The damage caused by the March 2011 earthquake and tsunami in Japan caught the world by surprise. The devastation was indescribable at the local level. Also shocking were the resulting losses by businesses thousands of miles from the wreckage-losses suffered due to an interrupted supply chain.
You always hear the term “global economy,” but it takes something like what happened in Japan to prove it’s real. Stories quickly surfaced of auto manufacturers, distributors and other companies here in the U.S. unable to continue operations because their product source overseas was shut down indefinitely.
Your firm’s commercial property policy covers only direct physical damage by a covered cause of loss such as fire or windstorm. Your firm’s business interruption policy(assuming you have one) kicks in to help compensate for lost income resulting from a covered cause of loss. So what happens if your firm is not directly damaged by the cause of loss, but a business that your firm depends on is?
Consider the following:
-If a business that buys a significant amount of product from you suffers damage in a hurricane, would you be able to replace the money they can no longer pay you?
-If a business from which you buy a significant amount of product suffers damage in a hurricane, would you be able to find a replacement supplier?
-Could such a loss cause you to have to negotiate less favorable purchasing terms?
-Could you face a breach of contract due to the inability to uphold a contractual requirement, such as a pre-determined quantity of product?