Protecting Your Rights After a Weather-Related Supply Chain Disruption - Global Trade Magazine
  March 2nd, 2016 | Written by

Protecting Your Rights After a Weather-Related Supply Chain Disruption

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  • Losing a key supplier caused a 25-percent fall in share price, and companies involved took two years to recover.
  • A 2014 report from the University of Tennessee found that companies often do not consider supply-chain risks.
  • Protect your business by reviewing and if necessary purchasing new insurance or updating your existing policies.

Weather can be bad for business. A 2005 MIT Sloan Management analysis of companies suffering supply chain disruptions found that losing a key supplier caused on average a 25-percent fall in share price, and that the companies involved took roughly two years to recover that loss—if they recovered at all.

But incredibly, a 2014 report by faculty at the University of Tennessee found that companies often do not consider their supply-chain risk, and that for many professionals, securing insurance as a risk mitigation approach was not even on their radar.

It is vital to protect your business by reviewing, understanding, and if necessary purchasing new insurance or updating your existing policies. If a major weather event does occur and disrupts your supply chain or other parts of your business, it is important to take the right steps to maximize your insurance coverage and protect your legal rights. With the right planning, you can prevent the next storm from becoming a business disaster.

The first step in understanding your insurance coverage is to anticipate the damage. Business income coverage pays for the loss of net revenue after expenses and its unavoidable continuing expenses during the loss period. Extra expense coverage pays costs incurred in minimizing or avoiding business income loss. Insurers also offer specific products to cover your business for supply chain disruptions.

With your anticipated losses in mind, you should take a critical look at the policies currently in place to be sure they cover everything you have anticipated. It is also essential to review their financial terms. Provisions including the properties covered, the per-occurrence limits, the sub-limits for certain losses and locations, and the applicable deductibles/retentions are all critical components of a thorough coverage assessment.

Next, be sure to create or review your disaster contingency plan. The time immediately following any catastrophic event is extremely important. A comprehensive plan should establish a dedicated disaster response team. You should also work now to prepare a checklist of items to address with your insurer. Because the insurance aspects of disaster preparedness can be complicated, and vary by policy, experienced coverage counsel can help you avoid pitfalls. This is a crucial point, because mistakes in the early stages of a claim can have a devastating impact on your ultimate recovery.

After a major disruption, you can also take steps to minimize legal claims based on any failure to meet sales obligations. One important law is Article 2 of the Uniform Commercial Code.

Adopted in some form by every state except Louisiana, Article 2 governs the sale of goods and may cover a situation that your standard force majeure provisions do not. It provides legal protections where “a contingency” makes a seller’s performance on its sales contracts “impracticable,” using a “foreseeability” test to ask whether the contingency is one the parties assumed would not happen. While all contingencies do not qualify, very severe weather that disrupts a supplier may.

A seller can protect against liability for breach of contract by following certain steps. First, it should perform as able by making a fair and reasonable allocation among customers. Article 2 assumes the seller will prorate and requires considering all customers when choosing how to supply each. But it leaves room for differing needs, such as prioritizing the most urgent requirements. The seller may even be permitted to supply those regular customers who are not under contract.

Second, within a reasonable time, the seller must also notify the buyer on each contract that there will be delay or non-delivery—and, importantly, must disclose the estimated quota available to each. All these steps are necessary, even if they lead to decreased profits or even a loss. But quick planning and communication with customers will maximize your legal protections.

Note that Article 2 also protects buyers, giving them latitude to alter or terminate the contract within a reasonable time. A buyer can modify the contract by accepting only the available quota, and may even terminate an installment contract if missed deliveries affect the whole agreement. Case law in your jurisdiction may also entitle the buyer to a refund for goods not delivered. But the short-term sacrifices will be important to securing long-term protections.

Weather may be unpredictable, but by preparing in advance and knowing your rights, you’ll be ready. Your bottom line will thank you.

Michael N. DiCanio is a counsel in Lowenstein Sandler LLP’s Insurance Recovery Group, and Sean Collier is an associate in Lowenstein Sandler’s Litigation Group. Please direct questions or comments regarding this article to mdicanio@lowenstein.com or scollier@lowenstein.com


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