Business insurance

Insurance Coverage Can Help With Losses Due To Microchip Shortage

In 2020, Americans faced a shortage of toilet paper. This year, companies are facing a shortage of electronic chips. Microchips are a crucial component in a growing number of electronic products, ranging from smartphones to cars and home appliances. As the shortage spills over down the supply chain, downstream companies are now unable to obtain the microchips or other components they need to make their products. This has forced companies to slow down or, in some cases, shut down their production lines altogether until microchip supply can be restored. These slowdowns and closures resulted in substantial revenue losses for the affected businesses. Fortunately, insurance coverage is probably available for these types of lost business income.

Most commercial property insurance policies contain supply chain or contingent time element coverage. This coverage applies when a business experiences a loss of business revenue due to a disruption in its supply chain, including the unavailability of critical components or products. As with most coverage under commercial property policies, supply chain disruption should usually result from physical loss or property damage, but when this threshold requirement is met, the supply chain or potential business interruption coverage may be widely available. Indeed, while some policies may limit this coverage to interruptions resulting from direct suppliers, others cannot, and may offer coverage when an actor in the insured’s supply chain (upstream or downstream) ) is disturbed by a cause of loss of a type which were covered if the loss or damage occurred to the insured property.

This is probably the case with the microchip shortage: Several microchip manufacturers have suffered commonly covered physical damage to their property. First, in February, the freezing in texas forced several state-owned chipmakers to shut down factories. Then, in March, a a fire destroyed an electronic chip factory in Japan. Meanwhile, a drought in Taiwan– which is home to two-thirds of the world’s microchip manufacturing capacity – has interrupted public service to chipmakers, depriving manufacturers of water that is essential for microchip production. Each of these three events should easily meet the threshold of physical loss or damage of the type provided by most commercial property insurance policies and should therefore be sufficient to trigger the supply chain and time-contingent coverage for the customers of the companies concerned.

Additionally, the COVID-19 pandemic has caused some manufacturers to slow down or stop production. Although insurers have always denied that COVID-19 causes property damage, some policyholders have won their cases in court and obtained coverage for the resulting business interruption and many more are on the verge of canceling the initial unfavorable decisions at the level of the court of appeal. As a result, there may also be coverage available for customers of manufacturers forced to shut down due to the pandemic.

As with any loss of commercial insurance, policyholders will be best served by consulting an experienced legal advisor to help them review all applicable policies, including those of third parties under which a business may be considered an additional insured, in order to ” ensure the recovery of all available insurance benefits.

Copyright © 2021, Hunton Andrews Kurth LLP. All rights reserved.Revue nationale de droit, volume XI, number 154

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