What is contingent business income insurance, and what does it cover?

What contingent business income is

Business income coverage replaces the profit you lose while your own space is being repaired after a covered loss. It stops at your own property line. If your income depends on a business next door, across town or overseas, and that business burns down, the standard form has nothing to say about it.

Contingent business income, which the standard forms call dependent properties coverage, extends that promise to other businesses’ buildings. The trigger is the same kind of event the base policy covers, such as a fire, happening at a location you rely on. You do not own that location and cannot control its repair, which is why insurers want it named in advance.

The shorthand CBI is used for this coverage and also for contingent bodily injury, which is liability coverage for an injury caused by a product or advice. They are unrelated. If you run an app or software company and are weighing injury risk, read the guide on bodily injury against contingent bodily injury instead.

The four kinds of dependent property

The ISO schedule sorts the businesses you depend on into four groups. Contributing locations supply you with materials or services. Recipient locations take your products or services, as a distributor or a large customer does. Manufacturing locations make products for you to deliver to your own customers under contract. Leader locations are the businesses whose traffic you share, such as the anchor store in a shopping center.

Which ones you need depends on where your income actually comes from. A restaurant that buys from one specialty supplier has a contributing location. A caterer whose largest account is one corporate client has a recipient location. A shop in a mall has a leader location it did not choose and does not control.

The dependent property has to be physically damaged

Direct physical loss by a covered cause is the trigger, and it is the part owners find hardest to accept. A supplier that closes for a strike, a recall, a bankruptcy or a permit problem has not suffered physical loss. A supplier whose warehouse burns has. Courts have read the phrase strictly: in the COVID-19 cases most decisions held that a closure order or the presence of a virus was not physical loss, and in the Southern Hospitality case a hotel lost because it could not point to any damaged property.

The cause must also be one your own policy covers. If your policy excludes flood, a supplier’s flood damage will not trigger the endorsement either. The 2011 Thailand floods showed the other side of this: contingent extensions there were often written for fire, lightning and explosion only, so businesses insured for flood at their own sites found no cover for flood at their suppliers.

Named locations, indirect suppliers and sublimits

The Broad Form uses a schedule that names and describes each dependent location, and unlisted ones are not covered apart from a small miscellaneous locations allowance. In practice insurers ask for first-tier suppliers and customers to be listed. In 2014 an Aon Benfield executive noted the Thai flood zone held about 570 sub-tier manufacturers that were not necessarily named in anyone’s policy.

Limits are the other pressure point. The Broad Form applies the policy’s business income limit to each scheduled location, but broker commentary describes the contingent coverage actually sold as typically carrying low sublimits. Ask for the limit in dollars next to each named location, and whether the waiting period and the period of restoration match the ones on your own premises.

What contingent business income does not cover

It does not cover an electricity, water or internet outage caused by the utility. That is a different endorsement, ISO’s Utility Services – Time Element, which has to be added and scheduled separately and responds to damage at the utility’s own property.

It does not cover a vendor’s software failure or a cloud outage, because nothing physical was damaged. Cyber policies can address that, with their own triggers and waiting periods; the guide on contingent business interruption on a cyber policy covers it. And it does not cover a customer who simply stops buying, or a supplier who raises prices.

Who should ask about it

Ask when one outside business supplies or buys a large share of your income. That includes a restaurant that depends on a single specialty supplier, a retailer in a mall anchored by one large tenant, a manufacturer that gets a key component from one plant, an agency or studio that gets most of its income from one client’s site, and an online seller that fulfills through one warehouse. The test is simple: if that one location burned, how many weeks until your revenue came back?

Businesses with many interchangeable suppliers usually need it less, because replacement is quick and the loss is small. The exposure is concentration.