As witnessed by the devastating impacts of hurricanes like Helene and Milton, natural disasters can do more than just damage physical premises — they can also wreak havoc on supply chains. For businesses, an interruption in the supply of raw materials, goods, or services can have a crippling effect on operations, leading to lost revenue, delayed production, and strained client relationships. Yet, many business owners and general counsel may not realize that their business interruption insurance could provide a lifeline in these challenging times.

The Overlooked Coverage For Supply Chain Disruption

While most businesses are familiar with the basics of business interruption (BI) insurance — coverage that compensates for lost income when a company’s operations are disrupted due to physical damage — there is a lesser-known but equally important facet of this coverage: Contingent Business Interruption (CBI).

CBI coverage steps in when a company’s supply chain is disrupted due to physical damage sustained by a third-party supplier, distributor, or customer. In the case of hurricanes, which can cause widespread destruction, this coverage can be critical in mitigating losses.

For instance, if a key distributor in North Carolina is unable to transport goods due to road closures after Hurricane Helene, or a key supplier in Florida is forced to shut down after Hurricane Milton, leaving a company without crucial materials, CBI coverage could reimburse the business for the lost income during this downtime.

However, to access this coverage, it is essential to understand the policy terms and to act promptly in the aftermath of a disaster.

When Does CBI Coverage Apply?

Not every supply chain disruption will trigger CBI coverage. Here are the key factors that determine whether a business is eligible for benefits:

1. Physical Damage Requirement: CBI coverage is usually triggered only when the third-party supplier, distributor, or customer sustains physical damage from a covered peril, such as a hurricane. If the disruption is due to other factors — like labor strikes or economic downturns — CBI may not apply.
2. Covered Perils: The peril that caused the damage must be covered under the business insurance policy. While hurricanes may fall within the scope of coverage, it is essential to ensure that related risks — like flooding — are also covered. Many commercial property policies exclude flood damage unless a specific endorsement has been added.
3. Documentation of the Loss: As with any insurance claim, proper documentation is key. Businesses need to provide evidence of both the physical damage at the supplier’s site and how that disruption directly impacted their own operations. Detailed records of lost income, production delays, and additional expenses incurred — such as securing alternate suppliers — will be critical to support a claim.

Why Business Owners and General Counsel Should Review Their Policies Now

Far too many companies only become familiar with the fine print of their insurance policies after a disaster strikes. However, taking a proactive approach to coverage can make a significant difference when the unexpected happens.

Businesses should review their commercial property policies regularly — particularly in the lead-up to hurricane season — to ensure they have sufficient CBI coverage and that they understand any exclusions or limitations. For instance, are they covered if their supplier in another country is affected by a storm? How long is the waiting period before CBI kicks in? What is the duration of the CBI coverage? What are the CBI limits? These are questions every business should be asking.

Moreover, many companies do not realize that extra expense coverage — which compensates for additional costs incurred to keep a business running — can be just as valuable. Whether it is paying premium rates to alternate suppliers or expediting shipments to avoid missed deadlines, this coverage can reduce the financial hit from a supply chain disruption.

Navigating the Claims Process: The Importance of Experienced Legal Counsel

When disasters strike, timely and effective action is critical. Filing a successful CBI claim is often a complex process involving precise documentation, negotiation with insurers, and, in some cases, legal disputes over policy language and coverage triggers.

Taft’s experienced insurance recovery attorneys assist companies in maximizing their insurance recovery, whether by guiding them through the claims process, reviewing and negotiating settlements with insurers, or pursuing litigation if necessary.

If a business has been impacted by a hurricane and is facing supply chain disruptions, Taft can help assess whether current insurance coverage applies to the loss, assist with filing a claim, or provide advice on how to strengthen the policy moving forward.

Conclusion

As supply chains become increasingly vulnerable to disruptions, BI insurance — particularly CBI coverage — is more important than ever. The aftermath of a hurricane and other natural disasters can bring unforeseen challenges, but with the right coverage in place and a solid understanding of the policy, businesses can excel where others may falter.

If a supply chain has been interrupted due to the effects of recent hurricanes or if coverage is uncertain, do not wait until it is too late. Contact experienced counsel to discuss options and ensure that the business is fully protected.