In April, Even Greenberg, CEO of Chubb Limited, told Bloomberg that forcing insurers to pay for losses that policies do not cover or were not priced for would damage the insurance industry.
"Pandemics, unlike other catastrophes such as a hurricane or earthquake, are not limited by geography or time...The loss potential from a pandemic, in practical terms, is infinite, and insurance companies have only finite balance sheets," said Greenberg.
While there is consensus that the coronavirus has caused billions of dollars in damages as a result of the widespread shut downs across the country, insurance companies, shareholders, and policymakers do not see eye to eye as to who will be responsible to fund the damages as a result of the pandemic.
In Paris, the Tribunal de Commerce de Paris ruled that insurer AXA must pay a restaurant owner's business interruption losses after COVID-19 was declared a global pandemic by the World Health Organization. This decision may open the door to a wave of similar litigation in Canada because of government-mandated business closures.
Many Canadian insurers are now facing class-action lawsuits over pandemic-related business interruption coverage. In dispute is whether policy interpretation excludes coverage for pandemic and communicable disease in the specific circumstances advanced in the claims. A component of the dispute seems to relate to policy terminology references with respect to standard business interruption claims which typically require physical damage to the insured property.
In a recent article, the question was raised whether COVID-19 constitutes "damage" to the premises and whether closures and the associated losses from COVID-19 (or any virus for that matter) can be categorized as physical damage.
Where a business shuts down as a result of a contaminated person in the workplace, an argument could be made that the contamination is considered to be physical damage. However, where a business shut down as a precaution, coverage may not be afforded under an all-risks policy.
Lloyd's of London has outlined three frameworks to better protect insureds against catastrophic events and their related impacts on businesses. Most recently, Lloyd's has proposed corresponding coverage options for small to medium-sized enterprises. The first, ReStart, is a business interruption risk-pooling solution without a "physical damage" trigger. The second, Recover Re, is a proposed non-damage business interruption insurance product for losses occurring 'after-the-event' where premiums are paid to recoup costs. The third, Black Swan Re, would provide coverage for long-term effects from 'black swan' events through a government-backed industry pool.
The implementation of coverage under these frameworks could allow businesses to re-open prior to a second wave of COVID-19, or throughout future pandemics, with managed risk and support from their insurers. Further, the frameworks are meant to provide support for insurers through proposed re-insurance and government guarantees.
Very few pandemic insurance products exist at this point as the risk is not predictable and, as such, it is difficult for insurers to determine an appropriate annual premium. However, when businesses have been paying insurance premiums for years, they expect coverage to be afforded when disaster strikes. As such, Canada is seeing a growing number of class action lawsuits against insurers in order to recoup losses due to COVID-19.
For example, Aviva Canada has been named in several class actions for denial of coverage due to COVID-19. In a recent example Aviva is alleged to be denying a claim on the basis that the COVID-19 "pandemic" does not constitute an "outbreak" as defined in their policy wordings.
A standard Aviva "Business Income Actual Loss Sustained 912000-01" form includes wording for standard business interruption and supplementary coverages. Included within the supplementary coverage is a subcategory titled "Group Three" which is subject to time or distance limitations, two of which consider "outbreaks" as an extension of coverage: (i) negative publicity coverage, and (ii) restricted access. Both categories provide coverage for the actual loss of business income sustained relating to an outbreak of a contagious or infectious disease that is required by law to be reported to government authorities.
Miller Thomson LLP, a national law firm, has commenced several individual and class action claims seeking business interruption losses under policies issued by Aviva. Chris Blom, a partner in the Insurance Group suggests, "Coverage should be available under the Negative Publicity and Restricted Access cover, when one reads the plain language of the endorsement."
While it is still unclear whether coverage exists under business interruption policies, both businesses and insurers will require assistance in assessing/calculating losses specific to the impact of COVID-19.
For businesses, specific attention should be paid to financial impacts affecting their operations during the pandemic. Having clear and concise records will allow for a more efficient claim. Where specific costs have increased/decreased as a direct result of the pandemic (examples could include increased telephone or travel costs, reduction in salaries), or where incremental costs have been incurred (i.e. cleaning or sanitization, printing, or repair and maintenance costs, etc.), companies should separately track these from normal operating expenses.
Further, it is important to determine the trends both prior to and as a result of COVID-19. Where a business may have been in its early stage could greatly impact projections. Vice versa, companies may also look to recover losses which are unrelated to the impact of the pandemic entirely.
Business interruption losses are less tangible than property losses, making them more difficult to calculate. In determining losses due to COVID-19, businesses need to establish projected profits (absent the pandemic) as compared to profits/losses as a result of the pandemic. In extreme situations, the entire value of the business may be lost necessitating a pre-COVID-19 business valuation to be determined.
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