Navigating the top 5 manufacturing risk gaps

The manufacturing industry thrives on intricate networks, interlinked operations, and complex supply chains. This interconnectedness offers numerous advantages, enabling cost-efficiency, access to expertise, and global reach. However, it also introduces numerous vulnerabilities, leaving manufacturers exposed to a range of potential risks such as design errors, financial damage, injury to workers, product recalls and business interruption.

Addressing these risks effectively requires a robust insurance strategy that minimises insurance gaps. This article delves into the 5 key challenges manufacturers face, explores potential gaps in their insurance coverage, and offers crucial insights for navigating them in the ever-evolving risk landscape. 

1. Interdependency in Operations Worldwide

The Challenge: Globalised manufacturing leverages on subcontracting and partnerships, which enhance efficiency and cost-effectiveness, but this interdependency creates exposure to incidents beyond a manufacturer's direct control. Consider a fire at a subcontractor's facility disrupting production, supplier insolvency, or even geopolitical tensions impacting an overseas logistics hub. These can have far-reaching consequences, leading to production delays, inventory shortages, and financial losses.

Potential Insurance Gaps: Traditional insurance policies may not adequately protect the subcontracting and partnerships assets. Standard business interruption insurance, for instance, may only cover losses resulting from property damage at the insured location, failing to extend protection to disruptions in overseas suppliers or distribution channels.

Mitigation Strategy: Manufacturers should consider specialised supply chain interruption insurance to fill this gap. This coverage provides financial protection against losses stemming from disruptions in the supply chain, including those occurring at subcontractors, suppliers, or logistics partners located anywhere in the world.

2. Sub-contracting Work to Related Entities Worldwide

The Challenge: Many manufacturers outsource certain production processes or components to subcontractors or related entities, both domestically and internationally. While subcontracting can offer flexibility and cost advantages, it also introduces risks related to quality control, contractual disputes, and regulatory compliance.

Potential Insurance Gaps: Standard liability insurance policies may not provide adequate coverage for liabilities arising from the actions or negligence of subcontractors. In the event of a defective product or a contractual dispute with a subcontractor, manufacturers may find themselves exposed to significant financial liabilities not covered by their existing policies.

Mitigation Strategy: Manufacturers should explore the option of obtaining comprehensive contractual liability insurance. This specialised coverage extends protection against liabilities arising from contractual agreements with subcontractors, ensuring that manufacturers are adequately covered in the event of disputes, breaches of contract, or defective products supplied by subcontractors.

3. Product Recalls

The Challenge: Despite stringent quality control measures, manufacturing defects can occur, potentially leading to product recalls. Whether due to safety concerns, regulatory non-compliance, or quality issues, product recalls can have profound financial implications, including costs associated with notification, retrieval, replacement, and damage to brand reputation.

Potential Insurance Gaps: While product liability insurance typically covers damages resulting from defective products, it may not include the expenses associated with product recalls. Standard policies often have limits and exclusions that leave gaps in coverage, particularly regarding the costs of recall management and brand rehabilitation.

Mitigation Strategy: Manufacturers should consider obtaining specialised product recall insurance to supplement their product liability coverage. This insurance provides financial protection against the expenses incurred during the recall process, including notification, transportation, storage, and disposal of recalled products, as well as public relations and crisis management expenses.

4. Manufacturing Errors and Omissions

The Challenge: In the detailed process of manufacturing, errors or omissions can occur at various stages, from design and production to distribution and installation. These errors can result in defects, malfunctions, or failures of products, machinery, or components, leading to property damage, bodily injury, or financial losses for customers and third parties through compensation or claims.

Potential Insurance Gaps: While general liability insurance typically covers bodily injury or property damage resulting from negligence, it may not adequately address liabilities arising from errors or omissions in the manufacturing process. Standard policies often have exclusions for professional errors, design defects, or contractual disputes related to manufacturing activities.

Mitigation Strategy: Manufacturers should explore the option of obtaining specialised errors and omissions (E&O) insurance tailored to their industry and specific risks. This coverage extends protection against liabilities arising from professional errors, omissions, or negligence in the performance of manufacturing services, including design defects, faulty workmanship, or inadequate quality control measures.

5. Cyber Attacks

The Challenge: With the increasing digitisation of manufacturing operations, manufacturers are becoming increasingly vulnerable to cyber threats, including data breaches, ransomware attacks, and industrial espionage. A cyber-attack can disrupt production processes, compromise sensitive data, and damage critical infrastructure, leading to significant financial losses and reputational harm.

Potential Insurance Gaps: Traditional insurance policies, such as property or general liability insurance, may not explicitly cover losses resulting from cyber incidents. While some policies may include limited coverage for cyber risks, they often have exclusions or sub-limits that leave significant gaps in coverage, particularly regarding data breaches, network security, and cyber extortion.

Mitigation Strategy: Manufacturers should prioritise cyber liability insurance as part of their risk management strategy. This specialised coverage provides financial protection against losses resulting from cyber incidents, including data breaches, network security breaches, business interruption, and extortion attempts. Cyber liability insurance can help manufacturers mitigate the financial and reputational risks associated with cyber threats and ensure business continuity in an increasingly interconnected digital environment.

Bridging the gaps 

Manufacturers must remain vigilant and proactive in identifying and addressing insurance gaps to mitigate potential risks and liabilities effectively. By understanding the unique challenges they face, evaluating their risk exposure, and investing in comprehensive insurance coverage tailored to their specific needs, manufacturers can safeguard their assets, reputation, and bottom line in today's dynamic and interconnected global marketplace.

Closing possible insurance gaps and managing operational risks and other emerging risks with the aid of modern insurance solutions are essential if you want your manufacturing business to survive and grow in the ever-changing global marketplace.

Concerned about how to manage these risks, or uncertain if your business is exposed to these risks? Howden are the risk experts that can help. Our team of talented experts provide tailored solutions to fully protect you against harm, financial loss, or property damage anywhere around the world.