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
- 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 firstname.lastname@example.org or (330) 887-0859.