by Bethan Moorcraft 27 Feb 2020
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The coronavirus
outbreak has provided a textbook example of just how complicated insurance can
be. Businesses around the world, especially those that deal heavily with China,
are desperately trying to work out whether they can file successful business
interruption claims for losses in revenue tied to the public health crisis. But
as many insurance brokers and corporate risk managers have quickly discovered,
business interruption insurance is far from straightforward.
There are
two methodologies commonly used when evaluating business interruption claims.
As explained in an IRMI.com commentary by Paul Haynes, manager of forensic
valuation litigation services at ParenteBeard LLC, the gross profit / receipts
method is a ‘top-down’ calculation that finds “the difference between lost
sales and the expenses saved as a result of not earning the lost sales.”
Meanwhile, the net income method is a ‘bottom up’ calculation that “starts with
an insured's or claimant's loss period net income and adds back the expenses
that continued during the loss period.”
In
theory, all approaches to business interruption claims are merely methodologies
to try and put policyholders back in the position they would have been if a
claim hadn’t happened. For classic property perils like fire and flood,
business interruption claims remain fairly straightforward. Where things get
much more complex is in the world of contingent business interruption – when an
event off-premises causes interruption with the supply chain. Typical triggers
for contingent business interruption would be: power outages causing power
failure at a premises, damage at a supplier’s premises, or damage in the
vicinity that restricts or blocks access to the premises.
In the
context of coronavirus, a trigger for contingent business interruption could be
what’s known as ‘notifiable disease coverage’. This is what many companies
around the world, with suppliers or subsidiaries in China, are focusing on
right now, according to Damian Glynn (pictured), head of financial risks at Sedgwick. But he added that many notifiable
disease claims will be “difficult to quantify,” and referred back to the SARS
epidemic in 2003 to illustrate his point.
“In
February 2003, SARS spread from Southern China to Hong Kong, and the economy of
Hong Kong was quite badly affected,” he said. “In early March 2003, the
government of Hong Kong asked hospitals on a voluntary basis to let them know
if you had instances of SARS. It wasn’t until March 27 that the government made
it compulsory for hospitals to confirm SARS cases, thus making it a legally
notifiable disease.
“Following
SARS, there was a legal case involving a hotel leisure complex in Hong Kong, in
which the judgment is directly relevant to the coronavirus situation today. The
court decided that if an insured has cover for notifiable disease, that will
only cover the additional loss suffered by virtue of something becoming
notifiable. So, the claim is based on the impact of the notifiable disease
compared with the impact the business felt from the disease before it became
notifiable. It’s not a claim for SARS versus no SARS, or coronavirus versus no
coronavirus. It’s a claim for legally notifiable disease versus non-legally notifiable
disease.”
While
notifiable disease coverage is the first business interruption trigger that
many brokers and corporate risks managers are thinking about, it’s not the
contingent business interruption that might apply. This is where individual
policy wording becomes absolutely crucial, according to Glynn.
“In the
supply chain business, it’s routine to have cover for damage at a supplier’s
premises triggering cover as if it was damage at the premises of the insured
person,” he told Insurance Business. “Then you stumble into the question
of: how does the policy define damage? Insurance is predicated on damage to
property. If you have a supplier and half the workforce falls ill, insurance
historically is not going to pick up any economic impact of that. But insurance
will provide coverage if there is damage to property. If you had a scenario
where a lot of the workforce falls ill, and the advice is that the insured
needs to do a deep clean and decontaminate its premises, that could potentially
provide a route for coverage as a result of damage to property.
“Another
trigger to look at is competent authority or non-damage denial of access. This
is when the police or another civil authority stop access to your premises.
Again, these coverages are far from straightforward. There’s an interesting
peccadillo where most policies tend not to say you can claim if the authorities
won’t let you in. Many policies have a slightly wider definition, where they
talk about restriction of use of the premises, without requiring an actual ban
on access for the coverage to trigger. Most policies I’ve studied require the
restriction of use of the premises to be because of a ‘thing’ – and that
‘thing’ varies in different policies. Some will talk about a ‘disturbance’ in
the vicinity. Some will talk about a ‘danger’ in the vicinity. It’s all about
the policy wording.”
Glynn was
given a policy to review in which the insured had cover if they couldn’t use
the premises due to food poisoning or contamination. In the context of coronavirus,
this wording was interesting. The coronavirus appears to have originated from a
food market in Wuhan, China. If a policyholder is located close to that food
market, or has a supplier or subsidiary close by, and that policyholder has
coverage for food contamination or poisoning, they may have grounds to make a
claim.
“Under
the contingent business interruption extensions, there are a wide variety of
wordings in use,” Glynn added. In such challenging times, it’s worthwhile for
brokers and corporate risk managers to reach out to experts. Even well-versed
insurance professionals can make the “wrong” interpretation in the complex
world of business interruption.
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