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The COVID-19 pandemic and the measures taken to limit the spread of the disease have significantly disrupted economic activity in countries around the world, resulting in significant business interruption losses. The vast majority of these losses are likely to be absorbed by policyholders as, unless governments (or courts) intervene, few companies have business interruption coverage that is likely to respond to these types of losses – exposing the existence of an important protection gap for some pandemic-related business interruption losses.
The
closure of manufacturing plants, restaurants, retail establishments and
other places of business to limit the spread of COVID-19 has resulted in
significant business interruption losses. The vast majority of these
losses are likely to be absorbed by the affected businesses as: (i) many
businesses have not acquired coverage for business interruption losses;
and (ii) unless governments (or courts) intervene, few of the
companies that have acquired business interruption coverage have
coverage that is likely to respond to these types of losses (see the
OECD’s Initial assessment of insurance coverage and gaps for tackling COVID-19 impacts for a more detailed assessment of the insurance coverage available for COVID-19 related losses).
In response to the current crisis, policymakers in a number of jurisdictions are examining various ways to support commercial policyholders (particularly small and medium-sized enterprises (SMEs)) in the context of the uninsured business interruption losses that they are facing or are likely to face as a result of the current COVID-19 pandemic. Policymakers are also beginning to examine longer-term solutions to address the gap in financial protection for pandemic-related business interruption that has come to light as a result of the current crisis.
This note provides an overview of the initial responses to the likely business interruption protection gap for COVID-19 and a discussion of how business interruption insurance against pandemic risk could be provided with support from governments based on the experience of other catastrophe risk insurance programmes.
Businesses across many sectors of the economy have faced a significant decline in revenue as a result of government directives to close their businesses in order to slow the spread of the virus among employees and customers. Most governments have implemented programmes to support businesses that have faced significant disruption as a result of COVID-19, focused on ensuring the availability of financing for businesses or income for their employees. Some commercial property insurance policies also include coverage for business interruption losses which provides policyholders with protection against some of the losses that they incur when their business is forced to close, subject to the terms and conditions of the individual policy.
Insurers and their associations around the world have indicated that most policyholders have not acquired insurance coverage that will respond to the business interruption losses that result from COVID-19 business closures. In most countries, business interruption coverage is provided as an optional coverage attached to commercial property insurance that is often (but not always)1 triggered only as a result of damage to physical property. In addition, in a few countries and policies (notably, in the United States), an exclusion was developed (more than 15 years ago) and has been applied with the aim of specifically excluding coverage for losses due to virus (or bacteria). Some explicit coverage for business interruption losses resulting from a pandemic has been made available as endorsements or specialty coverage although take-up of this explicit coverage has been limited (see Box 1).
Some insurance products have been developed to offer explicit coverage for business interruption losses suffered as a result of an infectious disease outbreak, either as a specialty stand-alone policy or as an endorsement to a policyholder’s existing business interruption coverage. In 2018, for example, a specific coverage for financial losses due to outbreaks, epidemics or pandemics was made available (Marsh, 2020[1]) although there has reportedly been almost no take-up (Collins, 2020[2]).
The Insurance Services Office in the United States developed two optional endorsements for commercial property policies applicable to business interruption losses as a result of business closures related to COVID-19 in February 2020 although it is too early to determine whether insurers will seek to offer that coverage (Barlow, 2020[3]). There are also a few commercial insurance policies that specifically include pandemics as a covered peril in some markets (such as a property and liability policy tailored to dentist practices in Canada) (O’Hara, 2020[4]). In addition, some coverage has been developed for non-damage business interruption which is meant to respond to any interruption to business that does not involve physical damage to the insured premises or a building in proximity to the insured premises (which would include pandemics unless specifically excluded under the terms of the coverage). However, non-damage business interruption remains a specialty coverage with limited penetration.
A number of insurance supervisors are assessing the potential for business interruption coverage to respond to losses incurred as a result of COVID-19 related business closures. In the US state of Washington, for example, the Office of the Insurance Commissioner undertook a review of policy wordings offered by 84 insurance companies and found that only two insurance companies offered coverage for a pandemic in their base policies while 15 others offered limited coverage through endorsements to other policies (Washington state Office of the Insurance Commissioner, 2020[5]). In France, the Autorité de contrôle prudentiel et de résolution (ACPR) requested information from approximately 20 insurers (accounting for a significant portion of business interruption coverage in the French market) and found that only 2.6% of these companies’ policyholders had explicit business interruption for a COVID-19-type event while a further 4.1% had coverage that could potentially respond (i.e. their policy wordings did not provide certainty on coverage) (ACPR, 2020[6]).2
It appears that many policyholder claims for COVID-19-related business interruption losses are being rejected by insurance companies. For example, in the United Kingdom, a survey of hospitality-related businesses found that less than 1% of hospitality businesses, 3% of innkeepers and 4% of beer and pub businesses had received a positive response from their insurer regarding business interruption coverage for COVID-19 related closures (Gould, 2020[7]). Some insurance companies have responded by offering additional coverage or making voluntary payments to support businesses affected by disruptions as a result of COVID-19 (see Box 2).
In a few jurisdictions, insurance companies are offering additional coverage or making voluntary payments to support businesses affected by disruptions as a result of COVID-19. In Switzerland, a number of companies have agreed to voluntarily compensate their policyholders in the restaurant sector for some business interruption losses. In the German state of Bavaria, insurance companies have agreed to provide voluntary compensation for 10%-15% of the normal daily cost of business interruption to policyholders in the hospitality sector (Bayerisches Staatsministerium für Wirtschaft, 2020[8]). At least one German insurer will reportedly provide similar compensation to all of its German policyholders (Huebner, 2020[9]). In France, insurance companies announced that they will collectively contribute EUR 400 million to a solidarity fund for affected businesses (FFA, 2020[10]) and some insurers are reportedly providing small firms with ex-gratia payments (Huebner, 2020[9]). In South Africa, a number of non-life insurers have agreed (as part of a discussion with prudential and market conduct regulators) to provide interim payments to some or all policyholders with a potentially relevant coverage for infectious diseases while legal certainty is being sought on the applicability of coverage (FSCA, 2020[11]).
According to the Italian insurance association (Associazione Nazionale fra le Imprese Assicuratrici (ANIA)), insurance coverage for business interruption is not common on the Italian market, particularly among SMEs – and where acquired, it may only be triggered as a result of physical damage to the insured premises. As a result, Italian SMEs subjected to closure orders (e.g. retail shops, bars and restaurants and various types of service providers) were unlikely to receive any insurance payments for the losses incurred as a result of the closures. A group of insurance companies responded by designing a coverage extension to provide affected SMEs with a daily allowance valid for up to 15 days of ordered business closure.
In addition, insurance companies in many jurisdictions are providing various forms of support to policyholders, including businesses, such as premium grace periods and refunds and flexibility in terms of coverage interpretation (see the OECD report on Insurance Sector Responses to COVID-19 for an overview of these initiatives).
The absence of (or uncertainty regarding) coverage has led (and will continue to lead) to a large number of disputes between insurers and their policyholders which is likely to take months (if not years) to resolve. For example, in the United States, over 1 000 COVID-19-related insurance coverage lawsuits have reportedly been filed (as of August 2020) with early outcomes suggesting different judicial interpretations of key issues and limited potential for any consolidation of proceedings (Covington, 2020[12]).
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