Manufacturers and retailers rely heavily on facilities around the globe to supply products, and any disruption in supply or distribution chains may cause significant interruption and loss to a business. The use of just-in-time supply systems significantly increases the potential loss caused by any interruption in a company’s logistics. Such systems benefit the company when operating at full capacity. But, anything less than full capacity operations may result in significant losses in the event the insured cannot acquire the materials needed to meet its production capacity, or cannot obtain the inventory needed to maintain its sales.

Further, a significant downturn in supply often results in increased costs for acquisition of the materials needed to continue operating. It can also result in partial or complete shutdown of facilities lacking the resources to operate.

 “Sandy”1 struck directly at property and facilities critically important to many of the world’s leading automobile manufacturers. The timing of these recent weather events could not have been worse. The northeast accounts for 25% to 30% of all auto sales in the United States. The end-of-month sales period in which the storms struck are “when sales are typically the strongest,” according to Kelley Blue Book analyst Alex Guitierrez.  
As a consequence of the storms, car dealerships throughout the East Coast were shut down as a result of property damage and/or lack of power. While the total number of automobiles destroyed is not yet known, Toyota, Chrysler, Nissan and Honda together estimate that they will be forced to scrap more than 15,000 new vehicles at dealers or at the region’s ports. Fisker Automotive, a boutique manufacturer of luxury hybrid cars, lost 338 Karma sedans stored at the port of Newark, N.J. With each car carrying a base price of over $100,000, the minimum retail value of Fisker’s losses alone is $34.8 million.  

Moreover, the Port Authority of New York and New Jersey alone handled more than 738,000 vehicle shipments in 2010. These ports are a significant gateway into the North American market for automobile manufacturers. The Port Authority closed its facilities at midnight on Oct. 29, 2012. The Port of Elizabeth did not begin business again until Nov. 4, 2012, and the Port of Newark did not reopen until Nov. 5. The result was a significant interruption in shipping, and the ripple effect may be felt throughout the country for the foreseeable future.  

With estimates that “tens of thousands” of automobiles in the New York region were lost because of recent weather events, and with additional expenses and delays anticipated due to delayed shipments and lingering power outages, policyholders in the automotive industry should look to their insurers to recover these storm-related losses. This article analyzes several common types of loss that may result from Sandy (or any catastrophic weather condition) with the goal of assisting policyholders in assessing the scope of available coverage to them and maximizing any potential recovery.  

Companies suffering interruption losses resulting from damage to third- party facilities often do not realize that they may be protected by their insurance program. Contingent Business Interruption (CBI) insurance protects a company from business interruption losses when a logistics system fails due to a covered cause of loss.  A company may be protected from such losses even if the company itself has not suffered any damage to its own property. Counsel familiar with the nuances of this type of insurance coverage can provide valuable advice to a company seeking to maximize its recovery for loss from a disruption in its supply or distribution chain.  

Companies suffering such disruptions should consider whether CBI insurance covers its losses due to such supply and distribution chain problems. Making a CBI claim requires a thorough understanding of the policy and related issues, such as applicable deductibles, the scope of the business interruption, the calculation of loss, and potential applicability of exclusions. This article provides an overview of what you need to know in order to maximize recovery from a property insurance program after business is interrupted due to a supply and distribution chain disruption.