Volcanic ash: risk and insurance advice

Marsh issued the following business continuity, supply chain and insurance advice to organisations affected by air traffic disruption following the eruption of the Eyjafjallajökull volcano in Iceland and subsequent ash cloud.

Business continuity implications

Many organisations have already begun implementing business continuity plans. Businesses that have kept these up-to-date, well-tested and flexible will be better placed to cope with threats to their supply chains, the challenges of staff absence, and potentially severe financial implications than those businesses that have not.

Marsh recommends that organisations:

• Encourage key staff to plan their continued availability for work in the event that their travel plans are disrupted

• Ensure that HR policies for dealing with temporary staff absences are in place and well understood by both management and the workforce

• Ensure that they are able to track the whereabouts and monitor the welfare of all affected employees

• Consider how they are best able to service customers, suppliers and key stakeholders if operations are disrupted and give early warnings of any problems

• Review the possibility for the temporary switching of some activities to other sites that may be less impacted and/or who have suitably experienced staff available

• Establish methods and processes for both internal and external meetings and communications (e.g. teleconferencing, hotlines, remote access to e-mail)

• Actively monitor the situation and communicate relevant information to employees and stakeholders (e.g. situation update and impact to the organisation, absentee rates, travel updates)

• Revisit their business impact analysis (BIA), particularly the risk assessment of critical activities – consider underpinning resources such as availability of transportation systems, routes and suppliers

Supply chain implications

The continued disruption to air transportation routes has ongoing implications for supply chains, especially in the retail sector. Among the supply chain resilience actions Marsh recommends are:

• Seasonal exporters and those handling perishable goods should consider alternative routes to market if goods cannot be moved to planned purchasers in a timely manner

• Supply chain resilience plans should include provision for the additional storage of excess products and alternative sourcing of components required for manufacturing

• Contingency planning should be discussed with air cargo handlers to ensure they have contingency plans for handling goods

• Plans for alternative ground transportation should be made well in advance via contractual agreements, remembering that following widespread air carrier disruptions, alternatives will be in high demand

• Be familiar with the contingency plans of suppliers and related business that have an impact on your supply chain

• Review your/your suppliers’ contractual obligations relating to the delivery of goods and services and the impact on these obligations if an extraordinary event or circumstance beyond the control of the parties involved occurs

Insurance implications

All Risks property insurance policies, which provide cover for ‘all risks’ detailed in the policy except those explicitly excluded, are in general not currently set up to respond to the type of losses arising from the volcanic eruption. As a result, very few insureds – including airlines – will be able to make a claim unless physical damage to an insured property can be demonstrated.

• Property damage – Volcanic eruption is part of the earthquake peril in an ‘All Risks’ policy. Typically, under a standard All Risks property insurance policy, physical loss, destruction or lasting damage to a property is required before the policy is triggered.

• Denial of Access (non-Damage) extensions – This extension is unlikely to provide cover, as it requires that access to the insured premises be prevented or hindered. The insured’s premises would also be required to be in the vicinity of the emergency or a specified distance from it. Deliveries may be delayed and this may have an impact on turnover, but this indirect loss is not covered unless a specific supply chain policy is in place for non-damage events such as transport delays.

Organisations should review the terms and conditions of their insurance policies to determine what coverages may apply. Additionally, they should closely document all related financial losses to support any claims to be made under their applicable policies.