Contingent Business Interruption Insurance – What is it and why does it matter?

Contingent Business Interruption (CBI) insurance is an optional extension of insurance coverage that reimburses lost profits and extra expenses resulting from an interruption of business at the premises of a customer or supplier. The contingent property may be specifically named, or the coverage may protect all customers and suppliers. Coverage is usually triggered by physical damage to a customer or supplier’s property, or to property on which the insured company depends.

It is not necessary that the customer or supplier property be completely shut down to cause a CBI loss to an insured. All that is necessary is that an insured loss occurs at the type of location covered under the policy and that the insured’s business be interrupted as a result.

For example, a supplier of wood for an insured might experience a partial interruption in business due to a fire at the supplier’s plant. The insured may be compelled to suspend production because it can’t obtain the raw material. Alternatively, it may be put on an allocation of product (or where demand is greater than supply available). In such a case, the insured will have suffered a contingent business interruption loss, even though the supplier has not been shut down.

An example of another scenario is a fire closing the woodworking plant completely. Rather than suspending production or interrupting business activity, the insured’s business may only slightly be impacted as they have either ample supply or an alternative supplier. In this situation, unless the insured cannot find another supplier or has to pay a premium to the new supplier, there may be no contingent business interruption loss. This scenario could lead into contingent extra expense or CBI in an attempt to avert a business interruption loss.

*There are three situations in which this coverage is widely used:

  • When the insured depends on a single supplier or a few suppliers for materials.
  • When the insured depends on one or a few manufacturers or suppliers for most of its merchandise.
  • When the insured depends on one or a few recipient businesses to purchase the bulk of the insured’s products.

What CBI is not:

  • Utility service interruption of an off-premise power interruption
  • Civil or military authority interruption
  • Lack of ingress or egress interruption (denial of access)
  • When damage at an owned location causes a loss of revenue to another owned location
  • Loss which results from a change in temperature due to damaged heating or cooling equipment

The most obvious difference between a CBI claim and a business interruption (BI) claim is that an insured is not dealing with damage to its facility and will not be handling a property damage claim. However, the documentation requirements for a CBI claim usually end up being more voluminous than a typical BI claim. The increased documentation is a result of the analysis and documents that may have to be completed and compiled to identify the loss impact of an event outside of the insured’s core business and company records. Ironically, these documentation requirements are not discussed in any policies.