Insurance coverage considerations on COVID-19

19 March 2020

There are many looming concerns surrounding COVID-19 in regards to daily disruptions to personal life and business activity. Social distancing is the new norm to minimise and contain the spread of this virus. Significant supply chain disruptions, travel bans, mandatory and voluntary quarantines are issues that are affecting a wide range of businesses.

In this uncertain climate, businesses are looking to understand how they can manage this crisis, limit their continuing financial losses and perhaps seek avenues for financial relief, raising the question of whether insurance coverage can respond to COVID-19 linked losses.

Commercial property policies

Business interruption coverage is typically triggered if the loss in income is due to physical damage to the insured assets of the policyholders. But, what if an epidemic causes a factory to shut down because its employees fell sick? Would coverage apply although there is no physical damage? And, how is ‘physical damage’ defined in the policy? These are all valid questions that need answers.

Contingent business interruption is a coverage that pays out lost income resulting from a covered loss to an insured customer or supplier. Again, these coverages are typically triggered as a result of a physical damage to the customer or supplier listed as reliant to the insured business. Questions as noted above would once again be of key consideration to determine whether coverage is applicable and the answer could vary on a case-by-case basis. 

Impact due to civil authority

This is a section in a typical property policy that responds to Interruption by Civil Authority, which is commonly defined as ‘actual loss as insured hereunder during the period of time, not exceeding two to four weeks, while access to the ‘premises’ described in the Declaration Page(s) is prohibited by order of civil authority’.

Given that the definition of this coverage may vary by policy, there is a possibility that if operations of a business are restricted due to an order prohibiting access, then coverage may apply. The opposite would be true if the wordings specify the requirement for physical damage. Once again, the applicability of this coverage and length would be case specific.

Event cancellation

Businesses hosting and organising large events normally purchase event cancellation insurance. Event cancellation insurance is specially considered for group meetings or events that generate revenue for business.

As with any insurance policy, businesses must review what items are covered within this policy but also what items are not covered (exclusions). Within event cancellation insurance policies, infectious or communicable diseases can either be included or excluded from coverage.

If coverage is determined, the timing of when the event is cancelled such as for precautionary measures or due to government intervention can ultimately be a determining factor for coverage.

In summary, there is NO clear-cut answer on whether insurance coverage applies but it is recommended that businesses should be reviewing their policies including any extensions and exclusions, with their brokers and claims consultants to better understand terms and conditions.

Take measures now

Once policy wording and insurer requirements have been confirmed and understood, businesses should start to document the financial impacts of the outbreak that fit within the policy parameters. This includes all incremental and abnormal costs such as cleaning and disinfecting the premises, media or communications campaigns to inform the public or employees and overtime pay to make up for production losses. These should be easily identifiable and tracked separately from normal operating expenses. This practice should also extend to all business impacts such as order cancellations, supply chain breakage, and lost profits.

Please keep in mind that even if these may not ultimately be covered under current insurance programs, they can inform future risk mitigation and management strategies.

Understanding how to determine and capture the lost revenue and income as a result of this unpredictable and far-reaching outbreak is critical in minimising the financial implications. Please contact a member of the BDO Forensics team should you require assistance in this area.

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