Insurance coverage can help with losses due to a microchip deficiency


In 2020, Americans faced a shortage of toilet paper. This year, companies are struggling with a shortage of microchips. Microchips are an integral part of a growing number of electronic products, from smartphones to cars to household appliances. As supply chain scarcity spreads, downstream businesses are now unable to source the microchips or other components they need to make their products. This forced companies to slow down or partially shut down their production lines until the supply of microchips could be restored. These slowdowns and closings have resulted in significant lost revenue for affected businesses. Fortunately, there is insurance coverage for these types of corporate income losses.

Most commercial property insurance includes supply chain coverage or a contingent time element. This coverage applies when a company suffers a loss of business income due to a disruption in its supply chain, including the unavailability of critical components or products. As with most commercial real estate insurance, the disruption in the supply chain must usually be the result of physical loss or damage to property, but when this threshold requirement is met, supply chain cover or eventual business interruption may be widely available. While some policies may limit this coverage to interruptions due to direct suppliers, others cannot and will not do so when an actor in the policyholder’s supply chain (upstream or downstream) is disrupted by a causal agent that is insured when the damage occurs insured property has occurred.

This is likely to be the case with microchip scarcity: several microchip manufacturers have suffered often covered physical damage to their property. First, in February, the Texas freezer forced several microchip makers in the state to close their factories. Then, in March, a fire destroyed a microchip factory in Japan. Meanwhile, a drought in Taiwan – where two-thirds of the world’s microchip manufacturing capacity is located – disrupted supplies to chip manufacturers and denied manufacturers water, which is essential for microchip production. Each of these three events should easily meet the threshold for physical loss or damage of the type insured in most commercial property insurance policies and should therefore be sufficient to trigger supply chain coverage and the contingent time element for the customers of the companies concerned.

In addition, the COVID-19 pandemic has caused some manufacturers to slow down or stop production. Although insurers have consistently denied that COVID-19 caused property damage, some policyholders have succeeded in court and have insured themselves for the resulting business interruption losses, and many others are willing to reverse negative initial decisions at the appellate court level. As a result, customers of manufacturers who have to close due to the pandemic may also be covered.

As with any commercial claim, it is best for policyholders to consult an experienced insurance advisor to review all applicable policies, including third party policies under which a company may be considered an additional insured, to ensure that any available insurance benefits are being reclaimed .

Copyright © 2021, Hunton Andrews Kurth LLP. All rights reserved.National Law Review, Volume XI, Number 154

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