Exposures Facing the Electronics Industry

Article excerpt

Today, electonics companies must compete in an increasingly dynamic and global industry where business interruptions and insurance coverage gaps could prove fatal, said Thomas Cornwell, vice president and electronics manager at Chubb & Son Inc. in Warren, New Jersey. "In this ever-changing and increasingly global industry, risk managers must ensure that they have adequate insurance coverage," he said at a recent College of Insurance seminar on the electronics and information technology industry. "However, many of these risks are not covered by general liability policies and must be augmented by errors and omissions (E&O) coverage."

The electronics industry is one of the most significant sectors of the U.S. economy, said John F. Mancini, senior vice president of the American Electronics Association, based in Washington, D.C. "Electronics is nearly a $1 trillion industry worldwide and accounts for nearly 2.3 million U.S. jobs," he said. Although the electronics industry has traditionally been associated with appliances such as televisions and radios, the industry today is highly diversified and consists of the hardware and software, telecommunications and industrial electronics sectors.

Yet with this diversification comes a host of risk management challenges, said Mr. Cornwell. For example, business interruption exposures remain a vexing problem for the industry. "The manufacturing processes in many segments of this industry involve very complex equipment and procedures," he said.

For example, circuit manufacturing requires the use of sophisticated equipment such as diffusion furnaces and ion implanters, as well as extremely toxic chemicals. "Besides its complexity, this equipment is not cheap," said Mr. Cornwell. "Per square foot, the value of the actual manufacturing area in one of these plants can be in excess of $5,000." Although major exposures include explosions and toxic releases, even a small equipment failure can lead to a significant business interruption loss. "The elaborate nature of these manufacturing facilities tends to increase the time it takes to get a line started again after a shutdown," said Mr. Cornwell.

To illustrate, Mr. Cornwell described "clean rooms," which are work spaces free of contamination from dust particles. Noting that these rooms have different rankings depending on the number of particles in the atmosphere, he explained that the clean rooms used in computer chip manufacturing-or wafer fabrication - are among the most sanitary. "For example, a hospital room is ordinarily a 10,000 clean room, which means that the room contains 10,000 particles of one micron or larger," he said. "However, a typical wafer fabrication manufacturer has anywhere from 100 to 1 of these particles in their clean rooms. So when one of these rooms goes down, it is impossible to clean it up and get it running again in a very short time."

Resuming Operations

For electronics firms, quickly resuming operations after a business interruption is critical, especially now that computer systems have open architecture. "With open architecture, the various components of a computer system are interchangeable, so a customer can easily switch to another vendor if its main supplier goes down," he said. This problem is exacerbated by the fact that many electronics firms utilize just-in-time (.lIT) manufacturing, which means that the company manufactures product to fill orders, and stores little finished merchandise or raw materials on-site. "The JIT process requires companies to maintain a well-run operation in which a shutdown or shipment delay can create big problems," he said. "And although electronics companies can use alternate facilities or farm out certain manufacturing tasks to board assembly operations, many of these firms also use JIT manufacturing," he said.

Besides circuit manufacturers and wafer fabrication operations, software firms also face a danger from business interruptions, said Mr. …