Four Common Business Income Coverage Gaps

According to the Allianz Risk Barometer, a survey of businesses and what they feel are their biggest risks, the top three risks that companies face in 2019 are all easily insurable. Unfortunately, after reviewing thousands of policies I often find that these risks are either not adequately covered or, even worse, not covered at all.

The top three risks that businesses face in 2019 according to the survey are:

  • Business Interruption (including supply chain disruption)
  • Cyber Incidents
  • Natural Catastrophes

I am not going to go into great detail in this post about where I typically see coverage gaps in relation to each of these risks as that would be much too lengthy. Each risk deserves its own post. What I will say is that the first sections I look at when reviewing both the Cyber and Property policies of prospective clients is the Contingent Time Element (Contingent Business Income and Contingent Extra Expense) section of the policy which is an extension of Business Interruption.

What is Contingent Time Element? Contingent Time Element is a financial loss that you incur as a result of an interruption at the premises of a customer or supplier. This could mean your key supplier had a fire and therefore cannot produce their part and as a result you suffer a financial loss because you don’t have enough inventory. This would be Contingent Business Income. Using the fire example again, it could also mean having to use a temporary supplier at a higher cost until your original supplier gets back up and running. This would be Contingent Extra Expense.

Why do I look at this section first? Simple, I usually find one of four scenarios:

  • There is no coverage – a high number of cyber policies have no coverage for this risk. If you are an online retailer and use a third party to host your site and that host goes down you could be out of luck.
  • Coverage is insignificant – Most property policies will automatically provide a token amount of coverage, maybe $25k or $100k, which can be insignificant, especially if you have a couple key suppliers or customers.
  • Coverage is inadequate or excluded – I have seen companies get the limit right but then have coverage excluded because they are using a supplier or have key customers that are outside of the coverage territory. For example, if you have a key supplier in Asia they could very well be excluded from the policy because they are outside of the coverage territory.
  • Contingent Business Income is covered but Contingent Extra Expense is excluded or the limit is insignificant.

These are not the only coverage gaps I find when it comes to Time Element and Contingent Time Element coverages, but these issues are the low lying fruit where I typically find coverage gaps without knowing much about the prospect’s business.

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