One of the most pertinent topics in enterprise risk management is why the coronavirus isn't covered by business interruption insurance. The pandemic's most major impact is that a lot of businesses faced severe business interruption during the early stages of the lockdown.
Many organizations that made use of traditional private insurance solutions didn't receive any coverage and had to shut down. Keep reading to find out more about business interruption insurance and whether your business qualifies or not!
Why Is Business Interruption Insurance Not Covered On Traditional Insurance Policies?
One of the main features of business interruption insurance is that it's written as part of the commercial property or the business owner's policy. Another feature is that most business interruption insurance agreements state that they will offer coverage if there's physical damage to the property.
That makes risk management for business interruption insurance difficult. The main reason is that business interruption doesn't only occur because of physical damage. Business interruptions may occur due to a civil authority commanding them to shut down operations. Many traditional business interruption insurance policies explicitly state they're not going to offer coverage in the case of a bacterial or viral event.
That's why many people are questioning whether or not they qualify for business interruption insurance due to the coronavirus.
Do Businesses Qualify For Business Interruption Insurance Because Of The Coronavirus?
There are two sides to every situation, and we're going to discuss both. Here's everything you need to know about the situation.
The Insurance Companies
The answer from the insurance companies' side isn't going to please business owners. Traditional insurance companies claim that they don't cover business interruption due to the coronavirus because there's no physical damage to the property.
While it might seem like an unfair policy, but when you look at the actual figures, it makes sense why insurance companies don't offer business interruption coverage due to the coronavirus.
Insurance companies, on average, collect four to five billion dollars a month, and that might seem like a lot of money. However, the statistics estimate that small businesses and organizations lose close to $250-400 billion dollars a month in revenue due to the pandemic. That means there's not enough money to provide businesses with the help that they need.
However, if an inspector shuts down the business after a structural inspection, the insurance companies typically offer coverage. That gives rise to another question, why is there a discrepancy between the two situations?
The SARS Outbreak
After the SARS virus outbreak in 2001-2002, insurance companies made adjustments to their policy to explicitly state that they won't offer coverage due to a bacterial or viral outbreak. That wasn't the case for all insurance providers. They were some insurance policies that still offered coverage.
The biggest example that people offer is Wimbledon. Wimbledon was forced to stop in 2020. However, their insurance policy specifically stated they would receive coverage in a bacterial or virus-related outbreak.
State and Government Involvement
There are three major ways the state is trying to intervene in the issue between small businesses and insurance companies.
The first way that the government is trying to get involved is by changing the policy's language. That's a very risky route to take as the policy is enshrined into the contract agreed upon by two parties. Altering the words without the proper caution is a dangerous strategy.
The second way is by forcing insurance providers to expand the meaning of property damage. Currently, property damage only takes into consideration actual physical damage to the property. To aid small businesses, the government pressures insurance providers to include the damage from a viral outbreak in their definition of “property damage.”
The third and final method by which the government is trying to intervene is by forcing insurance companies to pay these claims. Afterward, federal or state funds will reimburse the insurance companies. Suppose the government continues to force insurance companies to pay these claims. In that case, the insurance industry could be out of business in a two-to-six-month period.
Captive Insurance Is A Viable Solution
Captive insurance structure gives you much more control over the terms of the policy. The concept is essentially you writing your specific insurance policy. It allows organizations to write detailed coverage policies for any business interruption.
Businesses that already had a captive insurance structure present could save themselves from the brunt of the pandemic. Moving forward into the future, more organizations should switch over to a captive insurance structure.
Not only will it provide organizations with an opportunity to write their policy according to their needs, but it'll also help reduce the burden on the insurance industry. The pandemic has hit small businesses hard, and moving forward; the future is starting to look bright again!