Westfield Insurance on property coverage Featured

8:00pm EDT September 25, 2008

Many companies require the services

or goods of another company to

make their product or to run their business. As a business owner, your company may never experience a tragic loss or

damage, but what would happen to your

business if one of your suppliers experienced

such a loss? Do you have the proper insurance to cover your loss if your sole supplier

can no longer provide goods or service?

Business income provides for the business

what it cannot provide for itself. Dependent

property takes this coverage to the next level

to protect the business even if the loss happens to a third party on which it relies, says

William V. Reedy CIC, AU, The Learning

Group, Westfield Insurance. Business owners who understand the protection offered

with dependent property coverage and recognize their need are considered savvy insurance consumers and risk managers, he adds.

Smart Business spoke with Reedy about

the need for dependent property coverage,

how it can help protect your business and

how to evaluate your company’s risk to determine if such coverage is needed.

What is dependent property coverage?

Most businesses depend on other businesses to supply them with the raw materials or

finished products they will sell. Conversely,

supplier businesses rely on having other businesses that will buy their product. In both

cases, the business is dependent on another

entity to conduct its business. When a business cannot get the materials or product to

sell, it will experience indirect financial loss.

The fact that it is indirect does not lessen

the loss. Conventional business income

insurance reimburses a business for income

and expense after its own loss. Dependent

property coverage is used to protect a business when the loss takes place at a business

on which it relies.

Why is this type of coverage so important?

Dependent property coverage is extremely

important because the actual physical loss

(fire, wind, etc.) may happen to the business

you depend on and not your business. The

fact that this coverage responds on your

behalf relieves you of the financial loss you

would have had. These losses can be debilitating to a company.

Most business owners and insurance

agents readily identify buildings and business

personal property when they consider property exposures. Business income is sometimes overlooked in this process. Business

income coverage without the dependent

property endorsement will not respond to

the dependent property exposure. It requires

both business income along with the dependent property endorsement to make sure all

dependent exposures are addressed.

Who requires such coverage?

Any business that relies on another business is a candidate for dependent property

coverage. This coverage is especially important and most often provided when there is a

single or short list of key contributing or

recipient dependent property businesses.

For example, perhaps the insured business

makes wooden rocking chairs that are

known for their craftsmanship and quality. It

may only use one particular supplier of hickory that provides the best wood. Since the

chair company bases its reputation on quality, it is dependent on this particular wood

supplier. If the chair company added the

hickory supplier as a dependent property and

a fire occurs at the hickory supplier’s location

(rendering it unable to supply the insured

company with top-quality wood), it is considered a covered peril, since fire is a covered

peril under the policy.

The business income policy endorsed with

dependent property would pay the insured

company the amount it would have earned

until the wood supplier is back in business.

With dependent property coverage, the company is indemnified for the business it normally would have done, and it does not have

to resort to using inferior wood and potentially damaging its reputation for quality.

Are there different types of dependent properties?

There are four main categories of businesses that may require this coverage.

  • Recipients: businesses that rely on others

    for product 

  • Contributors: businesses that rely on others to whom they sell their product 
  • Manufacturing locations: businesses that

    sell a product on behalf of a manufacturer 

  • Leader locations: businesses that rely on

    other businesses to draw traffic to their location. An example would be a card shop located near a large retail chain store. The card

    store benefits from the traffic and would

    experience a downturn in revenue if the

    chain store were to close.


How can one determine risk of exposure?

If a business has a number of potential suppliers or available markets in which to sell its

product, then the need for dependent property coverage is not as great as if it depends

on a more limited and thus more important

few. The questions any business owner

should ask are: On what other businesses do

I depend? What would happen if they were

forced to shut down for a month, six months

or a year? Would I lose income as a result? If

the answer to these questions results in identifiable companies that would cause financial

loss if they were out of business, then one

may conclude that dependent property coverage is necessary.

WILLIAM V. REEDY, CIC, AU, is with The Learning Group, Westfield Insurance. Reach him at billreedy@westfieldgrp.com or (330) 887-0859.