Activation of 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 his 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 stay on his market
Purpose of the "business interruption" guarantee : it is supposed to allow the insured to compensate for the consequences of the drop/disappearance of his net profit by paying an insurance indemnity until he is able to return to normal turnover
Question : can 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 a loss of earnings?
Answer : several scenarios depending on the type of insurance contract that has been taken out
Situation 1: the insured has taken out a standard guarantee
Observation : in approximately 60% of insurance contracts on the French market, the operating loss guarantee can only be triggered if the insured also suffers material damage covered under this same contract.
Example : the insurance contract guarantees the insured against material damage caused by a fire and against operating losses generated by the stoppage of production following this fire
Analysis : the application of operating loss cover is subject to the occurrence of an event covered elsewhere by the insurance contract
Guaranteed events : the main guaranteed events are fire, explosions, lightning strikes, storms, riots, popular uprisings, 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
Result : even if the insured suffers a drop in turnover which is the consequence of the health crisis, its operating loss guarantee is not intended to come into play.
Famous precedents : the same problem has already been encountered during the eruption of the Eyjafjöll volcano in 2010 and the movement of "yellow vests" in 2018, which caused major economic disruption without causing material damage to policyholders
Rationale #1 :
The operating loss guarantee is not a compulsory insurance so it can be freely defined contractually
Rationale #2 :
Events outside the business are part of "business risk", which is not meant to be insurable
Situation 2: the insured has taken out the optional “no damage” guarantee
Explanation : some contracts offer the possibility of extending the operating loss guarantee for an additional premium to cases where the insured does not suffer any material damage otherwise covered by his contract.
Operation : in reality, these guarantees are not intended to cover all operating losses but only certain types of damage, triggered by certain specific events
Examples of damage covered : losses related to the failure of suppliers (for example following the blocking of an airport), the failure of customers (for example in the event of insolvency) or the occurrence of an act of terrorism of which the insured is not the target
Limits : 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 the failure of a customer or supplier 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 the supplier does not itself 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 1 :
Could policyholders who so wish take out new guarantees protecting them against the consequences yet to come of the current health crisis?
Answer : since the announcement of the WHO on January 30, 2020 recognizing the Covid-19 epidemic as being of global scope, the resulting health crisis is no longer an insurable event because there is no longer any risk as to its occurrence
Result : it is practically impossible for any insurer to agree to guarantee the current health crisis
Question 2 :
Could an insured take out optional guarantees to protect themselves against future health crises other than that linked to Covid-19?
Answer : given the magnitude of the economic consequences of the current crisis, it is almost certain that the insurance market will systematically exclude health risk from its insurance offers, at least until actuaries become capable of carry out modeling and thus be able to correctly quantify this risk
Result : at best, the insured will be able to take out an optional tailor-made guarantee, targeting limited events and directly suffered by one of a limited number of his business partners, probably in return for a high additional premium
