Supply Chain Insurance Gaps: Why Indian Manufacturers Are Exposed

Indian manufacturing has undergone a structural transformation over the past decade. The production-linked incentive (PLI) schemes across 14 sectors, the China-plus-one sourcing shift, and the growth of domestic manufacturing corridors in Gujarat, Tamil Nadu, Maharashtra, and Karnataka have created supply chains of unprecedented complexity. A single automotive OEM in Pune may source components from 400 Tier-1 and Tier-2 suppliers across eight states, with raw materials arriving by road, rail, and sea from both domestic and international origins.

Yet insurance programmes for Indian manufacturers remain stubbornly premises-centric. The standard fire and special perils policy covers the insured's own factory and warehouse. The marine cargo policy covers goods in transit between defined points. The machinery breakdown policy covers installed equipment. Each policy operates in its own silo, and the spaces between them (the handover points, the supplier dependencies, the transit interstices) are where insurance gaps silently accumulate.

These gaps are invisible during policy placement. They only reveal themselves at claim time, when a loss event exposes the fact that a critical link in the supply chain was never covered, or that coverage lapsed at a transfer point that nobody thought to insure. The financial consequences can be severe: a manufacturer whose own premises are fully insured can still suffer catastrophic business interruption if a key supplier's factory burns down and there is no contingent business interruption cover in place.

IRDAI's evolving regulatory framework for commercial insurance has improved disclosure requirements and policy transparency, but it has not mandated supply chain risk mapping as a prerequisite for commercial insurance placement. The responsibility falls on the insured and their broker to identify and close these gaps proactively. This article maps the five most common supply chain insurance gaps affecting Indian manufacturers and provides a structured approach to eliminating them.

The most consequential supply chain insurance gap for Indian manufacturers is the absence of coverage for losses originating at supplier premises. A manufacturer's own property insurance protects its factory, stock, and machinery. But it does nothing when a fire, flood, or explosion at a critical supplier's facility halts the supply of an essential component, bringing the manufacturer's production line to a standstill.

Consider a real-world pattern that recurs across Indian manufacturing clusters. An electronics assembler in Noida sources custom PCBs from a Tier-2 supplier operating out of a rented industrial unit in Bhiwadi. The supplier's unit has minimal fire protection, such as no sprinkler system, overloaded electrical circuits, and flammable packaging stored adjacent to the production area. A fire destroys the supplier's facility. The electronics assembler, which held no contingent business interruption (CBI) cover and had no alternative supplier qualified for the specific PCB specification, loses three months of production. The direct loss to the assembler, in terms of lost revenue, contractual penalties to its own customers, and idle workforce costs, runs into several crore rupees. None of it is recoverable under the assembler's own insurance programme.

The root cause is that Indian manufacturers rarely conduct insurance due diligence on their suppliers. Procurement teams negotiate price, quality, and delivery terms. They may even audit the supplier's manufacturing capability. But they almost never verify whether the supplier carries adequate property insurance, business interruption cover, or product liability insurance. Nor do they assess whether the supplier's premises meet basic fire safety standards that would make the supplier insurable in the first place.

The solution involves two elements. First, manufacturers should require key suppliers to maintain specified minimum insurance covers as a contractual condition; similar to how large corporates require vendors to carry workmen's compensation insurance. Second, manufacturers should purchase contingent business interruption coverage that explicitly names critical suppliers or covers unnamed supplier losses subject to a defined sublimit. CBI coverage is available in the Indian market as an extension to the standard fire policy's loss of profits section, but it is rarely purchased by mid-market manufacturers who most need it.

India's inland logistics infrastructure, despite significant improvements under the National Logistics Policy, 2022, remains a high-risk environment for goods in transit. Road freight accounts for over 65% of domestic cargo movement, and the combination of poor road conditions in secondary corridors, overloaded vehicles, monsoon disruptions, and accident rates on national highways creates a persistent exposure for manufacturers moving raw materials and components between warehouses, suppliers, and factory gates.

The insurance gap arises from the mismatch between marine cargo policies and the reality of inland transit. A marine open cover policy, issued under Institute Cargo Clauses (A), (B), or (C), is designed for international ocean shipments and the land transit legs immediately connected to them. It typically covers the journey from the overseas supplier's warehouse to the Indian buyer's warehouse, including the inland transit from the port to the final destination. However, once the goods are received at the manufacturer's warehouse and subsequently moved to the factory floor, or between multiple warehouses, the marine policy's coverage often terminates.

Inland transit between the manufacturer's own facilities, or from a domestic supplier's premises to the manufacturer's factory, requires a separate inland transit policy or an extension to the marine open cover. IRDAI's framework permits inland transit coverage under the Marine Insurance Act, 1963, read with the Multimodal Transportation of Goods Act, 1993, but the coverage must be explicitly placed. It does not arise automatically from a standard marine or property policy.

A common scenario: a pharmaceutical manufacturer in Hyderabad maintains a central raw material warehouse in Medchal and transports temperature-sensitive APIs to its formulation plant in Genome Valley, a distance of 40 kilometres. A truck carrying INR 2 crore worth of APIs overturns during monsoon rains. The manufacturer's marine open cover does not respond because the transit is entirely domestic and between the manufacturer's own facilities; it falls outside the marine policy's voyage definition. The property insurance at the factory covers goods only once they arrive on premises. The loss falls into the gap.

Manufacturers must map every transit leg in their supply chain (not just the international legs) and ensure each is covered under either the marine open cover (with appropriate inland transit extensions), a standalone inland transit policy, or a goods-in-transit policy. Special attention is needed for last-mile movements, inter-warehouse transfers, and return logistics for defective goods.

Goods arriving at Indian ports (whether Mumbai's JNPT, Chennai, Mundra, or Kolkata) routinely spend days or weeks in port storage during customs clearance. The average dwell time at Indian ports has improved to approximately three to four days for containerised cargo, but for goods subject to examination, testing, or documentation disputes with customs authorities, delays of two to six weeks are not uncommon. During this period, goods are exposed to a range of perils: theft and pilferage from container freight stations, water damage from monsoon flooding in open storage yards, fire at overcrowded port warehouses, and deterioration of perishable or temperature-sensitive goods.

The insurance gap manifests because marine cargo policies cover goods in transit, and property policies cover goods at the insured's premises. The port storage period falls into a twilight zone. Under Institute Cargo Clauses (A), the transit clause, Clause 8.1, provides that coverage terminates upon delivery to the consignee's warehouse at the destination named in the policy, or upon expiry of 60 days after discharge from the vessel, whichever occurs first. If customs clearance delays push the storage period beyond 60 days, coverage lapses entirely. Even within the 60-day window, certain perils, such as gradual deterioration of food products stored in non-temperature-controlled port warehouses, may be excluded under the inherent vice or insufficient packaging exclusions.

For Indian manufacturers importing capital equipment or bulk raw materials, the exposure can be substantial. A steel manufacturer importing specialised alloy billets worth INR 15 crore from Korea may face a customs examination that detains the goods at JNPT for 45 days. During a heavy monsoon, flooding in the port's open storage area causes water damage to the billets. Whether the marine policy responds depends on the precise wording of the transit clause, the cause of the delay, and whether the 60-day limit has been breached.

The solution involves three measures. First, negotiate an extended storage clause in the marine open cover that increases the 60-day termination period to 90 or 120 days, reflecting the reality of Indian customs processing times. Second, for high-value or perishable cargo, purchase specific port storage insurance that covers the goods from the point of vessel discharge until actual delivery to the factory. Third, work with customs brokers to expedite clearance procedures — reducing dwell time is the most effective risk mitigation, as it compresses the window of exposure. Manufacturers in sectors where customs delays are chronic, such as chemicals subject to DGFT licensing or food products requiring FSSAI clearance, should treat port storage coverage as a mandatory element of their marine insurance programme.

India's cold chain infrastructure is expanding rapidly but remains inadequate for the scale of temperature-sensitive manufacturing. The pharmaceutical sector, food processing industry, and chemical manufacturing all depend on unbroken cold chains from raw material receipt through production, storage, and distribution. A temperature excursion at any point in this chain can render goods worthless: a batch of biologic APIs exposed to temperatures above 8 degrees Celsius for even a few hours may lose efficacy and require destruction.

The insurance gap in cold chain coverage is complex. Standard property insurance policies cover machinery breakdown, including refrigeration equipment failure, but the coverage for consequential spoilage of temperature-sensitive stock is often inadequate or absent. The stock deterioration cover available as an add-on to the machinery breakdown policy typically carries sublimits that are a fraction of the actual stock value at risk. A cold storage facility holding INR 10 crore worth of frozen seafood may have a deterioration of stock sublimit of only INR 1 crore: a gap that becomes apparent only when a compressor failure wipes out the entire inventory.

Transit temperature excursions present a separate challenge. Marine cargo policies under Institute Cargo Clauses (A) cover all risks, but the exclusion for inherent vice, Clause 4.4, is frequently invoked by insurers when temperature-sensitive goods deteriorate during transit. The insurer's argument is that the goods' susceptibility to temperature damage constitutes inherent vice, and that the loss resulted from inadequate packaging or temperature control rather than an insured transit peril. Indian courts and the NCDRC have examined this issue in several cases, with outcomes depending heavily on whether the shipper can demonstrate that the temperature excursion was caused by an external event, such as a vehicle breakdown or a reefer container malfunction, rather than the inherent nature of the goods.

For food processing manufacturers subject to FSSAI regulations, the liability exposure compounds the property loss. If temperature-compromised products enter the distribution chain and cause consumer harm, the recall costs and product liability exposure may dwarf the direct spoilage loss. Standard property and marine policies do not cover product recall costs: this requires a separate product recall insurance policy, which itself may exclude losses arising from temperature control failures unless specifically endorsed.

Manufacturers operating temperature-sensitive supply chains should take four steps: ensure stock deterioration sublimits under machinery breakdown policies reflect the actual maximum stock value at risk, require reefer container operators and cold chain logistics providers to carry adequate transit insurance with temperature excursion coverage, install IoT-based temperature monitoring systems that create an evidentiary trail for claims substantiation, and purchase standalone product recall insurance with cold chain endorsements. The cost of complete cold chain coverage is modest relative to the catastrophic loss potential of a single uninsured temperature excursion event.

Contingent business interruption (CBI) insurance covers the insured's loss of profits resulting from damage to the premises of a supplier or customer — not the insured's own premises. It is, conceptually, the most important supply chain insurance cover a manufacturer can purchase. It is also the most underinsured risk in Indian commercial insurance.

The standard fire and special perils policy in India provides business interruption coverage (technically termed loss of profits or consequential loss cover) as an add-on section. This section indemnifies the insured for the reduction in gross profit caused by the interruption of the insured's own business following material damage to the insured's own premises by an insured peril. The critical limitation is the phrase 'the insured's own premises.' If the production stoppage is caused by damage to a supplier's premises, a customer's premises, or a utility provider's infrastructure, the standard loss of profits section does not respond.

CBI extensions are available in the Indian market. They can be structured as named supplier extensions (covering loss of profits arising from damage to specifically listed supplier premises), unnamed supplier extensions (covering loss arising from damage to any supplier's premises, subject to a sublimit), and denial of access extensions (covering loss when the insured's own premises are undamaged but inaccessible due to damage to surrounding property or infrastructure). Some policies also offer utility interruption extensions covering loss from damage to power stations, water treatment plants, or telecommunications infrastructure.

Despite availability, CBI uptake among Indian manufacturers remains extremely low. Industry estimates suggest that fewer than 15% of mid-market manufacturers in India carry any form of CBI cover, and among those that do, sublimits are typically inadequate. A manufacturer with an annual turnover of INR 500 crore and a gross profit margin of 25% faces a potential CBI loss of INR 10 crore for every month a critical supplier is offline, yet the CBI sublimit in the policy may be INR 2 crore.

The reasons for low adoption include cost sensitivity (CBI premiums add 10-20% to the base loss of profits premium), difficulty in identifying and naming all critical suppliers, and a behavioural bias among Indian business owners who focus on protecting their own assets rather than insuring against events at third-party premises. The COVID-19 pandemic and subsequent semiconductor shortages highlighted the catastrophic potential of supply chain disruptions, but the insurance market response in India has been slow.

Manufacturers should work with their brokers to model their CBI exposure by identifying single points of failure in their supply chain — components or raw materials sourced from a single supplier, sole-source machinery spares, or logistics bottlenecks such as a single port of entry. The CBI sublimit should be calibrated to cover the realistic maximum indemnity period for the most severe plausible supplier disruption. This modelling exercise often reveals that the CBI exposure exceeds the material damage exposure at the manufacturer's own premises: a finding that should reshape how insurance budgets are allocated.

The following loss scenarios, drawn from patterns observed across Indian manufacturing claims, illustrate how supply chain insurance gaps translate into unrecovered financial losses.

Scenario one: an auto components manufacturer in Chennai sourced precision castings from a single Tier-2 supplier in Coimbatore. A fire at the supplier's foundry (caused by a ladle spill during the night shift) destroyed the facility. The Chennai manufacturer's production line for a major OEM customer stopped for 11 weeks while an alternative supplier was qualified and tooled up. The manufacturer's own fire policy and loss of profits section did not respond because the damage occurred at a third party's premises. The manufacturer had no CBI extension. The uninsured loss, including lost revenue, contractual penalties, and expediting costs for alternative sourcing, exceeded INR 8 crore.

Scenario two: a food processing company in Nashik imported fruit pulp concentrate from Vietnam under a marine open cover with Institute Cargo Clauses (A). The container arrived at JNPT and was held for customs examination for 23 days. During this period, the reefer container's power connection at the port was interrupted for 14 hours due to an electrical fault at the container freight station. The temperature excursion rendered the entire consignment (valued at INR 1.4 crore) unfit for processing. The marine insurer invoked the inherent vice exclusion, arguing that the perishable nature of the goods made them inherently susceptible to temperature damage. The policyholder's position was that the reefer malfunction at the port was an external insured peril. The dispute went to arbitration and was ultimately settled at 60% of the claim value. A partial recovery that left the manufacturer absorbing nearly INR 56 lakh.

Scenario three: a pharmaceutical manufacturer in Baddi moved finished goods from its factory to a distribution warehouse in Chandigarh using a contracted transporter. The truck was involved in a road accident on the Panchkula highway, destroying INR 3.2 crore worth of finished formulations. The manufacturer's marine open cover had terminated at the factory gate because the shipment was a domestic movement between the manufacturer's own facilities. The property policy at the factory covered goods only on premises. The transporter's own goods-in-transit policy had a per-vehicle limit of INR 25 lakh. The manufacturer recovered INR 25 lakh from the transporter's insurer and absorbed the remaining INR 2.95 crore loss.

These scenarios share a common thread: the losses were foreseeable and insurable. The coverage gaps existed not because the market could not provide solutions but because nobody mapped the supply chain end to end and verified that insurance coverage was continuous across every link and handover point.

Closing supply chain insurance gaps requires a systematic audit that maps the entire supply chain against existing insurance coverage. The following checklist provides a structured framework for Indian manufacturers to identify and remediate gaps before a loss forces discovery.

Supplier risk assessment: identify all Tier-1 and critical Tier-2 suppliers. For each, document the component or material supplied, the degree of supply concentration (single source versus multiple source), the estimated business interruption impact per week of supply disruption, and whether the supplier carries adequate property and business interruption insurance. Require key suppliers to provide annual certificates of insurance as a contractual obligation.

Contingent business interruption review: verify whether the current fire policy includes a CBI extension. If it does, check whether critical suppliers are named or whether the extension covers unnamed suppliers. Assess the CBI sublimit against the modelled maximum loss for the most severe single-supplier disruption. Ensure the indemnity period in the CBI extension aligns with the realistic time required to qualify and onboard an alternative supplier.

Transit coverage mapping: list every transit leg in the supply chain. International inbound, port to warehouse, warehouse to factory, inter-factory transfers, factory to distribution centre, and domestic outbound to customers. For each leg, identify the applicable insurance policy and verify that coverage is active and adequate. Pay particular attention to domestic inter-facility movements, which are the most commonly uninsured transit legs.

Port storage and customs exposure: review the marine open cover's transit termination clause (typically 60 days post-discharge). Assess actual customs clearance times for your product categories. If dwell times regularly approach or exceed the policy's termination period, negotiate an extension or purchase separate port storage cover. For perishable or temperature-sensitive imports, verify that port storage conditions are consistent with the marine policy's requirements.

Cold chain integrity: for temperature-sensitive supply chains, verify stock deterioration sublimits under machinery breakdown policies, reefer container insurance during transit, temperature monitoring capabilities for claims evidence, and product recall coverage for cold chain failures.

Contractual risk transfer: review contracts with logistics providers, warehouse operators, and freight forwarders. Verify their insurance coverage limits and ensure they carry adequate goods-in-transit and warehouse legal liability policies. Where contractual indemnities exist, confirm they are backed by insurance; an indemnity from an undercapitalised transporter is worthless if the loss exceeds the transporter's net worth.

Annual review cycle: supply chains are dynamic. New suppliers are onboarded, logistics routes change, product mixes shift, and warehousing arrangements evolve. The supply chain insurance audit should be repeated annually at policy renewal, with a mid-term review triggered by any significant change in the supply chain structure. Sarvada's AI-powered platform can assist in mapping supply chain dependencies against insurance coverage to identify gaps in real time, ensuring that coverage evolves as the supply chain does.