Baltimore Key Bridge Collapse: Managing Supply Chain Business Interruption Losses

In today’s interconnected economy, businesses rely heavily on intricate, global supply chains, exposing them to various risks that can severely disrupt operations beyond their control. The collapse of the Key Bridge in Baltimore will have rippling impacts to organizations that rely on it, as risk managers face the challenge of identifying potential losses and determining where insurance coverage may exist to offset them.

Far-reaching impacts
In the wake of the devastating collapse of the Key Bridge in Baltimore, the port has been brought to a standstill, with authorities announcing an indefinite closure until further notice. This closure has sent shockwaves through the region's economy, impacting shipments in and out of the Port of Baltimore for an extended period. The Port of Baltimore ranks ninth in the U.S. for both dollar value and tonnage of international cargo, and it holds the distinction of being the nation's top port for roll-on/roll-off cargoⁱ. Given that the port is the most relied-upon port in the U.S. for automobile, construction equipment, farm equipment and other types of cargoⁱⁱ, this disruption will have economic impacts that ripple far beyond the local area. Therefore, risk managers need to be vigilant about indirect losses to their operations due to physical damage hindering their suppliers, distributors or principal customers.

Insurance protection for business interruption
Property insurance policies often include coverages designed to mitigate such risks from third-party property, such as contingent business interruption (CBI), ingress/egress, service interruption or civil authority coverages. This insurance protects income loss or extra expenses resulting from physical damage at a third-party location, which prevents or impedes the insured's ability to conduct business as usual. Hence, even if the insured does not directly suffer physical damage, its financial losses may still be covered. However, these coverages are frequently overlooked, poorly understood and challenging to quantify. Additionally, there might be a delay in communication from the time of physical damage to when the insured is notified by their supplier or distributor, or when an insured realizes it may have a loss. Thus, diligence is critical.

Critical actions by risk managers
When assessing these impacts, risk managers should consider fundamental steps:

1. IDENTIFY risk exposure in the business’s supply chain: Consider whether the business relies on third parties for supplies, distribution or purchasing, and the locations of these third parties. Determine whether physical loss or damage to a third party prevents or hinders access to the insured’s business. Dependency on a single or few third parties magnifies the risk, as any disruption could cause significant business interruption loss.
   
   
2. DETERMINE the loss of income to the business: Risk managers must calculate the potential loss of income to the business if an event occurs. Catastrophic events like the Key Bridge collapse could result in significant losses to organizations relying on suppliers, manufacturers, distributors or customers in the affected area. Quantifying lost income depends on which part of the business’s operations were impacted. Documentation such as production reports, profit and loss statements, inventory reports and related correspondence are crucial for evaluating and calculating lost income as a result of the bridge collapse.
   
   
3. DOCUMENT any additional expenses incurred due to the interruption: Interruptions in the supply chain may lead to additional expenses beyond regular operating costs to restore the business to its pre-loss levels of operations. For instance, a major supplier or distributor interruption may necessitate obtaining goods and services through alternative means, leading to increased transportation costs, material expenses or internal labor costs. Early reports relating to the bridge collapse indicate increased trucking will be part of the mitigation. Maintaining documentation and tracking these costs (invoices, purchase orders, etc.) is vital for preparing a claim, especially considering the ongoing effects of the bridge collapse on global supply chains.
   
   
4. EVALUATE the timeline of repairs and ongoing impacts to operations: Risk managers must grasp the time required for the insured to resume normal operations beyond the restoration period. This determines the duration during which the financial impact will be covered under the insured’s policy. That time period is often limited, so the necessity to act quickly is paramount.

Given the intricacies of business interruption coverage, limitations or exclusions to coverage, and other factors surrounding this event, risk managers should seek advice from insurance professionals to identify potential coverage areas under their policy and assist with claim preparation and loss quantification. Businesses must have a comprehensive risk management strategy in place to navigate the complexities of today's interconnected supply chains and mitigate the impact of unforeseen events such as the Baltimore Key Bridge collapse.

Sources:
i. https://msa.maryland.gov/msa/mdmanual/01glance/html/port.html
ii. https://msa.maryland.gov/msa/mdmanual/01glance/html/port.html