How to Recover Business Income Losses Caused by Third-Party Disruptions

DECEMBER 5, 2023

A common statistic cited in the insurance industry is that roughly half of all businesses that suffer a major property loss do not reopen or fail within three years. This alarming data should be cause for concern, because many businesses cannot generate their normal revenue when a key third party with whom they do business experiences a property loss of their own. Unfortunately, many companies neglect a critical element of property coverage: contingent business interruption.

Supply chain issues have exposed companies to a variety of business interruption risks that can result in significant income losses. These disruptions aren’t only limited to the supply chain; they can be applied to any interruption caused by an event that occurs away from the insured’s premises and prevents them from doing business. The impact of a business interruption due to a loss suffered by a supplier, a major customer, or by an anchor location can be just as devastating to your company as if it suffered the loss itself.

Contingent business interruption coverage can help protect against revenue-related losses by extending insurance coverage to reimburse lost profits and pay ongoing expenses including payroll, rent, and other continuing costs when your business’s source of income has been interrupted due to a third-party loss.

Many business owners don’t know about this coverage because their insurance agent has overlooked it or simply neglected to discuss it with them; others don’t have it structured properly to respond to their unique exposures, because most policies only provide low sublimits or exclude this coverage all together.

To illustrate the impact of this coverage, here are two claim scenarios showing very different outcomes:

Claim Scenario 1 — No Contingent Business Interruption Coverage

ABC Manufacturing is a small component parts company that supplies its products to a handful of customers, one of which represents 60% of its total sales. Unfortunately, that customer suffers an extensive fire and needs to shut down operations for the better part of a year. During that time, the customer does not purchase any parts from ABC Manufacturing.

ABC Manufacturing carries business income and extra expense coverage on its own property, but does not have a contingent business interruption endorsement. It cannot sustain the loss of income represented by a 60% decrease in sales, and must lay off most of its workforce and liquidate assets to stay afloat — and, a competitor forms relationships with some of its other customers due to the disruption.

Claim Scenario 2 — Contingent Business Interruption Coverage

XYZ Kitchens & Baths is a regional contractor specializing in building and remodeling custom kitchens and bathrooms for luxury homes. It depends on a single cabinet shop that is renowned in the area for exceptional quality products.

When the cabinet shop is struck by a tornado and demolished, dozens of jobs cannot be completed — or even started — on schedule. While XYZ’s customers know that this type of loss is out of XYZ’s control, they’re still frustrated with the delay and cancel projects. Fortunately, XYZ’s property policy includes a contingent business interruption endorsement that extends coverage to dependent properties, and the insurance company pays the lost income XYZ would have received from the cancelled contracted work.