Is Coronavirus Covered by
Business Interruption Insurance?
As businesses suffer due to the coronavirus, there will
likely be increased insurance claims. But whether these claims will be covered
depends on several factors:
Riia O'Donnell on
Mar 13, 2020
As the coronavirus continues
to spread, so do the concerns of individuals and business owners. For many
businesses, the virus threatens to disrupt supply chains, production, and
revenue. Many are looking to business disruption insurance to cushion the blow.
But the safety net they thought they’d purchased may not be there.
Businesses, large and small, could experience an
interruption to their business due to the coronavirus outbreak. Many will seek
relief through their business insurance, specifically through policies that
cover business interruptions. But while many policies do have business
interruption coverage, a significant number of these policies exclude
compensation for communicable disease outbreaks, a change many insurers made
after the SARS outbreak of 2003.
What is business disruption insurance?
Most small and medium-sized businesses (SMBs) carry some
form of business disruption insurance. This includes coverage in the event of a
natural disaster or fire.
Business disruption insurance is typically not a stand
alone policy, but part of an overall comprehensive insurance or
property/casualty policy. Depending on the type of policy your business holds,
coverage is limited to certain types of disruptions and exclusions.
How communicable diseases changed business interruption
insurance
The Severe Acute Respiratory Syndrome (SARS) outbreak in
2003 put insurance companies on notice.
After Mandarin Oriental International Ltd. received $16 million from
its insurers to pay for business interruption losses due to SARS, policies were
quickly updated to exclude certain types of disasters — specifically
communicable diseases.
In another SARS-related case,
the Court of Final Appeal ruled the insurance company’s liability was limited
to the amount of disruption caused after the contagious disease was “required
by law to be notified to an authority.”
This
“trigger date” limits the amount of payment a carrier has to pay to the
insured, even if the disruption began before the official reporting date. On
January 8,2020, COVID-19 was included in the Prevention and Control of Disease
Regulation 2020 and the Prevention and Control of Disease Ordinance, making it
a notifiable disease.
But
after SARS, the insurance industry began to exclude losses incurred by
communicable disease in most policies. The only coverage that pays for such
losses are specifically pre-negotiated.
AFTER SARS, THE INSURANCE INDUSTRY BEGAN TO EXCLUDE
LOSSES INCURRED BY COMMUNICABLE DISEASE IN MOST POLICIES. THE ONLY COVERAGE
THAT PAYS FOR SUCH LOSSES ARE SPECIFICALLY PRE-NEGOTIATED.
How
business disruption insurance could recover losses
For
businesses that have interruption insurance, the threshold for recovery
generally depends on a series of factors:
·
The property has to sustain damage (e.g.,
a lightning strike)
·
The property must be insured (so renters
might not be covered)
·
The peril itself must be insured (not
specifically excluded)
·
The loss must be quantifiable
If
all these conditions exist, coverage could pay out for the entire period of
time it takes to restore the damaged property and put the company back in
business.
BUT MANY EXISTING BUSINESS DISRUPTION COVERAGE PAYS ONLY
FOR QUANTIFIABLE PHYSICAL LOSSES, LIKE REPAIRING AND REPLACEMENT OF
DAMAGED PROPERTY AND INVENTORY.
But
many existing business disruption coverage pays only for quantifiable physical
losses, like repairing and replacement of damaged property and inventory.
If
the coronavirus disrupts business, there may be no physical damage to the
organization.
Companies
may see business slowdown, incur a loss of revenue, experience disruptions in
the supply chain, or completely close due to the need to disinfect. But
none of these would be the result of physical damage, and none would trigger
payout from a typical business disruption policy.
Communicable
disease coverage
Some
industries remember the SARS losses and negotiated communicable disease
coverage.
This
specific rider must be negotiated and accepted at the time the policy goes into
effect. Even for these, there may be limitations on the amount of recovery an
organization can realize. A trigger event may be outlined in the policy and may
be required from a qualified agency to begin the disruption recovery.
This
could include a closure to sanitize facilities or protect employees or consumers.
Organizations
impacted by coronavirus or other pathogens — and carry communicable disease
coverage — may still have to wait for an appropriate authority to inspect and
certify their facility.
A
second order from that authority may be needed to lift the closure — but even
then, some policies predetermine a maximum amount of days that are
reimbursable.
Even
with communicable disease coverage, many policies limit the amount of recovery
to physical costs (cleanup) and exclude loss of revenue inflicted by the
outbreak in the policy.
Specific,
pre-negotiated terms that cover customer or supply chain losses would be
needed, but may be cost-prohibitive to most businesses.
Contingent
business interruption coverage
For
an SMB to get full coverage for business disruption due to a communicable
disease, they will need to purchase “contingent business interruption coverage”
that specifically includes loss of commerce caused by disease as well as other
disasters.
CBI
could include loss of revenue due to disruptions from customers, the cost to
repair or replace facilities or equipment, and costs to clean and sanitize.
Another
area may be disruption in the supply chain. Your company may be ready to
manufacture, but if vendors or distributors are having issues, third-party CBI
coverage could help business keep afloat until things improve.
Unlike
general business disruption coverage, this special clause or rider to a policy
would cover the lost revenue an organization experiences during the disruption.
A
third area CBI can cover is losses due to proximity. Your small business may be
located close to a nearby attraction or business, driving revenue because this
secondary location is your primary source of customers.
Foot
traffic near a museum or a restaurant located near a busy factory could be a
major source of revenue. For these organizations, a shutdown of the proximal
location could create a major disruption in revenue. CBI could cover these
losses until the situation has returned to normal.
What
to look for in a CBI policy
The
challenge for SMBs who look for business disruption coverage is to assure the
policy specifically includes any types of disasters they may
experience, including communicable diseases.
According
to Aon, these types of plan
clauses may be referred to as Loss of Attraction, prevalent in the hospitality
and entertainment industries; Communicable Diseases or Special Perils Business
Interruption.
These
plans are typically subject to a maximum payout and can be costly. Work closely
with your insurance broker or representative to look at all aspects of the policy,
all exclusions and all potential contingencies, before you decide what’s the
best plan to meet your needs.
Making it over the hump
As the coronavirus continues to spread, individuals,
business, governments, and healthcare providers will see its impact and
fallout.
For SMBs, loss of commerce can have significant,
long-term effects, but many won’t be able to get assistance with their existing
insurance coverage.
Planning for the next problem may be key, but in the
interim, the federal government is increasing the amount of small business
loans available to
help companies weather the storm.
Contact your insurance carriers and carefully look
through existing policies to see what coverage, if any, you have today, and
what coverage you may want to purchase for the future.
If your business is impacted by coronavirus, review your
insurance policies now and be sure to document coronavirus-related business impacts.
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