damage, equipment failure, or cyber coverage by reimbursing the company for its loss of pretax profit plus continuing expenses while it is either shut down or impaired. Unlike physical damage that can be appraised or expenses that can be added up to determine a claimable amount, the amount of pretax profit a company has lost as a result of being shut down or impaired is an estimate.
• Contingent business interruption (CBI) coverage is an extension of the normal business interruption insurance. However, rather than being triggered by an event at the company itself, it is triggered by an event at one of the company’s suppliers or customers. The event must be a covered loss per the CBI policy and must result in a disruption and loss of profits for the insured company. The computation of losses is similar to business interruption coverage.
• Extra expense coverage generally provides reimbursement to a manufacturer that is operating at an impaired level because of a covered property/equipment loss or other event that has disrupted its normal operations. The most intuitive description of extra expenses is that additional expenses are incurred to continue operating, albeit in an impaired manner.

For manufacturers, additional expenses could be incurred if a non-economical process is utilized following an equipment failure that affected the company’s optimal process. Similarly, a distributor could incur additional expenses if it needed to adjust its delivery/warehousing/logistics to work around facilities that are damaged or unusable.

Knowing that these beneficial coverages are available and vital, your company can take the following prudent measures:

• Identify your company’s vulnerabilities. Manufacturers should be aware of their internal as well as external vulnerabilities and recognize that having only minimal coverage may leave them with significant income shortfalls. For example, reliance on obsolete or antiquated equipment that is insured against equipment failure could result in an extended need for business interruption coverage. Similarly, reliance on a sole-source vendor that suffers from losses could result in a shutdown or impaired continuation if another supplier cannot be located—an instance when having contingent business interruption coverage would be beneficial.
• Review coverages in your policy before agreeing to your next renewal. Review your policy with an eye toward your company’s vulnerabilities as well as coverage limitations. A pleasant surprise for many companies, despite the occurrence of a loss, is that many policies provide coverage for claim preparation services. Companies that realistically approach the potential for an insured-against loss will tend to select a coverage limit that is greater than the bare minimum. Depending on the amount of the coverage, claim preparation by an insurance claims professional/loss accountant may result in no additional cost to your company. Make sure you get adequate claim preparation coverage to help you when you really need it. Talk to your broker about coverages and costs.
• Reconsider carrying only minimal coverage for the sake of saving premium dollars. Companies that have never suffered from a loss may naively minimize their coverage to save premium dollars. Such savings will be cold comfort when a loss occurs and the company discovers that it will be completely shut down or impaired for an extended period of time but has limited business interruption coverage. The cost of additional coverage would have been minimal compared to the costliness of facing an extended period of impaired operations.

Don’t Leave Your Business Exposed

Manufacturers are especially vulnerable to property damage, equipment failures, and vendor problems resulting in supply disruptions. These vulnerabilities can be partially mitigated through the use of business interruption, contingent business interruption, and extra expense coverage.

Losses are random, but preparation is fully within your company’s control and will be invaluable if and when it is needed.

If the unthinkable happens and your company is affected by a loss, Wipfli can help review your policy for applicable coverage, assist in the documentation and preparation of claims, and help negotiate an equitable settlement with your insurer.