By Procor SVP, Chris Mortifoglio and Senior Analyst, Morgan Machado

Since the beginning of the new year, the Novel Coronavirus/2019-nCoV (“Coronavirus”) has dominated the news headlines. The number of infected individuals continues to climb significantly and the corresponding impacts on businesses continue to rise daily. With the world economy more globalized than ever, businesses from China to New York City and around the world are being impacted.

Below is just a sample of the Coronavirus impact[1]:

  • Apple announced its earnings would fall short in the current quarter due to disruptions in the supply chain and the drop in customer traffic at stores in China.
  • Starbucks has closed many stores in China as a result of the government-imposed quarantines.
  • Cruise lines are reporting drops in bookings, while airlines have canceled many flights in and out of mainland China.
  • Casinos in Macau were closed during a government-ordered 15-day shutdown.
  • Auto-companies, such as Honda, Nissan, and General Motors, have major hubs in Wuhan, the epicenter of the virus and are experiencing operational disruptions.

When evaluating the insurance implications associated with the coronavirus, it is important to look back at history. The coronavirus has been compared to previous epidemics, such as SARS and Ebola, both of which caused severe economic damage to the originating country’s economy.

SARS caused fewer casualties than the Ebola virus. However, this virus still resulted in severe economic damage to China’s economy. Short for Severe Acute Respiratory Virus, SARS struck China in 2003 and resulted in a death toll of nearly 800. The SARS crisis, based on a 2004 analysis, cost the world economy a total of $40 billion[2].

Retail, hospitality (restaurants, hotels, etc), entertainment, and tourism were the industries that experienced the greatest impact as a result of the government’s bans on travel. In 2003, these industries made up 42% of China’s gross domestic product. Now, 17 years later, these service industries make up 54% of GDP and China’s GDP has grown from 4% to 17% on a global scale, meaning that the impact of the coronavirus has the potential to be even more crippling on businesses than SARS[3]. Due to the global nature of the economy and the level of uncertainty, it is important for policyholders to understand whether they have insurance coverage to recover business interruption (“BI”) losses associated with the coronavirus.

Most standard property insurance policies offer coverage for BI caused as a direct result of property damage. In order to trigger BI coverage related to the outbreak of a disease, historically it has proven difficult to demonstrate direct physical loss. However, there are several other potential non-damage coverages that may come in to play and allow for the recovery of BI losses. Examples of these include:

  • Contingent Business Interruption – This coverage allows for a recovery of losses caused by a disruption at a key supplier or customer of the policyholder. However, physical damage to that supplier/customer is often a requirement.
  • Civil / Legal Authority – This coverage allows for a recovery of losses incurred when the government orders a mandatory shutdown or evacuation of an area. There may also be a requirement of physical damage within a certain proximity to the policyholder.
  • Pollution / Contamination – Environmental policies can allow for recovery of losses due to biological contaminants under the definition of “pollutants”, which covers losses from fungi, mold, bacteria, viruses or microbial matter.
  • Event Cancellation Insurance – Coverage for the income that events (concerts, sporting events, etc.) would have produced is often broad and may apply in a situation where there are losses stemming from an epidemic.

There may even be specific, enhanced wording added to traditional policies via endorsements or manuscript forms that allow coverage. For example, AJG International presented a case study following the outbreak of the Ebola virus. An enhanced wording policy was issued by Tokio Marine Kiln Insurance to an international school that operated in the United States. The policy included coverage for Contamination, which was defined as sickness, illness or disease at an Overseas Branch of Private School to more than five individuals who are employees, faculty or students[4].

As always, when considering the coverage afforded by policies, it is just as important to review what is not covered by reviewing the policy exclusions. For example, most standard insurance policies exclude communicable diseases, as insurers have become more cautious about exposure following prior outbreaks such as SARS and Ebola, both of which resulted in large economic losses.

Ultimately, a determination of coverage will be decided based upon the specific language of an organization’s insurance policy and not industry standards.

If there is insurance coverage that can provide reimbursement for losses, then it will be critical for organizations to properly and accurately document their business interruption loss. While the peril causing the loss is unique and uncommon, the methods used to quantify the financial loss is ultimately the same as if their business had sustained physical damage from man-made or natural disasters. These methods include the following:

  • Comparing the actual performance of the business to the budget for the impacted time period
  • Reviewing the trends of the business prior to the impacted time period
  • Identifying and documenting specific cancellations of orders or sales from customers
  • Documenting all out-of-pocket extra expenses incurred as a result of the impact

Again, the guiding principle for quantifying the business interruption loss caused by the coronavirus disruption will be to project how the business would have performed but for the loss. If coverage is available, and a loss has been connected to the coronavirus and quantified, then the claim will need to be presented in a professional, concise and timely manner, outlining all aspects of the loss and including all supporting documentation.

[1] Source: Phillip Braun, “Why The Coronavirus Impact On Business Goes Beyond Current Contagion”, Forbes 4 February 2020, Web, 11 February 2020.

[2] Source: Bruce Haring, “Economic Impact Of Coronavirus Will Likely Top $40 Billion, As Theme Parks, Restaurants And Theaters Go Dark”, Deadline 26 January 2020, Web, 11 February 2020.

[3] Source: “Coronavirus Is More Dangerous for the Global Economy Than SARS”, Bloomberg 31 January 2020, Web, 12 February 2020.

[4] Source: “Ebola: The Impact on Insurance”, Arthur J. Gallagher, Web, 4 February 2020.

To learn more about Non-Damage Business Interruption click here>

To learn more about managing traditional Business Interruption click here

Please be advised that any and all information, comments, analysis, and/or recommendations set forth above relative to the possible impact of COVID-19 on potential insurance coverage or other policy implications are intended solely for informational purposes and should not be relied upon as legal advice. As an insurance broker, we have no authority to make coverage decisions as that ability rests solely with the issuing carrier. Therefore, all claims should be submitted to the carrier for evaluation. The positions expressed herein are opinions only and are not to be construed as any form of guarantee or warrantee. Finally, given the extremely dynamic and rapidly evolving COVID-19 situation, comments above do not take into account any applicable pending or future legislation introduced with the intent to override, alter or amend current policy language.