Is the "business interruption" guarantee being invoked?
Reminders / Questions
Observation : the current health crisis is causing a very sharp drop in supply and demand for companies operating in the French market
Consequences : while its net profit decreases, or even disappears, the insured must continue to meet its fixed costs (firm purchases of raw materials, for example) and sometimes incur exceptional expenses to remain competitive in its market.
Purpose of the "business interruption" guarantee : it is intended to allow the insured to compensate for the consequences of the decrease/loss of their net profit through the payment of an insurance indemnity until they are able to generate normal revenue again.
Question : Can an insured party turn to their insurer to claim the benefit of the "business interruption" guarantee on the grounds that the health crisis is causing them a loss of earnings?
Answer : Several scenarios depending on the type of insurance contract that was taken out.
Situation 1: The insured has taken out a standard insurance policy
Observation : In approximately 60% of insurance contracts on the French market, business interruption coverage can only be triggered if the insured also suffers material damage covered under the same contract.
Example : the insurance contract guarantees the insured against material damage caused by a fire and against operating losses generated by the production stoppage resulting from this fire.
Analysis : the activation of business interruption insurance is contingent upon the occurrence of an event otherwise covered by the insurance contract.
Guaranteed events : The main guaranteed events are fire, explosions, lightning strikes, storms, riots, civil unrest, acts of terrorism, and sabotage.
Problem : the health crisis is not a covered event under the insurance contract and, by definition, does not cause material damage to the insured.
As a result , even if the insured experiences a drop in revenue due to the health crisis, their business interruption insurance is not intended to cover it.
Famous precedents : the same problem was encountered during the eruption of the Eyjafjöll volcano in 2010 and the "yellow vest" movement in 2018, which caused significant economic disruption without resulting in material damage to policyholders.
Justification #1 :
Business interruption insurance is not mandatory, so it can be freely defined contractually
Justification #2 :
Events external to the company are part of "business risk," which is not supposed to be insurable
Situation 2: The insured has purchased the optional "no damage" guarantee
Explanation : Some contracts offer the possibility of extending business interruption coverage, for an additional premium, to cases where the insured does not suffer any material damage otherwise covered by their contract.
How it works : in reality, these guarantees are not intended to cover all business interruption losses but only certain types of damage, triggered by specific events.
Examples of covered damages include losses related to supplier default (e.g., following an airport blockade), customer default (e.g., 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 covered in the contract; the insured customers and suppliers must, in principle, be identified in the insurance contract.
Consequently , compensation for the consequences of a customer's or supplier's failure to perform will only be granted if the event stipulated in the contract occurs.
Problem : In the event of economic paralysis caused by a health crisis, the customer or supplier does not themselves experience any particular event, so the conditions for applying the optional guarantee are not met.
Situation 3: The insured takes out a new insurance policy?
Question #1 :
Could policyholders who wish to do so take out new guarantees protecting them against the still-to-come consequences of the current health crisis?
Answer : Since the WHO's announcement on January 30, 2020, recognizing the Covid-19 epidemic as being of global concern, the resulting health crisis is no longer an insurable event because there is no longer any uncertainty regarding its occurrence.
As a result , it is virtually impossible for any insurer to agree to cover the current health crisis.
Question #2 :
Could an insured person purchase optional coverage to protect themselves against future health crises other than the one related to Covid-19?
Answer : Given the scale of the economic consequences of the current crisis, it is almost certain that the insurance market will systematically exclude health risks from its insurance offerings, at least until actuaries are able to develop models and thus accurately quantify this risk.
The result : at best, the insured will be able to purchase a customized optional guarantee, covering limited events directly experienced by one or a limited number of their business partners, likely at a significant surcharge.
