A global supply chain squeeze may result in contractual liability exposure for Australian businesses that are struggling to meet deadlines and delivery obligations, experts at Honan say.

Workforce shortages across Australia due to the Omicron strain outbreak are placing considerable pressure on businesses and this may hinder the ability to meet contractual obligations to customers.

Difficulty in getting hold of raw materials such as timber and equipment is also wreaking havoc on business timelines.

Available insurance coverage under Business Interruption policies will depend on the construction of various disease and contractual liability exclusions, Honan National Head of Corporate Insurance & Risk Solutions Poppy Foxton tells Insurance News.

She says shortages are having a knock-on effect on property developers, and retail, marine, transport & logistics and tech firms are also impacted by the squeeze on materials and difficulty in supplying goods and services.

“It’s having a fairly broad impact,” Ms Foxton said.

If contractual obligations are not met, businesses may be financially penalised under agreed performance provisions. That may mean a total loss of the contract, or specified penalties for failure to perform agreed timelines or standards.

Cover for such third-party financial loss is not generally available without bespoke arrangements, Honan Head of Placement Travis Wendt says.

Underwriters are asking “a lot more questions” and vetting key supply contracts, Mr Wendt says, as the cost of sourcing materials has led to an inflationary claims cost “blow out” (which may mean valuations in existing business interruption policies are inadequate) and as clients increasingly query whether additional fees incurred to access equipment are covered.

Ms Foxton says a second exposure – and one more likely to impact insurers – is the supply of raw materials that do not meet the required quality and standard, or are faulty. That may lead to injury, for example, and liability policies would extend to that (unless well-worded pandemic exclusions apply).

She advises businesses to carefully evaluate contract clauses against their insurance policies to ensure no new liability exposure is unwittingly introduced. Honan’s risk management team advocates extensive scenario testing and says it is vital at renewal time to fully review risk exposure with thorough and robust methodology, pre-empting unexpected liability issues.

“Australian business is very creative and innovative and has a track record of pivoting quickly,” Ms Foxton said.