The Trump administration’s pledge of across-the-board tariffs have many U.S. companies concerned about higher-priced inputs and disrupted supply chains. The new administration recently confirmed that it would be levying aggressive tariffs on U.S. trading partners, including 25% tariffs on Canada and Mexico and a 10% duty on China, adding to the growing concern among businesses who rely on imports and relationships with international clients. The tariffs are predicted to impact a wide-range of industries, from pharmaceuticals to the steel industry, as well as overseas producers of copper and aluminum. Indeed, even the insurance industry is expected to feel the impact, as 25% tariffs on imported goods from Canada and Mexico may raise costs for insurance carriers responding to property-related losses—including, for example, losses resulting from the ongoing Los Angeles fires—and thus might increase premiums on policyholders purchasing home and property insurance.
This article explores the insurance coverage options, such as political risk insurance and trade credit insurance, that can offer coverage to protect against and mitigate trade-related risks. This article also provides advice on how policyholders can maximize coverage should a loss occur, and further discusses the impact that tariffs might have on the insurance market, including premiums for certain types of insurance lines.
Political risk insurance protects businesses and their investors from financial losses caused by adverse government actions or inactions. Common risks covered under political risk policies include expropriation, civil unrest, or acts of terrorism and war.
In the context of trade conflicts, aggressive trade restrictions by the U.S. may lead to protests or riots that result in damage to U.S. warehouses, offices, or other property in countries on the receiving end of the tariffs or other trade restrictions.
The coverage language in political risk policies may also be broad enough to encompass any retaliatory acts from foreign governments in response to the new administration’s tariffs on foreign products. These might include imposing counter-tariffs or other similar trade restrictions on U.S. companies operating abroad, as well as other politically motivated actions, such as retaliation. A foreign government, for instance, might deny a U.S. company the ability to continue operating in its country by, for example, denying required permits and authorizations or increasing taxes on a targeted line of business.
Coverage language in political risk insurance policies, however, varies from policy to policy, and thus—as with all insurance policies—the scope of coverage available for tariff-related losses depends on the specific policy language.
Cargo insurance covers loss or damage to physical property—particularly when the loss or damage occurs during the transportation of cargo. Similar to political risk insurance, cargo insurance may respond to cover physical damage to U.S. property abroad resulting from retaliatory acts in response to the new administration’s tariffs. For example, policyholders can procure cargo insurance with an endorsement that covers strikes, riots, or civil commotions (i.e., “SRCC” endorsements), which may extend to losses caused during riots or protests in response to the imposition of tariffs.
Policyholders, however, should evaluate whether any war and terrorism exclusions in the policy are sufficiently narrow (or add coverage for war and terrorism through a war-risk endorsement) to maximize coverage for tariff-related losses.
Trade credit insurance protects companies against the effects of supply chain disruptions, as well as the risk of clients not paying when trade conditions deteriorate. For example, a trade credit insurance policy may protect the policyholder against bad debt caused by bankruptcy or political risks. And it may also enable U.S. companies to extend credit to their clients affected by high tariffs.
There are two main types of trade credit insurance: the first type guarantees the payments policyholders expect from their clients in full; and the second type insures against a single customer’s potential default or a key account.
While trade credit insurance is more common in the European market, U.S. companies should consider incorporating trade credit insurance into their risk management plans to mitigate losses resulting from tariffs, especially if global trade tensions escalate.
The new administration’s tariffs may also disrupt supply chains by making it harder for U.S. companies to obtain the materials and products from other countries. For instance, tariffs often lead to higher prices, changes in product quality, and at times, product shortages.
Policyholders may procure supply chain insurance, a specialty “all-risk” type of insurance designed to respond to losses resulting from supply chain disruptions, to respond to these tariff-related losses. Supply chain insurance is often not limited to losses resulting from physical damage, meaning the policyholder may get coverage for purely financial losses that may not be covered by traditional policy forms. Another benefit of supply chain insurance is that it is customizable and thus policyholders may tailor the coverages and specific policy language to their companies’ unique risks.
If a tariff-related loss occurs, business and risk managers must know that they might have a claim for coverage to protect against the resultant losses and extra costs. To secure coverage, policyholders are well-advised to:
In terms of specific coverage types, tariffs implements on, for example, goods and products related to home and property repairs and construction, automobiles, and health care—to name just a few—might impact coverages involving these industries as the added costs might then be passed on from the insurers to the policyholders in the form of higher insurance premiums.
If the costs of certain construction items rise because of tariffs, insurance companies might have to pay more in connection with, for example, the reparation, restoration, or replacement of homes following claims for damages to the home and related property. As an example, the recent California wildfires will likely trigger a wave of reconstruction that will spike the demand for lumber imported from Canada and cement imported from Mexico, thus increasing the price and decreasing the supply of key materials needed for construction. As a result, the premiums for home and property insurance might also rise.
Another sector that might be impacted is the auto industry. Tariffs might affect the costs of most vehicles and vehicle parts, including those made using copper, aluminum, or steel, and thus might raise the costs for auto insurance premiums as the costs of replacing foreign-sourced vehicles and parts increase.
Likewise, tariffs implemented on goods and products required for medical devices and equipment for providing healthcare might cause medical costs to spike and impact the premiums for businesses’ policies, such as commercial general liability (CGL) policies that cover third-party bodily injury and resultant medical expenses.
More broadly, the imposition of tariffs might make companies reliant on certain goods and products to revise their plans and look for new vendors and suppliers therefore disrupting where certain goods come from and how they are transported. The adjustments required to address these changes in supply, demand, and trading might disrupt established systems and processes leading to shipping delays and extra expanses to adjust operations. To the extent these changes make the costs of certain goods and products increase, those costs will have an impact on the premiums to insure against losses that might trigger the need for such goods.
With trade conflicts potentially on the horizon given the new administration’s planned strategy of imposing higher tariffs on imports from several foreign markets, including country-specific tariffs for China, Mexico, and Canada, the risks, and resultant losses that might follow a change in trading policies are now top of mind for managers whose businesses are engaged in and affected by international trade trends.
China, Mexico, and Canada supplied about $536 billion, $455 billion, and $437 billion of goods, respectively, to the U.S. in 2022, according to the Office of the U.S. Trade Representative. With so many unknowns surrounding the new administration’s tariffs, including responses from foreign governments, policyholders should consider procuring insurance tailored to cover tariff-related risks. Political risk, trade credit, and cargo insurance are a few tools that U.S. companies can incorporate into their current risk management arsenal to mitigate losses from tariffs and any resulting trade issues.
*Jorge R. Aviles is a counsel and Jae Lynn Huckaba is an associate with Hunton Andrews Kurth LLP
Comments
No comments on this item Please log in to comment by clicking here