As a result of the COVID-19 pandemic, the global supply chain has been under strain throughout 2021. While many sectors of the economy have recovered after the abrupt halt in the first half of 2020, the logistics and supply chain industries have continued to operate at a lower capacity. Major economies, such as the United Kingdom, the United States and China, expect the crisis to last until 2022.
Robyn Anderson, an attorney in the insurance and recovery department of US law firm Lathrop GPM, spoke with Corporate Risk and Insurance on how businesses affected by supply chain issues may navigate the crisis.
According to Anderson, the large shutdowns and quarantines resulted in a reduction in industrial capacity and supply at first. Consumer behavior shifted at the same time, with many individuals working from home and consuming goods in private areas.
There was an immediate gap between supply and demand as a result of these events, and practically everyone was affected. Even if supply and demand have increasingly resynchronized over time, there are still distribution hitches to be smoothed out. Major ports are still shut down on occasion due to epidemics, labor shortages exist, and operational expenses are growing, all of which can add stress and delay to an already overburdened global system.
These are just a few of the pandemic’s supply chain difficulties. Floods, droughts, wildfires, and hurricanes, which are “traditional” supply chain disruptors, still exist and maybe get worse as a result of climate change.
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The first step in avoiding supply chain risks, according to Anderson, is to fully comprehend the supply chain and its weaknesses. Some businesses use artificial intelligence and other forms of technology to gain a better understanding of the intricacies and hazards that they face in real-time. Businesses should, if at all possible, streamline their supply chains, according to Anderson. Some businesses are also changing away from “just-in-time manufacturing” as a result of the epidemic.
When interruptions arise, organizations can try to shift risk through contractual risk transfers or insurance coverage placement, according to Anderson. Contingent business interruption coverage in a property policy, for example, is a traditional insurance choice. Even if the insured does not suffer direct property loss or damage, the insurance remains in effect. It is triggered when a supplier or client suffers physical property loss, causing supply chain interruption and affecting the insured’s business. When natural disasters such as floods or fires disturb the supply chain, this type of coverage is ideal.
However, in the case of the pandemic, contingent business interruption coverage is not a black-and-white issue, and courts will have to evaluate if the coverage is still legitimate.
Many courts have been challenged with determining whether the presence of COVID-19 in a business might result in “physical” property harm, according to Anderson. “Some courts have ruled yes, or at least possible, while many others have said no, meaning contingent business interruption coverage would not apply if the disruption is exclusively due to, say, a COVID-19 outbreak and closure.
The UK Supreme Court determined in September 2020 that enterprises with business interruption insurance who were forced to shut down owing to the epidemic are eligible for compensation from their insurers.
Other insurance choices for businesses exist that do not need proof of physical damage, but these coverages are less frequent, less standardized, and often more expensive, according to Anderson. To ensure that the coverage meets the company’s needs, consult with a qualified insurance broker and thoroughly analyze any suggested policy language.
Despite court orders, business interruption coverage during the pandemic is still largely unknown, with questions about whether a claim would be covered and how much compensation will be paid.
The operative policy clauses and many exclusions are notoriously difficult to decipher, according to Anderson, and courts have struggled to interpret and apply them. This means that how a policy is interpreted may be substantially influenced by the law that controls it. Although coverage litigation may be unavoidable in some cases, non-litigation alternatives should be considered.
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Anderson encouraged organizations to analyze their contracts with business partners and their own insurance policies ahead of time to identify what rights or remedies they may have in the event of a supply chain mishap.
She advised paying close attention to reporting and proof-of-loss deadlines, as well as having a mechanism in place to document both losses and loss mitigation activities. Property, business interruption, and contingent business interruption losses and claims are all calculated and documented by many competent accounting companies.