Suppliers and Customers Extension Clause

Purpose

The suppliers and customers extension is the basic contractual form of contingent business interruption (CBI) cover: it clarifies that an insured physical damage event at a named, or – subject to a blanket sub-limit – unnamed supplier or customer triggers the insured’s own loss of income, even though no damage occurs at the insured’s own premises. The extension reflects the reality of modern, tightly interlinked supply chains, in which the failure of a key supplier can effectively halt the insured’s own operations.

Effect and limits

The extension requires that the cause at the third party be an event that would be covered under the insured’s own primary policy – damage that would not be covered at the insured’s own premises does not trigger CBI cover at the third party either. Named suppliers and customers usually attract significantly higher sub-limits than unnamed ones, but require disclosure of revenue shares and alternative sourcing options. Purely financial or insolvency-driven supply failures are regularly excluded, as is damage arising further down the chain (tier 2 and beyond) unless a separate extension has been agreed.

Negotiation and practice

A robust supply-chain mapping exercise is a precondition for setting sensible limits: insurers increasingly require transparency on revenue share per supplier/customer, single-source dependencies and realistic replacement lead times. In globally concentrated sectors (semiconductors, pharmaceutical active ingredients, automotive suppliers) the sub-limit often becomes the real constraint on cover, which is why extending protection to tier-2 suppliers is a recurring negotiation topic.