How 3rd Party Liability Insurance Protects Your Supply Chain!

Liability Insurance

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Businesses face all sorts of risks in almost all aspects of their business operations. Perils in the supply chain are some of the risks that can potentially cause severe and lasting damage to the capability of a business to operate and its reputation with clients and customers.

Large enterprises and multinational corporations often have to manage risks at several tiers or layers of their suppliers, vendors, and service providers. 

When a business suffers from disruptions to its supply chain, this can have an impact on all aspects of its business operations. And they can often result in financial losses and damages.

Thus, if you want to know how you can protect your business from potential claims by your customers and buyers, you might want to read more information on product liability insurance for your business.

Here’s how third-party liability insurance protects your business from supply chain disruptions:

Protects You From Supply Chain Disruption

One of the first things that third-party liability insurance can do for your small business is to protect it from supply chain disruptions. An unplanned and unscheduled interruption or cyber network disruption of your supply chain will have potentially damaging domino effects down the line for your business. For one, it will disrupt the availability of certain parts that you use in production if you’re manufacturing, assembly, or processing business.  

Industry observers have noted the following leading causes of disruption along the supply chain:

  • Extreme weather disturbances and natural disasters
  • Transportation stoppages and disruptions
  • Geopolitical conflicts and social instability
  • Steep price hikes
  • Attacks on cybernetworks and infrastructure

Lasting Consequences And Damages

There are some supply chain disruptions that could cause impacts and consequences to the company for many years, even after the incident. In these kinds of disruption, the financial costs are prohibitive and damaging. With the increasing number and frequency of potential causes of disruption, it has become necessary to get third-party liability insurance to protect your business from unpredictable risk

As part of a company’s overall risk management strategy, it would be wise to consider getting insurance against disruptive events and activities. It would at least minimize their financial losses and mitigate the negative impact of supply chain disruption. Doing so, all businesses from small family shops to global enterprises should consider getting third-party liability insurance against supply chain disruptions.  

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Protection Against Liability To Third Parties

Another essential aspect of the supply chain disruption insurance is that it will protect your business from liabilities to third parties who aren’t part of your supply chain but would be affected by disruptions to it.  

The foremost example of third-party entities that would be affected by supply chain disruptions is your wholesale buyers, institutional clients, and even individual customers. If these businesses rely on you for the supply of their raw materials, equipment, or merchandise, they will suffer financial and business losses when you suddenly cut off or reduce your sales to them.  

For example, some of your clients, customers, or buyers, might be dependent on you for some of the raw materials, parts, or inputs that they use in producing or manufacturing their final products. You might be a leading manufacturer of electric battery and inverter systems.

One of your clients might be an electric vehicle (EV) manufacturing company and they designed one of their best-selling make and models using one of your best battery systems as an essential component of their EV.

Supply Agreements And Damages Clauses

To make sure that you’re legally obligated to supply them with your indispensable battery systems, they made you sign a supply agreement with them. You’re obliged to supply certain models of your battery systems to them, and they made sure to lock you in as a supplier for several years.  

To cap it all, they included a clause or provision which says that you’ll have to pay them damages if you fail to deliver the battery systems that they order from you within a certain number of days from the time they sent the purchase order (PO) to your offices.

If something happens to your suppliers, and you can’t meet production deadlines, you might not be able to meet your obligations to supply in your supply agreement. If things go south, you might have a demand and suit for damages in your hands in a couple of weeks.  

Contingent Business Interruption (CBI) Insurance 

Contingent Business Interruption (CBI) insurance is a concrete example of third-party liability insurance that can protect you from incurring liability over the supply chain failures of your partners. It’s an essential component of many companies to their risk management strategies. It’s an effective non-technical solution to the financial impact of supply chain disruptions.  

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CBI is triggered when one or several of your partners, suppliers, or providers suffer a loss that degrades their ability to meet your supply requirements. It can at least provide financial relief if the impact severely disrupts your ability to operate or complete your production process. But CBI has its limitations, and it doesn’t cover all known risks and perils. And CBI only provides coverage if you are dependent on the property which suffered the disruption.

Broader Supply Chain Coverage

The other type of specialized supply chain insurance is known as the Broader Supply Chain Coverage insurance. It provides coverage of some of the other risks and perils which aren’t specifically covered by CBI. Here are some of the risks and disruptions covered by Broader Supply Chain Coverage:

  • Damage to property 
  • Disruptions caused by natural calamities
  • Disruptions to transportation systems and logistics networks
  • Work disruptions such as labor union strikes and labor shortages
  • Industrial mishaps and workplace accidents
  • Financial difficulties such as disruptions to your cash flow cycle
  • Other causes resulting in production stoppages
  • Risks and uncertainties caused by political instability

It’s possible that you might not be able to have a technical solution right away to the disruption. Both CBI and Broader Supply Chain Coverage insurance would at least allow you to recover some of your financial losses from lower productivity of idle but paid workers, unrealized sales and undelivered orders, and possibly even canceled purchase contracts. It will also protect you from claims for damages by your customers and other third parties who rely on your supplies.  

Conclusion

In the past few years, there have been increasing risk factors that have caused disruptions to the supply chains of large multinational corporations as well as small businesses. The globalization of the supply chain networks and processes has spread out to the players but also multiplied the risks and vulnerabilities.

Some companies suffered financial losses and damage as a result of supply chain disruptions. These could have been mitigated by business disruption insurance.

Liability insurance article and permission to publish here provided by Claire Glassman. Originally written for Supply Chain Game Changer and published on February 25, 2022.

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