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Interdependencies in business increase risk

For a business, there are many risks to insure against, ranging from typical property damage, such as damaged roof from a severe storm to fire burning your factory or warehouse, loss of inventory from flooding or fresh food lost when refrigeration systems go down.

According to one large insurance company, business interruption claims are increasing and now exceed the damage caused in more traditional property damage claims by 36 percent. And ironically, part of this growth is a result of businesses becoming more efficient.

Companies today rely on a complex web of other businesses and transportation systems. In the past, a company may have been somewhat vertically integrated or may have used parts from local subcontractors or manufacturing plants within a short distance from their operations.

Today, many of those small businesses have been replaced with suppliers from across the country or across the world. In addition, many companies operate on a "lean" business model for inventory control, keeping just what they need on hand and counting on UPS or FedEx to replenish their next production run.

Like many things, this is cost-effective and efficient until it isn't; when a disaster across the country or in another hemisphere suddenly means your next contract delivery will go delinquent because the inventory supply chain has dried up.

The potential for these types of business interruptions needs to be factored into your business plans, including your business interruption insurance. In some cases, the interdependencies are unavoidable and necessary, and in others, it may make sense to develop a "Plan B."

Source: claimsjournal.com, "Allianz: Fire, Explosion Main Causes of Business Interruption Loss," December 14, 2015

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