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Transcript of Supply Chain Vulnerabilities - Amazon S3€¦ · Supply Chain ulnerabilities v SCHEDULE Presented...
Lunch and Learn Series: “The Sky Is Falling!” (Maybe)—Insurance for Product Manufacturers
Wednesday, May 9, 2018 Noon–1 p.m.
1 General CLE credit
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SUPPLY CHAIN VULNERABILITIES
The materials and forms in this manual are published by the Oregon State Bar exclusively for the use of attorneys. Neither the Oregon State Bar nor the contributors make either express or implied warranties in regard to the use of the materials and/or forms. Each attorney must depend on his or her own knowledge of the law and expertise in the use or modification of these materials.
Copyright © 2018
OREGON STATE BAR16037 SW Upper Boones Ferry Road
P.O. Box 231935Tigard, OR 97281-1935
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TABLE OF CONTENTS
Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Faculty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v
Presentation Slides . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
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SCHEDULE
Presented by Chris Keefer, KEEFER, Portland.
11:30 Registration
Noon Supply Chain Vulnerabilities
F Knowing your supply chain
F Business interruption (BI) insurance
F Contingent business interruption (CBI) insurance
F Pitfalls to avoid in BI and CBI coverage
1:00 Adjourn
FACULTY
Chris Keefer, KEEFER, Portland. Mr. Keefer guides brands and product manufacturers through complex insurance and risk management scenarios. He has assisted manufacturers around the world in developing risk management strategies and has led the insurance program of a global medical device manufacturer. He has presented nationally on risk management and insurance issues. Mr. Keefer is a member of the Oregon Entrepreneur Network and is admitted to practice law in Oregon and Indiana.
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“The Sky is Falling!” Insurance for Product Manufacturers May 9, 2018Part 2: Supply Chain Vulnerabilities
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Session 1 Recap
Value Chain• Understand and react to risks along
each step
• Identify, classify and then decide what to do with each
Risk Transfer (hint, insurance)• Different types for different risks
• Move forward by working backward
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Session 1 RecapTailor Coverage• Add coverage where needed (lines, limits
and sub-limits)
• Clarify ambiguities where possible
• Reconsider insurers who are not helpful
• Reconsider brokers who are too aligned with insurers’ interests
Retain coverage and risk counsel solelyrepresenting your interests
Recap
Cap
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What is Business Interruption Insurance?Replaces business income lost due to some insurable event• Natural disaster (earthquake,
hurricane, flood, fire)
• Cyber event
• Political event
• Labor/strike
• Loss of cargo
• Others (if not excluded)
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What BI Insurance Covers . . .
DOES COVER = lost incomedue to stoppage of business after something happens to yourpremises, equipment, cargo, etc.• Typically covers up until damaged
premises or equipment is repaired or restored
• Can be extended to cover up until business income returns to pre-loss level
DOES NOT COVER = lost income due to stoppage of your business after something happens to 3rd party you rely on to attract customers (supplier, customer, business contractor)
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Contingent Business Interruption InsuranceTriggered by physical damage to property on which the insured company depends to attract customers:
• Upstream suppliers
• Downstream customers
• 3rd parties such as marketers or distributors who may facilitate sales
Ingress/egress issues
Tier 2+ suppliers?
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What is a “Dependent” Property?A property operated by others that you depend upon to conduct your business
May or may not be defined in your policy
If defined, may be broken into sub-groups:• Contributing locations = deliver materials/services to you
• Recipient locations = accept your products or services
• Manufacturing locations = manufacture products for delivery to your customers
• Leader locations = attract customers to your business
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Supply Chain InsuranceBroader coverage than CBI . . . can include non-property damage events such as:• Labor issues (strikes, shortages)
• Production issues
• War, terrorism, riots
• Closures of roads, bridges, etc.
• Pandemics (e.g., SARS)
• Regulatory actions
• Financial issues (e.g., insolvency)
May be more attractive if you are manufacturing in a politically unstable nation, or are in an unstable retail market
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When to Buy CBI/SCI?Your business relies on one or a few factories and/or materials suppliers to make your products
You have one or a few businesses (customers) that buy your products
Your business relies on one or a few manufacturers or suppliers for most of your merchandise (e.g., you are a retailer)
There are a limited number of businesses you rely on to sell your products (e.g., marketers, distributors)
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Beware!
Sub-limits
Deductibles and Exclusions
Coverage Territory
Physical vs. Non-physical Damage
Direct vs. Indirect Suppliers
Named vs. Unnamed Suppliers
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Natural Disaster Sub-limitsMake sure you have coverage for natural disasters (both for your business and along your supply chain)• Oregon is in the Cascadia Subduction
Zone
• Asian manufacturing operations may be exposed to earthquake, tsunami, typhoon, flooding
Beware sub-limits for these events which may leave you underinsured
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CBI Sub-limitHow long will the business interruption last in the event of a disruption at a key supplier?• Do you have alternate suppliers
available?
• If so, how quickly will they be able to fulfill your order? (Hint, consider level disruption occurred)• Tier 1• Tier 2• Beyond?
The longer the business interruption, the higher the CBI limits you need
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Deductibles and ExclusionsYour business interruption coverage may be subject to deductibles and exclusions, which could blindside you
Consider earthquakes, which (if not excluded) can have deductibles of up to 20% of total insurable value if in a high-risk area
• An earthquake which shuts down your network for a period of time may result in substantial business interruption losses, especially if you sell product online direct-to-consumer
Consider negotiating down the deductible if commercially feasible, and remove/narrow exclusions as much as possible
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Consider the FollowingYou have a $50 million property policy which includes business interruption coverage
You contract production through a factory in Indonesia, which is named in the policy as a dependent property
There is a $5 million sub-limit for named dependent properties
There is also a $2 million sub-limit for earthquakes in the Asia Pacific region, as well as a 10% deductible in such an event
The factory is hit with an earthquake, causing a 6-month interruption in your business, totaling $20 million in lost business income
• You will only be able to recover $2 million of these losses, subject to a $200,000 deductible
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Coverage TerritoryMake sure the coverage territory defined in your policy actually aligns with your operations
Some policies may only cover the U.S., Canada, and Puerto Rico . . . even though you have Asian-based manufacturing
Also, consider the following defined coverage territory: “Worldwide, except for any jurisdiction prohibited or restricted under the trade or economic sanctions of the United States.”
• Unless “trade or economic sanctions” is narrowly defined, this could be construed as excluding ANY overseas manufacturer or supplier that has in some way been subject to trade sanctions by the U.S.
• As an example, this broad exclusion could include China or other ASEAN countries which have been subject to anti-dumping and other trade sanctions by the U.S. (even recently)
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Physical vs. Non-physical DamageYour policy may only cover “direct physical loss or damage”• This would mean no coverage if an earthquake
shuts down the road that the factory would use to get product out to port • There is no “direct physical damage” to the product• Make sure you have an ingress and egress
provision in your CBI coverage which should patch that hole
• Also, no coverage if a political or labor strike issue shuts down production at the factory, or if the factory goes out of business • This would be considered non-physical loss
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Supply Chain InsuranceBroader coverage than CBI . . . can include non-property damage events such as:• Labor issues (strikes, shortages)
• Production issues
• War, terrorism, riots
• Closures of roads, bridges, etc.
• Pandemics (e.g., SARS)
• Regulatory actions
• Financial issues (e.g., insolvency)
May be more attractive if you are manufacturing in a politically unstable nation, or are in an unstable retail market
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Direct vs. IndirectYour policy may only recognize a “direct supplier or direct customer” as a dependent property• This means no coverage if an outer-tier
materials supplier goes down and cannot get materials to your primary factory for production• This would be considered an “indirect” supplier
under the policy . . . See Millennium v. National Union
• Make sure you have a full understanding of your key dependent properties and align your coverage needs accordingly
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Named vs. UnnamedIf you have dependent properties you want covered, make sure to identify them to the insurer
You will likely have lower sub-limits for unnamed dependent properties, or worse (no coverage) if you have not identified them• Again, have a full and complete
understanding of your supply chain and distribution networks
• Make sure your coverage aligns with it as much as commercially feasible
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Marine CargoIf you manufacture product overseas, probably a good idea to have this
• Stock throughput = comprehensive policy that insures product from source of production to final destination (e.g., warehouse or store)
Typically covers risks of “physical loss or damage”
• Many times there will not be an ingress/egress provision
• So, if an earthquake makes ingress/egress impossible for accessing product, but does not physically damage the product, then no coverage
Beware coverage for only replacement costs
• Can recover business income loss by changing “replacement cost” to “selling price”
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Cyber Contingent Business InterruptionAs the cyber and legal landscapes become more developed, there are more data points for insurers to underwrite more novel risks
What if your dependent property is hit with a cyberattack?
• Typical CBI provisions will not cover this scenario (not a physical damage or loss)
• Cyber insurance policies covering business interruption typically only cover attacks or breaches of the company’s own systems
Newer policies available which cover cyberattacks, data breaches, and system failures at the dependent properties
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Key TakeawaysUnderstand your supply chain and distribution networks
Know your dependent properties and make sure you have succession plans in place
Retain counsel to review your insurance program and determine whether it aligns with your business interruption exposure
To the extent it does not, negotiate appropriate policy language as much as commercially feasible
Thank You.Thank You.
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