How do you activate the “operating loss” guarantee?
Reminders / Questions
Observation : the current health crisis is causing a very sharp drop in supply and demand for companies operating on the French market.
Consequences : while net profit decreases or even disappears, the insured must continue to meet his fixed costs (firm purchases of raw materials, for example) and must sometimes incur exceptional costs to remain in the market.
Purpose of the “operating loss” cover : it is intended to enable the insured to compensate for the consequences of the decrease/disappearance of his net profit by paying an insurance indemnity until he will be able to achieve normal turnover again.
Question : Could an insured person turn to his insurer to claim the benefit of the “operating loss” guarantee on the grounds that the health crisis is causing him to lose income?
Answer : There are several scenarios depending on the type of insurance contract that has been taken out.
Situation 1 : the insured person has subscribed to a classic guarantee
Observation : in approximately 60% of insurance contracts on the French market, operating loss guarantee can only be triggered if the insured person also suffers material damage covered under the same contract.
Example : the insurance contract covers the insured against material damage caused by a fire and against operating losses generated by production shutdown as a result of the fire.
Analysis : the activation of operating loss guarantee is subject to the occurrence of an event covered by the insurance contract.
Covered events : the main guaranteed events are fire, explosions, lightning strikes, storms, riots, civil commotion, acts of terrorism and sabotage.
Problem : the health crisis is not an event guaranteed under the insurance contract and, by definition, does not cause material damage to the insured person.
As a result, even if the insured person suffers a drop in turnover as a result of the health crisis, his operating loss cover is not intended to play a role.
Famous precedents : the same problem has already been encountered with the eruption of the Eyjafjöll volcano in 2010 and the movement of the French “yellow jackets” in 2018, which caused severe economic disruption without causing material damage to policyholders.
Explanation No 1 :
Operating loss cover is not a compulsory insurance and can therefore be freely defined contractually.
Explanation No 2 :
Events outside the company are part of the “business risk”, which is not supposed to be insurable.
Situation 2 : the insured person has purchased the optional “no-damage” coverage
Explanation : some contracts offer the possibility of extending operating loss cover at an additional premium to cases where the insured does not suffer any material damage otherwise covered by his contract.
How it works : actually, these guarantees are not intended to cover all operating losses but only certain types of damage, triggered by certain specific events.
Examples of covered losses : losses due to the failure of suppliers (e.g. due to the blocking of an airport), the failure of customers (e.g. in the event of insolvency) or the occurrence of an act of terrorism of which the insured is not the target.
Limitations : the guarantee is strictly limited to the damages and events referred to in the contract + the guaranteed customers and suppliers must in principle be identified in the insurance contract
Consequence : compensation for the consequences of a customer or supplier’s failure to act will only be acquired if the event referred to in the contract occurs.
Problem : in the event of economic paralysis caused by a health crisis, the customer or supplier does not himself suffer any particular event so that the conditions for the application of the optional guarantee are not met.
Situation 3 : the insured takes out a new insurance policy ?
Question n°1 :
Would policyholders who wish be able to take out new cover to protect themselves against the consequences of the current health crisis?
Answer : Since the WHO’s announcement of 30 January 2020 recognising the Covid-19 epidemic as being global in scope, the resulting health crisis is no longer an insurable event because there is no longer any uncertainty as to its occurrence.
As a result, it is practically impossible for any insurer to agree to cover the current health crisis.
Question n°2 :
Could an insured person take out optional guarantees to protect against future health crises other than the one linked to Covid-19 ?
Answer : given the extent of the economic consequences of the current crisis, it is almost a given that the insurance market will systematically exclude health risk from its insurance offers, at least until actuaries become capable of carrying out simulations and are thus able to correctly quantify this risk.
Result : at best, the policyholder will be able to take out optional tailor-made cover for limited events suffered directly by one of a limited number of business partners, probably at a high additional premium.
Lawyer at the Paris Bar since 2000, holder of a Master’s Degree (D.E.S.S.) in Business Law (in partnership with HEC) from the Jean Monnet University (Paris XI).