Hunton Insurance Recovery Blog

In 2020, Americans faced a shortage of toilet paper. This year, companies face a shortage of microchips. Microchips are a crucial component in a growing number of electronic products, everything from smartphones to cars and household appliances. As the shortage trickles down the supply chain, downstream businesses are now unable to obtain the microchips or other components they need to make their products. This forced companies to slow or, in some cases, totally shut down their production lines until the supply of microchips can be restored. These slowdowns and closures have led to substantial losses of income for affected businesses. Fortunately, insurance coverage is likely available for these types of business income losses.

Most commercial property insurance policies contain supply chain or contingent time element coverage. This coverage applies when a company sustains a loss of business income due to a disruption of its supply chain, including the unavailability of critical components or products. As with most coverages under commercial property policies, the supply chain disruption typically must result from some physical loss or damage to property, but when that threshold requirement is met, supply chain or contingent business interruption coverage may be broadly available. In fact, while some policies may limit this coverage to interruptions resulting from direct suppliers, others may not, and may afford coverage where any player in the policyholder’s supply chain (upstream or downstream) is disrupted by a cause of loss of a type that would have been covered had the loss or damage occurred to insured property.

This is likely the case with the microchip shortage: several microchip manufacturers suffered commonly covered physical damage to their property. First, in February, the deep freeze in Texas forced several microchip manufacturers in the state to shut down their plants. Then, in March, a fire destroyed a microchip factory in Japan. Meanwhile, a drought in Taiwan—home to two-thirds of the world’s microchip manufacturing capacity—interrupted utility service to chip manufacturers, denying manufacturers water that is essential to microchip production. Each of these three events should easily meet the threshold for physical loss or damage of the type insured under most commercial property insurance policies and thus should suffice to trigger supply chain and contingent time element coverage for customers of affected businesses.

Additionally, the COVID-19 pandemic has caused some manufacturers to slow down or stop production. Although insurers have consistently denied that COVID-19 causes property damage, some policyholders have had success in court and obtained coverage for resulting business interruption losses and many others are poised to undo adverse initial rulings at the appellate court level. As a result, there may also be coverage available to customers of manufacturers forced to close because of the pandemic.

As with any commercial insurance loss, policyholders will be best served by consulting experienced coverage counsel to help review all applicable policies, including those of third parties under which a business may qualify as an additional insured, to ensure recovery of all available insurance benefits.