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The recent series of trade-related supply chain disruptions, along with the imposition of new tariffs, have intensified the demand for comprehensive risk-mitigation tools and insurance offerings.
Following are some options available to policyholders who are seeking to strengthen their safety nets against the mounting risks associated with global trade.
Contingent business interruption is a type of insurance that protects a policyholder from lost profits resulting from physical damage to the property of an impacted supplier, vendor or customer, rather than direct damage to the policyholder’s own property. CBI, therefore, protects businesses that are reliant upon third parties (such as suppliers or vendors) to perform their own business operations. To illustrate the importance of CBI, consider Baltimore’s Francis Scott Key Bridge collapse. Traditional business interruption insurance would not provide coverage for the myriad companies that experienced lost profits due to the resulting supply chain disruption, but didn’t sustain physical damage to their own property. Policyholders with CBI, however, would not have faced the same issue, as these policies provide coverage when the physical damage occurs to an impacted supplier, vendor or consumer.
To maximize protection, policyholders should review policy language with an eye toward endorsements and exclusions that may include or exclude risks particular to the region or country in which they’re doing business.
Cargo insurance is a comprehensive means of addressing risks associated with the loss, damage or theft of goods during transit. Such policies would cover losses from incidents such as the Morning Midas carrier fire off the coast of Alaska, which led to the loss of around 3,000 cars.
There are countless variations across cargo insurance policies, but the most commonly used forms are either all-risk or named perils coverage. While all-risk coverage typically involves higher premiums, it provides more comprehensive coverage, because it covers all causes of loss except those that are explicitly excluded. In either case, policyholders should review their policy language to ensure that typical exclusions for things like “poor packaging,” “inherent vice” and “loading/unloading” aren’t written so broadly as to limit coverage for risks related to particular industries or locations.
Trade credit insurance protects an insured’s capital and cash flow, and mitigates the risk associated with economic downturns. TCI provides coverage when an insured’s business partner or customers are unable to pay for goods or services, whether the inability to pay is due to insolvency, bankruptcy or political instability in the partner or customer’s county of operation. It can help policyholders secure more favorable financing terms from lenders, because by insuring their accounts receivable, policyholders provide greater assurance to lenders that payments will be collected, even if cash flow is disrupted due to issues with a supply chain.
TCI can be tailored to suit an insured’s specific risk exposure and budget, including providing coverage only for specific high-risk business partners operating out of certain countries. Policyholders should also be aware that TCI policies often include detailed and sometimes complex reporting obligations, which insurers may invoke as a basis to deny or limit coverage where a policyholder does not comply fully.
Supply chain insurance is a specialty, all-risk type of insurance which responds to losses arising from supply chain disruptions, and can be tailored to address risks associated with a specific country, region or industry. Beyond customizability, SCI policies are also beneficial because — depending on the particular language of a policy — they cover losses other than those resulting from physical damage, such as natural disasters, that a typical commercial policy would not. Firms working in international trade and depending on upstream suppliers would be well-served to consider adding SCI coverage to address potential gaps.
Political risk insurance protects policyholders against losses caused by political events or instability in a foreign country. Common covered risks include expropriation, trade restrictions, and even war and acts of terrorism. Thus, PRI serves to insulate policyholders from the adverse financial effects of government action and other political events outside policyholders’ control. For example, it could protect a policyholder whose business operations in the Middle East are impacted by the Israel-Iran conflict.
PRI is particularly well-suited for firms looking to expand to developing nations, as it can offset the risk associated with political volatility. Policyholders, as well as potential investors, can more confidently pursue such ventures knowing that they are protected against risks outside of their control.
Cyber insurance shields policyholders from financial losses arising out of cyberattacks, data breaches and other online threats. In an era where firms continue to rely more on digital systems and automated processes, cyber insurance policies are more important than ever. They typically provide both first-party coverage for losses associated with response costs, business interruption and legal expenses, and third-party coverage for losses associated with claims asserted against the insured entity.
While cyber insurance policies can often provide extensive coverage, there are various endorsements and exclusions that serve to limit coverage, particularly when the risk does not arise from the policyholder. Thus, insureds should carefully scrutinize policy language to ensure there are no gaps in coverage.
Following are some key steps to take, to get the most benefit out of trade insurance.
Know your particular risks and vulnerabilities. The trade-related risks that an insured faces vary significantly based on factors such as the industry it serves, where it’s located in the supply chain, and which countries or regions it depends upon for transport or upstream components.
Review existing insurance policies to determine what coverage exists, and identify potential gaps in coverage that can be addressed by some of the insurance options discussed above.
Maintain accurate and complete records. Proper documentation, including detailed records of historical and projected performance, is essential for understanding the cost of securing substitute resources, transport and logistics. It’s also critical, in the event of a claim, that an insured be able to provide information on all incurred damages, costs and losses.
From piracy to accidents and political upheaval, the threats facing the international shipping industry continue to intensify. There are many insurance options available to help firms mitigate the associated risks, both known and unknown. By working with industry professionals to understand the nuances of these policies, policyholders can implement tailored and comprehensive insurance coverage plans that protect not only their shipments, but their bottom line.
Michael S. Levine is a partner, and Evan J. Warshauer is an associate, in the Insurance Coverage group of Hunton Andrews Kurth LLP.
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