After more than a month of stalled sales, many businesses have exhausted their emergency funds and COVID-19 related financial losses are expected to reach historic levels. Some businesses are considering making claims on business interruption insurance to help.
Although it’s typically not sold separately, business interruption insurance coverage can be added to a standard commercial property policy. Just as property insurance covers financial losses from property damage, business interruption insurance compensates policyholders for lost revenues.
A Bank of International Settlements analysis of forecasts by various groups in April 2020 states, "The current estimated impact on global GDP growth for 2020 is around -4 percent."
"Annual output loss could range between 5 percent and 9 percent of pre-COVID-19 estimates for the US," the BIS analysis found.
Effects on individual companies are expected to be significant as well. The American Property Casualty Insurance Association estimated in April that closures would cost small businesses with fewer than 500 employees between $393 billion and $668 billion per month.
The Pandemic Problem
Unfortunately, business interruption insurance may not protect businesses against most COVID-related losses.
“People who have business interruption insurance think, ‘This is a case where my operations were shut down because of the pandemic. Certainly I can make a claim for the lost income,’” says Erik Josowitz, an insurance analyst at insuranceQuotes. “But there are a couple of issues with that.”
Business interruption insurance is designed to pay claims when businesses' assets are physically damaged. Hurricanes, floods and fires are examples of disasters that typically damage business property and may lead to business interruption claims.
A pandemic, however, doesn’t damage property, at least not in the same way. Financial losses from a pandemic generally stem from mandated closures, disrupted supply chains and customers staying away because of lockdowns or fear of contamination.
“In order for business interruption coverage to be triggered, there typically needs to be a physical loss or damage as a result of a covered cause of loss,” explains Jeffrey Alpaugh, a managing director at insurance broking and risk management firm Marsh.
“In some instances, property policies exclude ‘contamination’ as a covered cause of loss," Alpaugh says. "In cases where there is no exclusion, insurers may argue there is no coverage as the presence of the virus is not a physical loss or damage.”
As a result, many business interruption insurance policyholders, including those most heavily impacted by the pandemic, are getting short shrift from insurance companies
“We are seeing a lot of restaurants right now making claims on business interruption insurance and those claims are being summarily denied,” Josowitz says.
Finding Business Interruption Solutions
If your business has business interruption insurance and has experienced financial losses from the pandemic, first, review your coverage. Check the details. Business interruption insurance is an add-on to standard commercial policies and specifics of individual coverage may vary widely.
“Take a look at the policy and figure out whether communicable diseases are excluded,” Josowitz says. “If it was not excluded I’d say they should file claims as soon as possible.”
Next, if your business has a claim, file it. Do this even if your broker tells you it won’t be covered. Future regulatory, legislative or legal actions may give businesses more protection than they have now. Filing a claim will put a business in better position as the situation becomes clearer.
When preparing a claim, document it carefully. Financial records have to support the claimed losses. Josowitz suggests bearing in mind the nature of business interruption insurance when making a pandemic-related claim. For instance, the more closely the claim can be related to physical damage, the better. A claim of losses due to contaminated ventilation ducts, for instance, may get paid while one based on customers simply failing to come around is denied, Josowitz says.
In order for business interruption coverage to be triggered, there typically needs to be a physical loss or damage as a result of a covered cause of loss.
-Jeffrey Alpaugh, managing director, Marsh
If a claim is denied, consider getting legal advice. The way claims should be handled during the pandemic will in many instances be decided by the courts, Alpaugh says. Indeed, lawsuits by businesses claiming they were unfairly denied compensation under business interruption insurance policies began appearing not long after the first U.S. cases of COVID were diagnosed. Class action lawsuits are also in the works, Josowitz says.
Finally, check your liability coverage. Standard commercial insurance policies include disease as a covered bodily injury. This may protect against losses due to claims by customers or others that the business enabled the spread of the disease.
Preparing for the Future
A global sporting event makes a strong case for getting business interruption insurance against infectious diseases. For 20 years, a British tennis tournament has been paying approximately $2 million a year for a custom pandemic add-on to its business interruption coverage. Now that this year’s event is off, it stands to collect more than $140 million on the policy.
Businesses with similar foresight are rare, however. In 2018, Marsh and Munich Re rolled out PathogenRX, which was designed primarily to protect hospitality and entertainment businesses against losses from infectious agents.
“Despite having multiple conversations with many clients about it, there was no take up,” Alpaugh says.
Now, of course, Alpaugh reports Marsh and Munich Re are scrambling to meet “tremendous” interest in PathogenRX. However, buying a policy now obviously can’t help with losses already incurred in this pandemic nor, in fact, any future COVID-19 outbreaks.
“While PathogenRX was designed to cover pandemic situations like COVID-19, businesses, both small and large, seeking to purchase the insurance now for future pandemics will find exclusions for COVID-19,” Alpaugh explains.
While few businesses will pay as much as the tennis competition, pandemic insurance won’t be free. The RIMS survey found risk managers would pay 5 percent more for pandemic interruption insurance. However, court cases, bills introduced into state legislatures and calls for a public-private pandemic insurance fund may make the coverage more available and affordable. After the 9/11 attacks, for instance, the federal Terrorism Risk Insurance Act did just that—and it could possibly be replicated to cover pandemic losses.
But even that won’t protect businesses with a perfect security blanket. Power failures, nuclear hazards, earthquakes and even floods are all significant risks that, along with infections, may not be covered by business insurance. Josowitz warns against getting distracted by pandemic pandemonium to the point of ignoring other risks that may be similarly significant.
“We’re living in a world where big storms and floods and epidemics are becoming more common,” Josowitz notes. “I’d encourage businesses owners to think broadly about the world we’re moving into and what risks they need to protect from rather than just focusing on the last problem.”
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