Business Interruption & Contingent Business Interruption Insurance: Insuring Yourself Against Other’s Risks

By: Brian A. Homza

Shareholder – Cook, Yancey, King & Galloway
The concept of risk is often the under-discussed, and under-addressed “pink elephant” standing in the middle of many boardrooms. Risk is universal to all business models, whether small or large, new or old; and those businesses that successfully manage and limit the risks associated with the fulfillment of its goals and mission will enjoy consistent years of positive growth and profitability. Specifically, medical practices and institutions are constantly bombarded with the need to minimize the risks associated with business operations and service to patients. Most practitioners and administrators can successfully navigate the waters of risk management, by securing coverage policies that protect against medical malpractice, and business losses resulting from damage to facilities or products owned, or in the control of, the policyholder. However, two overlooked and under-utilized methods of protection against risk are Business Interruption and Contingent Business Interruption Insurance Coverage.

Business Interruption Insurance is a coverage mechanism that protects a business from loss directly resulting from interruption of business due to destruction or damage to the personal or real property of the insured. This form of coverage is directed at protecting the insured’s direct goods, but does not usually cover loss associated with utility interruption or the like. These policies can vary but its intention is to reduce the risk associated with maintaining the day to day activities of a business such as a medical facility or private practice.
Contingent Business Interruption Insurance, an extension of Business Interruption Insurance, protects against the loss of prospective earnings because of the interruption of the insured business caused by an insured peril to property that the insured does not own, operate, or control. This form of insurance effectively protects the policyholder from business losses suffered from a third-party’s inability to provide a component necessary for the completion or execution of the insured’s services. This policy is usually an extension of coverage already in place to protect the policyholder from losses associated with an interruption of business due to damage suffered to property or facilities held by the policyholder.

Take for example the following two scenarios:

1. Sharp Point Needle, Co., located in Baton Rouge, Louisiana is the sole manufacturer and supplier of a unique hypodermic needle used in cancer treatment at Statewide Medical Center, located in Shreveport, Louisiana. On August 29, 2009 Hurricane Drew strikes the gulf coast, severely damaging the manufacturing plant of Sharp Point, and effectively shutting down production of all hypodermic needles for three months. As a result, Statewide Medical Center is unable to service some 10,000 patients and suffers a loss in profitability for the months of September, October, and November.

2. Open Air Gown Co., located in New Orleans, Louisiana stocks the gown supply of Statewide Medical Center, located in Shreveport, Louisiana. Open Air and Statewide share a long standing relationship, and Open Air supplies hospital gowns to Statewide for $2 apiece. Open Air Gown Co., is also forced to halt business for three months due to Hurricane Drew. As a result, Statewide must utilize the business of Competitor Gown Supply, Co.; and in order to secure the business of Competitor, Statewide must pay a $5,000 premium and an increased cost to $3 a gown.
In consideration of these two scenarios, the benefit of Contingent Business Interruption Insurance becomes overtly apparent. The purpose of such policy provisions is to allow businesses, such as medical practices and institutions, to offset the cost of increased expenses on the insured that result from unfortunate occurrences to third parties integral to the fulfillment of the policyholder’s business objective. In scenario one, a Contingent Business Interruption Insurance Policy would cover the business interruption that results from Statewide’s inability to obtain the unique hypodermic needles; and in scenario two, the policy would cover the increased expense associated with switching the supplier of the hospital gown.

Both Business Interruption Coverage and Contingent Business Interruption Coverage are methods of risk reduction that benefits not only the policyholder, but also the clients that the policyholder serves. Remember, the policies vary and should be discussed with an insurer for an in-depth explanation of coverage limits and terms.