Spotlight on business interruption insurance

In the UK, a group of SME clients of insurer Hiscox have threatened a class-action lawsuit against the firm after they were denied a payout for “an occurrence of any human infectious or human contagious disease” under their BI policies.

Hiscox says the insurance industry does not have enough capital to cover BI losses from Covid-19. It argues its BI policy covers only localised events, such as an outbreak of Legionnaires’ disease, on company premises.

The dispute underlines the mismatch in expectations between buyers and providers on BI policies. In the US, insurers are under political pressure to pay out on more claims. Yet most BI policies exclude pandemics and only cover business interruption caused by physical property damage.

Asia-Pacific risk and insurance professionals believe the Covid-crisis will prompt organisations to review their insurance coverage and the level of protection BI products offer.

Peter Jackson, senior director at Lockton Wattana Insurance Brokers in Thailand, says BI policies were initially designed to cover property damage and have lost some of their focus in recent years, leading to the current confusion.

“Business Interruption policies have always been to pick up the loss of profits from property damage events, but over the years there’s been “scope creep” as additional clauses have been added, and to some extent, BI policies have lost their focus. The addition of contagious and communicable diseases was a nice “add-on” and one that insurers and clients alike never thought would result in many claims.”

Jackson adds: “Now everyone is focusing on a tiny corner of the BI policy wording. Is COVID-19 a derivation or mutation of the SARS exclusion? Many clients’ businesses are in desperate situations, and they are looking at all ways to get relief and support cash flow in particular. Likewise, can insurers afford to open the floodgates to a tidal wave of claims they never anticipated?”

Jackson believes the COVID-19 outbreak will lead risk managers and insurance-buyers to look again at BI and consider new products to cover non-damage business interruption losses.

“After the dust has settled, clients could go two ways,” Jackson adds. “Covid-19 has already awoken some to the fact that their insurance policy doesn’t cover a lot of risks and are asking ‘what else is available?’. This provides an opportunity if insurers and brokers are smart.”

Jackson says an “opportunity exists for simplified products” to cover non-damage business interruption.

He believes organisations should understand BI’s limitations: “Recognise the BI is only for physical damage. The risk manager needs to understand the intangible business interruption risks and build a risk mitigation and risk transfer strategy accordingly.”

The COVID-crisis will prompt risk managers to review their insurance arrangements before the next crisis hits.

While BI may not provide adequate coverage, new insurance products may help organisations cover future business interruption losses.

Insurance groups, including Aon, have launched non-damage business interruption insurance (NDBI) products in recent years. Parametric insurance products, meanwhile, may also help to cover certain risks.

Victoria Tan, head of group risk management at Philippines conglomerate Ayala Corporation, believes organisations have the right products available to cover business interruption losses.

“It is the insured who should think about how they can protect their operations. Sometimes people need to learn the hard way,” she says.

Tan says Ayala has evaluated “procuring cover related to non-damage business interruption under our parametric solutions”.

Specific insurance products can be also tailored to cover non-damage business interruption. Ayala’s cyber coverage includes business interruption considerations, Tan says.