6 ADJUSTINGTODAY. COM A D J U S T I N G T O D A Y fall under extra expense coverage. This is complementary to business interruption coverage, but some policies are written for business interruption without extra expense. If you don’t have extra expense coverage, consider talking with your broker about obtaining it. Contingent Business Interruption What is it? Do I need it? Contingent business interruption insurance and contingent extra expense coverage reimburse lost profits and extra expenses resulting from an interruption of business at the premises of a customer or supplier. For instance, if a supplier provides an important component for your manufacturing process, a severe insurance loss to that supplier could result in a shutdown of your manufacturing operations when that part becomes unavailable. This coverage can be purchased as an extension of your standard property insurance, and it only applies if the dependent property sustains a loss caused by a “causes of loss” stated in your policy. There are three situations in which this coverage is most widely used: 1. When the insured depends heavily on a single supplier or a few suppliers for materials or merchandise. 2. When the insured depends heavily on one or a few major customers to purchase the bulk of the insured’s products. 3. When the insured counts heavily on a neighboring business to help attract customers (known as a leader property).1 Civil Authority When and how does it trigger my policy? All policies have language for civil authority, but some policyholders do not understand how it can work in their favor. When a windstorm causes a massive mandatory evacuation and a coastal area is extensively damaged, residents and business owners are often not allowed to return for several days or weeks due to safety concerns. In these cases, civil authority can trigger coverage for business interruption for a specified limited period. Most civil authority language requires that the situation extend beyond 72 hours in order for the coverage to come into effect. Spoilage Endorsement Protecting perishables Because a windstorm can cause massive power failures or mechanical breakdowns, perishables need to be insured with spoilage coverage. Prescription drugs and _____________________ 1 Daniel T. Torpey - Ernst & Young, LLP, May 2003, www.irmi.com, Contingent Business Interruption: Getting all the Facts. Case Study: A furniture manufacturer in North Carolina had a supplier that provided upholstery for a majority of their products. The upholstery supplier suffered a total loss due to a Category 4 windstorm that destroyed their building and inventory. As a result, the furniture manufacturer had their operations stopped on five major products for several months, and the major back order caused an additional loss of existing customers. Fortunately, the contingent business interruption coverage paid for the extra expenses necessary to get materials from another manufacturer and covered the business interruption loss.
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