Does Business Interruption Insurance allow you to meet the pandemic’s economic losses?

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Does Business Interruption Insurance allow you to meet the pandemic’s economic losses?

1:37 CAT | 22 Apr 2020

Image: Courtesy of MDS Moçambique

The coronavirus pandemic continues to spread and impact exponentially on the production and business of companies both small and large.

The mitigation measures being implemented by the state, including the declaration of the state of emergency, are forcing many companies to interrupt their economic activities totally, or at least partially, which will cause huge falls in their volumes of sales and profits.

Taking this into account, entrepreneurs legitimately ask whether the economic losses they suffer as a result of the reduction in revenue resulting from this pandemic will be guaranteed by the Business Interruption insurance they have contracted.

Unfortunately, the response is not positive!

Direct property damage

In fact, most Business Interruption insurance, both nationally and internationally, can only be triggered if the losses and/or profit reduction have resulted from direct material damage occurring in insured premises and, if the event fits the risks foreseen in the property policy cover that are associated with it, such as fire or storms, among others.

However, in cases of pandemics or phenomena similar to Covid-19, physical damage to physical assets (for example, in premises, machinery, etc.) is never at stake, so the business interruption cover will not apply.

Shortages of clients, suppliers and access prevention

The answer continues to be negative and for the same reasons – no material damage – in the event that these insurance policies include additional cover for shortages of clients and/or suppliers and/or access prevention.

In fact, the operation of additional cover for shortages of clients and/or suppliers also requires the verification of material damage to goods and/or buildings as a result of risks guaranteed by the policy, and these do not have to occur in the property insured (for example, at their premises), but at of your clients’ or suppliers’.

With regard to preventing access cover, the policy also requires that the inability to use or access the insured premises results in material damage, usually in its immediate vicinity, which falls within the cover of the policy’s material damage. without prejudice to the need for the ban to be decreed by a state authority.

Financial losses arising from pandemic outbreaks

This is the Business Interruption insurance framework in effect worldwide.

Most companies worldwide are not protected against the risk of financial losses arising from pandemic outbreaks.

In fact, the world insurance market itself has revealed many difficulties and little (almost none) interest and openness to offer insurance solutions for risks such as pandemics, infectious outbreaks.

First of all, because these phenomena are rare, very difficult to predict, and there is not enough experience and sufficient historical and scientific statistical bases to understand them. But also because the economic and financial consequences of these events are extreme and practically incalculable in anticipation, which makes the construction of risk and pricing models almost impossible to carry out. Effectively, it is only possible to measure what is known!

Business Interruption insurance, obviously, does not escape this reality. And when insurers have started (rare) initiatives and commercialization of business interruption cover specially designed for these risks (and without the requirement of the existence of material damage) they did not succeed for lack of interest on the part of the companies and in fact, and except for a better opinion, because these initiatives do not translate into real and effective solutions.

In fact, the level of protection they afforded insured companies was little, since not only was the sum insured available very limited, but they established conditions that were too restrictive, such as the requirement that outbreaks and contagious diseases occur, be detected within safe facilities; the mandatory identification/prior appointment in the policy of specific diseases, and others. Let us not forget that Covid-19 is new and was only discovered in late 2019!

This is the current context in the face of a phenomenon with an unprecedented global dimension, but we are certain that this pandemic will make the market react, on the one hand because we will see an increase in the demand for companies to have insurance that protects them and makes them more resilient in the face of these risks.

On the other hand, Insurers now have a level of knowledge and structured data on risk that they never had. Thus, with the help of data analytics and artificial intelligence tools, they are in a better position to launch technically effective solutions that can respond to what will be the companies’ expectations.

As the philosopher Nassim Taleb writes, “History and societies do not crawl. They make jumps.” And the same will happen, especially now, with insurance.

Send us an email for any clarification you need or request for analysis of your insurance policies:

Tatiana Bernardo

Task Force MDS “COVID-19”

[email protected]

We would like to meet your information needs at this very critical time for the world, countries, companies and, fundamentally, so critical for all of us!

We offer our most sincere greetings, and we hope that, together, we will be able to win this battle.

MDS Moçambique Insurance Brokers Team

Source: MDS Moçambique