Business Interruptions and the plight of the Insurance Industry
In today's newsletter we ask a very important question—Are business interruptions eligible for insurance claims? If not, what are they doing about it?
The Story
The 21-day lockdown has brought businesses across the nation to a grinding halt. Restaurants are shuttered, hotel rooms are empty, retail stores are no go zones, and don’t even get us started on the plight of the travel industry. Companies, across the board, are likely to make substantial losses in the next few days and they’re hoping that their insurance policies will offer some protection.
One insurance product that’s making all the waves right now is business interruption insurance. These policies are usually add-ons to property or comprehensive package policies, and they cover for the losses and fixed expenses that a business incurs during an interruption. Under the agreement, business interruption is regarded as a temporary suspension of business operations because of a specific event like a fire, hurricane or tornado.
But there’s a problem. Most business interruption policies can only be triggered if there is physical damage or loss to property. And so insurers can always refuse to process a claim citing that there’s not a whole lot of physical damage happening here. After all, we are talking about an invisible virus. Not earthquakes and floods.
But if you had a philosophical disposition, you could perhaps stare deep into the void, stroke your beard and ask with a brooding voice— "What is physical damage, after all? Are we not all damaged by birth?”
….
Okay, maybe that’s taking the argument a bit too far. But a restaurant in New Orleans is trying to push its luck nonetheless.
Their claim is simple. The insurance company is legally obligated to cover all financial losses arising out of the lockdown because Coronavirus has damaged their property by contaminating surfaces. And since, business interruption can now be directly linked to the damage caused by these “contaminants”, this one is a no brainer. The insurance company must pay. Or we will sue.
WOW, didn’t think of that now, did you!!!!
But what happens if everybody resorts to the same claim. Will insurance companies revolt?
Well, we don’t know. But what we do know is that there are good reasons why most insurance companies don’t cover global pandemics. You see the insurance industry works because most companies can afford to pay out claims when such claims are distributed across geographies and different time intervals. But the very definition of a global pandemic nullifies both covenants. It affects everyone, everywhere, at the same time. Meaning if they cover claims arising out of a global pandemic, they will be in a whole world of (financial) pain when the moment of truth arrives.
But what if insurance companies simply demand a higher premium to cover losses arising out of a global pandemic. Surely, this should be an acceptable compromise for both businesses and insurers alike, right?
Well, not so quick hotshot. Look what’s happening at Wimbledon.
Yes, we are talking about the Wimbledon where Tennis players wear white clothes and hit a green ball back and forth until someone commits a forced error or an unforced error or misses the ball or…..
Okay, doesn't matter. What matters is that The All-England Lawn Tennis Club, which governs Wimbledon, cancelled its 2020 event, as opposed to postponing it, because doing so allowed it to collect on pandemic insurance. Yes, that’s right. These people inserted a specific clause in their insurance contract to cover all claims arising out of a global pandemic triggered by a virus after the SARS outbreak of 2003. And here’s the kicker, they’ve been paying an additional 1.8 million dollars in premium ever since, which adds up to 31 million dollars in total. This is a lot of money. However, now that the virus is here, they are claiming close to 124 million dollars in damages.
Wowww!!!
As one Twitter user succinctly put it- "The company that insured Wimbledon will need an intervention from the lord himself"
But what about India? What will happen to us?
Well, in all likelihood the Insurance regulatory body IRDAI will step in and force insurance companies to honour certain benign obligations even if it’s legally contestable. However, if IRDAI forces Insurance companies to honour all obligations, that could simply disincentivize future entrepreneurs from even stepping into the industry fearing regulatory overreach.
So what’s imperative is that we find the right balance and not act in haste. Hopefully, by the time we emerge from the lockdown, businesses and insurers in this country will still be alive and kicking.
Until then…