What Is Contingent Business Interruption Insurance?

Business operations rely on a complex network of suppliers, customers, and other external entities. While traditional business interruption insurance protects against losses from direct physical damage to a company’s own property, a disruption elsewhere in this network can also halt operations and cause significant financial harm. Contingent business interruption insurance addresses this risk.

Understanding Contingent Business Interruption

Contingent business interruption (CBI) insurance, also known as dependent properties insurance or contingent business income insurance, is an extension to a standard property insurance policy. It reimburses a business for lost profits and extra expenses when operations are interrupted due to physical damage at the premises of a key supplier, customer, or other external entity. Unlike standard business interruption coverage that addresses losses from direct damage to the policyholder’s own facility, CBI extends protection to losses caused by disruptions affecting third parties. The term “contingent” in this context refers to the policyholder’s financial reliance on these outside businesses.

The purpose of CBI insurance is to shield a company from financial losses that occur when a dependent property suffers a covered physical loss, which then impacts the policyholder’s ability to operate. For instance, if a manufacturer cannot produce goods because a critical parts supplier’s factory is damaged, CBI could provide coverage. This helps manage supply chain risks.

CBI coverage is triggered by physical damage to the dependent property caused by a peril that would be covered under the policyholder’s own property insurance. The coverage provides for loss of net income, continuing expenses, and extra expenses resulting from the shutdown or reduction in operations of the dependent entity.

Covered Disruptions and Dependencies

Contingent business interruption insurance addresses financial losses arising from disruptions to specific types of external entities, known as dependent properties. These typically fall into three main categories: suppliers, customers, and leader properties.

Disruptions to key suppliers represent a significant vulnerability for many businesses. If a company relies on a single or a few suppliers for materials, components, or services, a physical damage event at that supplier’s facility can halt the policyholder’s production. For example, a car manufacturer depending on a specific parts supplier would experience a loss of income if a flood damaged the supplier’s factory, preventing the delivery of essential components. CBI insurance can provide coverage for such lost income until the supplier resumes production or an alternative can be found.

Similarly, a major disruption affecting a key customer can severely impact a policyholder’s sales and revenue. If a significant customer’s operations are halted due to a covered peril, the policyholder may experience a substantial reduction in orders. For instance, if a large retail chain’s distribution center is damaged by fire, a clothing manufacturer that primarily sells to that retailer would suffer lost income due to decreased demand. CBI coverage for customer dependence helps mitigate these financial losses.

Leader properties, sometimes called “attraction properties,” are another form of dependency covered by CBI. These are businesses or locations that draw customers to the policyholder’s area. An example is an anchor store in a shopping mall; if that store is forced to close due to physical damage, other smaller businesses in the mall may experience a drastic reduction in foot traffic and, consequently, a loss of sales. CBI insurance can also extend to other dependencies, such as logistics providers or even utility providers, if their physical damage leads to an interruption for the policyholder.

Key Policy Components

Contingent business interruption policies include several components that define the scope and extent of coverage. Coverage limits establish the maximum monetary amount an insurer will pay for a covered loss. These limits are often sub-limited, meaning they might be lower than the broader business interruption coverage within the main property policy.

Deductibles also apply to CBI claims, typically in the form of a waiting period before coverage begins. This waiting period, sometimes called a “time deductible,” specifies the duration, often 24 to 72 hours, that must pass after the disruption at the dependent property before the policyholder’s losses are covered. The period of restoration defines the timeframe during which losses are covered. This period generally begins after the waiting period and continues until the dependent property is repaired and able to resume normal operations, or until the policyholder’s business returns to its pre-loss level.

Policies may distinguish between named and unnamed dependent properties. Named dependent properties are specifically identified in the policy, often for critical, highly reliant relationships. Unnamed, or blanketed, coverage applies more broadly to any qualifying dependent property. Some policies may offer a hybrid approach, providing a higher limit for specifically named properties and a lower sublimit for unnamed ones.

Filing a Claim

Filing a contingent business interruption claim requires a structured approach and thorough documentation to substantiate the loss. The first step involves promptly notifying the insurer about the potential claim as soon as a disruption at a dependent property is identified.

Policyholders will need to provide various types of documentation to support their claim. This includes proof of the business’s dependency on the affected third party, such as contracts with suppliers or customers, or evidence of foot traffic generation from a leader property. Financial records are also essential, including historical sales data, profit and loss statements, and projections, to demonstrate the lost income and ongoing expenses. Additionally, evidence of the physical disruption at the dependent property and communications exchanged with that entity regarding the impact are necessary for the insurer’s assessment.

The calculation of the financial loss is a detailed process. It typically involves comparing the revenue the policyholder would have earned had the disruption not occurred with the actual revenue received during the interruption period. Businesses also need to account for any variable costs that were saved due to the reduced operations.

Once the claim is submitted, the insurer will conduct an investigation to verify the disruption, the dependency, and the reported financial impact. This may involve reviewing the provided documentation and potentially engaging forensic accountants or other experts to assess the loss. The process concludes with the resolution of the claim, where the insurer determines the amount of covered loss based on policy terms and the evidence presented.