Global supply chains have been under pressure throughout 2021 as a knock-on effect of the COVID-19 pandemic. While many sectors of the economy have recovered from the sudden stoppage in the first half of 2020, the logistics and supply chain industries remained operating at reduced capacity. Governments of major economies, such as the US and China, are expecting the crisis to extend into 2022.
Corporate Risk and Insurance spoke with Robyn Anderson (pictured above), an attorney in the insurance and recovery practice of US law firm Lathrop GPM, on how businesses affected by supply chain issues can navigate the crisis.
“Initially, the massive shutdowns and quarantines meant decreased manufacturing capacity and supply,” Anderson said. “At the same time, consumer behavior changed, with many people working from home and consuming goods in private spaces. These created an immediate disconnect between supply and demand, and the disruption was felt by almost everyone. But, even as supply and demand have gradually resynced over time, there are still kinks to be ironed out in distribution. Major ports are still occasionally being shut down due to outbreaks, labor shortages persist, and operational costs are skyrocketing, all of which can add pressure and delay to a strained, global system.”
These are just the supply chain issues caused by the pandemic. The “typical” supply chain disruptors, such floods, droughts, wildfires and hurricanes, still exist and may actually be worsening due to the effects of climate change.
According to Anderson, the first step to avoiding supply chain risks is to fully understand the supply chain and its vulnerabilities. Some companies harness technology such as artificial intelligence to better understand the details and real-time risks. Anderson also suggested that, if possible, businesses simplify their supply chains. Due to the pandemic, some businesses are also shifting away from “just-in-time manufacturing”, while others turn to temporary employees to address labor shortages.
“When disruptions do occur, businesses can also try to shift risk either through contractual risk transfers or placement of insurance coverage,” Anderson said. “A classic insurance option, for example, would be contingent business interruption coverage in a property policy. That insurance applies even if the insured does not suffer direct property loss or damage. It is triggered if a supplier or customer has physical property damage that then causes disruption along the supply chain, impacting the insured’s business. This type of coverage works well when physical events such as floods or fires cause disruption in the supply chain.”
However, with regard to the pandemic, contingent business interruption cover is not an open-and-shut issue, and it has been left to courts to decide whether the cover remains valid.
“With COVID-19, many courts have been tasked with answering whether the presence of the virus in a business may be “physical” damage to the property,” Anderson said. “Some courts have said yes, or at least maybe, but many others have said no, meaning contingent business interruption coverage would not apply if the disruption is solely due to a COVID-19 outbreak and closure, for example.”
In September 2020, the UK Supreme Court ruled that companies that held business interruption insurance and were forced to suspend operations due to the pandemic are entitled to be compensated by the insurers.
“There are other potential insurance options available to businesses, which would not require proving physical damage, but these coverages are less common, less standardized, and often costlier,” Anderson said. “As always, speaking with a knowledgeable broker and carefully reviewing any proposed policy language is key to making sure the coverage fits the company’s needs.”
Despite court rulings, business interruption cover amid the pandemic is still mostly uncharted territory, with uncertainty about whether a claim may be covered, as well as to the extent of compensation.
“The operative policy provisions and various exclusions are notoriously difficult to decipher, and courts have grappled with their interpretation and application,” Anderson said. “This means that how a policy will be interpreted may depend heavily on what law governs. Although coverage litigation may be inevitable in some situations, it is prudent to consider non-litigation options. Sometimes insureds and insurers will enter into standstill and tolling agreements to allow time for presentation and discussion of the claim, without having to worry about either party filing suit. Also, enlisting the services of a knowledgeable mediator to help with settlement discussions can also be a good investment, and a cost-effective alternative to reaching compromise without litigation.”
In anticipation of a supply chain incident, Anderson advised businesses to proactively review their contracts with business partners and their own insurance policies to determine what rights or remedies they may have.
“Pay careful attention to reporting and proof of loss deadlines and have a procedure in place to document both losses and efforts to mitigate loss,” she said. “Many good accounting firms specialize in calculating and documenting property, business interruption and contingent business interruption losses and claims.”