Tariffs are taxes on imported goods. When foreign goods reach a country’s border, its government collects tariffs, also called customs duties, based on the type, value and quantity of the goods being traded and the nation they originated from. Tariffs imposed by the United States can fluctuate over time in response to the latest geopolitical developments and global trade negotiations.
Although tariffs can support U.S. companies by making foreign goods less competitive and promoting increased domestic production and sales, they may also raise the cost of raw materials. This could get passed along supply chains, driving up expenses and posing operational challenges for small businesses that rely on imports. Even businesses that don’t import these goods directly could face increased supplier costs, inventory shortages and project delays.
While small business owners may assume their business interruption (BI) coverage will respond to trade disruptions, standard policies don’t address tariff-related losses. Reviewing these exposures and available coverage options can help small businesses limit potential losses. This article outlines tariff-related risks and coverage gaps and highlights specialty insurance solutions.
Understanding Tariff-related Risks
When tariffs on imports increase, the cost of raw materials generally rises in tandem. These costs tend to trickle down, ultimately making finished goods and equipment more expensive as well. Consequently, small businesses may encounter prolonged inventory shortages, shipping delays and extended lead times. Complicating matters, sudden cost increases on imports can easily strain cash flow and diminish profit margins for small operations, as these businesses tend to have limited reserves.
Some small businesses will experience greater tariff-related risks than others. For instance, supplier concentration can significantly amplify trade exposures. When businesses source their imports primarily from a single country, supplier or trade route, they may have fewer alternatives and contingency plans available when costs spike or a supplier fails, thereby causing considerable financial and operational fallout. Here are some key questions small business owners can ask themselves to determine their overall trade-related risks:
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- Which products and materials are most dependent on imports?
- Do any of our primary suppliers rely on countries currently impacted by tariffs or similar trade restrictions?
- How quickly could we identify and implement alternative suppliers amid a potential trade disruption?
- How much additional cost could our business absorb from tariff-related losses before profitability is affected?
Answers to these questions can help businesses identify potential vulnerabilities before a trade disruption occurs. In many cases, operational risk management strategies, such as supplier diversification, contingency sourcing plans, vendor contract reviews and inventory planning, may help reduce tariff-related risks more effectively than insurance alone.
What Standard Policies Don’t Cover
Small business owners commonly look to their BI coverage for protection against tariff-related losses. However, standard BI insurance typically only applies if a business is forced to pause operations or temporarily close due to direct physical damage to covered property. Similarly, contingent business interruption (CBI) insurance usually must be triggered by physical damage to a key supplier, customer or otherwise dependent property. Most business owners policies (BOPs) that bundle BI insurance alongside commercial property and general liability insurance also follow the same coverage framework.
As a result, increased operational costs stemming from tariffs, trade restrictions or changes in foreign policy often don’t meet traditional BI, CBI or BOP coverage requirements because they involve no direct physical damage. This means that small businesses facing tariff-driven revenue losses, margin compression and elevated operating expenses could find themselves uninsured and increasingly susceptible to financial distress. In these instances, specialty coverage may be worth exploring.
Specialty Insurance Solutions
Although coverage for trade exposures is limited in traditional policies, there are specialized insurance solutions small business owners can consider. These solutions, which are generally available for purchase within the specialty market, may respond to certain government actions, embargoes, customs delays, border closures and other covered trade disruptions, depending on policy wording and the specific cause of loss. Key coverage offerings include:
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- Political risk insurance—This specialized coverage is designed to protect businesses operating abroad against financial losses caused by adverse government actions or political upheaval in foreign markets. It’s best suited for small businesses with substantial international operations, overseas assets or foreign supplier dependencies. A related product, trade disruption insurance, is tailored specifically to supply chain risks stemming from changes in trade regulations or conditions.
- Trade credit insurance—This specialized coverage can help reimburse businesses when their customers fail to pay for goods or services due to insolvency or financial distress, including conditions stemming from elevated tariffs or trade disruptions. It’s ideal for small businesses with high customer concentration, tight margins and long payment cycles.
Small business owners should carefully evaluate their foreign import volume, supplier concentration and larger supply chain exposures to determine which specialty insurance solutions (if any) make the most sense for their operations.
Conclusion
Even when no physical damage occurs, tariffs and trade disruptions present real financial risks for small businesses that standard insurance policies often leave uncovered. By assessing their specific trade exposures and exploring specialty insurance solutions, small business owners can better protect their operations and bottom line. In addition to considering specialized coverage, it’s best to consult trusted insurance professionals to discuss supply chain diversification and contractual risk management measures to minimize tariff-related losses.
Contact us today for additional guidance on small business risk mitigation strategies and coverage options.
Article Published By: Zywave, Inc.
