Posted on 31 Jan 2013 by Neilson
The aftermath of Hurricane Sandy has driven home the financial exposures to disruptions in critical supply chains.
Don Harrell, senior vice president of marine for Liberty International Underwriters, estimates that total supply-chain interruption losses from Sandy could reach up to 15% of total insured commercial losses, adding it might be the largest commercial property/casualty insurance loss in history. There is a lot of logistical infrastructure in New York City, New Jersey and Connecticut ports, terminals, consolidation hubs and warehousing, Harrell said, noting Sandy impacted a major part of the import/export chain.
Sandy had widespread impact on supply-chain and logistics transportation networks, affecting ports, roads/highways, bridges, railroads and airports. Sandy impacted two dozen states along and near the U.S. Eastern Seaboard.
Among the biggest issues was the breadth of the impact because many ports were impacted up and down the coast even shipping on the Great Lakes, said Linda Conrad, director of strategic business risk of Zurich Global Corporate.
Post-Sandy, the focus in the underwriting community is on some of the coverages being provided, and specifically, the peril of flood, said Patrick Hennessy, managing director and east zone property leader at broker Marsh Inc. Insurers are reviewing how much flood they are providing for each individual risk, with a focus on certain deductibles, and how storm surge is defined in policies overall, he said.
With supply-chain disruption, generally the commercial coverages that come into play are business interruption insurance, contingent business interruption insurance, cargo/other marine coverages and commercial property insurance, such as for buildings and equipment.
Joseph Grasso, a partner in Wiggin and Dana LLP's litigation department and co-chairman of its insurance practice group, said an issue confronting supply-chain insurers and insureds is the wind versus flood debate the big dispute that occurred in the wake of Hurricane Katrina. Generally, flood is not covered but wind damage is, Grasso said.
A big legal question is whether Sandy was considered to be a hurricane when the storm hit the ports and caused the damage that insurers are being asked to pay for, Grasso said, noting a policy may specify different terms for that versus a non-named storm.
According to Kelley Blue Book, New Jersey typically accounts for 3% to 5% of all new car sales in the United States. In the week immediately following Sandy, New Jersey saw its share of nationwide sales volume drop to 1%, its lowest share for the state in 2012. While New Jersey was most heavily impacted by Sandy's aftermath, vehicle sales in New York similarly fell, it said.
Thousands of brand new cars sitting in the ports were flooded by seawater, and rendered total losses, Grasso said. This would interrupt the business of the dealerships, and whoever has title to those cars that were destroyed will have to recover insurance for them assuming it was a covered risk, Grasso said. The potential dispute is whether the damage that caused the cars and other cargo sitting in a port was caused by something covered under a policy or something not covered, Grasso said, noting if damage was caused by flooding, insurers probably won't provide coverage.
Business interruption and contingent business interruption, which provides insurance cover in the event of a failure of a key supplier caused by physical damage, typically account for 50% to 70% of overall catastrophe losses in the corporate insurance segment, according to Allianz Global Corporate & Specialty.
AIR Worldwide in late November said its estimates for Sandy-related insured losses included, among others, wind and storm surge damage to onshore residential, commercial and industrial properties and their contents, automobiles, and business interruption for commercial properties.
The Insurance Information Institute doesn't have a figure on supply-chain coverage, but there were 167,500 claims on the commercial side, which represents about 12% of the total 1.38 million privately insured claims resulting in an estimated $25 billion in insured losses, Loretta Worters, vice president at the III, told BestWeek. While the homeowner claims were higher 982,000, representing 71% -- a good portion of those claims are from flood insurance. There is "a greater number of commercial losses from this storm."
"What we have learned with all of the recent catastrophes is that a company doesn't have to suffer physical damage in order to incur significant uninsured contingent business interruption and extra expense losses due to disruptions to their supply chains," Ben Tucker, a senior vice president within Marsh's property specialized risk group, told BestWeek.
As an example, if a car was in inventory on a ship that value of inventory could potentially be covered by marine cargo insurance if it was damaged at a port, Conrad said. However, if it was turned away from the port and sent to another port, the inventory may not have been damaged but there would be a delay and the cost of that delay wouldn't necessarily be covered by marine cargo insurance or by business interruption insurance, in which there must be physical damage, Conrad said.
Contingent business interruption, business interruption and marine require physical damage, Conrad said. Zurich offers an "all-risk" supply chain insurance policy, which would cover these delays as well as flood, she said, noting the policy was launched in the United States about a year ago. The one with the purchase contract or receiving the supply would buy the coverage, Conrad said, noting in the car example, it would be a dealership or a car rental company.
Interest in supply-chain insurance is currently more focused on events outside the United States, driven by the 2011 floods in Thailand and earthquake and tsunami in Japan instead of Sandy, Tucker said, but noted an effective supply-chain management program, including supply chain insurance, "will help mitigate this exposure."
Supply-chain interruption polices mostly cover the contractual liabilities that occur with a supplier and a buyer, Harrell said, noting there will many contractual disputes from Sandy.
Many businesses haven't analyzed what their "value chain" looks like from supplier to customer, and so don't understand their potential exposures, Conrad said. They should do a supply-chain risk analysis to understand their risk on a key supplier by key supplier basis. The supplier that a business has the direct contract with is called tier 1, and statistically, 40% of disruptions occur below tier 1.
Meanwhile, brokers may face lawsuits, with potential claims including disputes over whether or not a broker delivered adequate flood insurance.