Many businesses rely on third parties for parts and supplies that go into their finished products; these third-party firms are part of the primary companies supply chain. This is especially true of manufacturers. Any disruption in a firm’s supply chain could have a negative impact on that company’s output and lead to lost income. To address the risk of lost income in this type of scenario, insured’s can purchase business income from dependent properties coverage. This article will describe what business income from dependent properties coverage is and how it works.
So what is dependent properties coverage? The International Risk Management Institute defines this as “property insurance that pays for the loss of income or increase in expenses resulting from damage…to the premises of another organization on which the insured depends, such as a key supplier or customer.”[i] This form would be endorsed to modify an insured’s business income coverage form thus broadening your business interruption coverage. Therefore, you have to have business income coverage in order to use the dependent properties coverage form.
Lastly, the loss has to be due to direct damage to property at locations the insured depends on; that is, direct damage to property. For example, your firm manufactures audio equipment and you get circuit boards from a third party supplier. The third party supplier’s building suffers direct damage from a fire and all of their circuit boards are destroyed. As a result, that third party supplier can’t provide those circuit boards and the audio equipment manufacturer can’t get a key part needed to complete their finished products. This could mean lost revenue to the audio manufacturer since they may not be able to provide their finished products and meet customer demand. In this situation, the dependent properties coverage form will respond and provide for lost income resulting from this kind of loss. To provide this coverage, the actual dependent property locations must be shown on the endorsement.
In closing, many companies, especially manufacturers, rely on third parties for key parts and supplies that go into their finished products. Should a third party supplier suffer direct damage and are rendered unable to provide their products, the company could suffer lost income. That is, they can’t get key parts for their finished products. The dependent properties coverage will cover lost income in this situation. This is a very useful coverage firm’s should consider purchasing if they have finished products that depend on parts from third parties.