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.