Mon | Aug 3, 2020

Cedric Stephens |Monitoring COVID-19 as insurance risk

Published:Sunday | March 15, 2020 | 12:25 AM
A man wearing a protective mask rides his bicycle through traffic in Half Way Tree, Kingston on Wednesday, March 11, 2020, after the announcement of postitive cases of the coronavirus in Jamaica.
A man wearing a protective mask rides his bicycle through traffic in Half Way Tree, Kingston on Wednesday, March 11, 2020, after the announcement of postitive cases of the coronavirus in Jamaica.

ADVISORY COLUMN: INSURANCE HELPLINE

Mircea Bozga, PricewaterhouseCoopers’ risk audit partner in Romania, calculated the economic impact of the COVID-19 coronavirus on the global economy on Wednesday at between US$120 billion and US$160 billion.

“Economists who evaluated the costs of the 2003 SARS epidemic at around US$40 billion,” he wrote, “predicted that the COVID-19 virus could cost three or four times more. Coronavirus is a risk that must be actively monitored … it comes with a high level of uncertainty. The effects are already felt in problems arising in the distribution chain, travel restrictions and increasing uncertainty in markets around the world.”

Jamaica is not an exception. The local stock exchange ended last Thursday with 38 stocks traded. The prices of 19 declined, 14 advanced and five held firm. Add to these metrics, the negative impact the virus will have on economic growth, the cancellation of flights from Europe into the island, the decision not to hold Champs, the abandonment of other events and consideration of more flight bans from the United States and the United Kingdom.

These things are happening as a result of what another columnist calls the ‘coronisation of Jamaica.’

It would be very helpful if some of the presenters at the West Indies Economic Conference 2020 would use their considerable skills to estimate the economic impact of COVID-19 is likely to have on the local economy.

Will the local insurance industry be involved in the financing the costs and expenses associated with the Coronavirus or the monetary losses that are likely to arise directly from it? Last Sunday’s piece did not explore the topic. I will try to answer this question today under four headings

Case 1: Employee contracts illness due to the virus

Employers are required by law to provide employees with a safe place of work and a safe system of work. This is one of the pillars on which the gestating Occupational Safety & Health Bill rests. It says that workers should be given “the highest level of protection against harm to their safety and health from hazards and risks arising from work”. Employees may be covered by employers’ liability insurance if they were initially exposed to the virus in the workplace or while they were working.

Case 2: Business operations disrupted by COVID-19

Closed manufacturing, wholesale or retail facilities, quarantined workers, travel restrictions and the temporary suspension of imports and exports are just a few ways that a pandemic can disrupt crucial supply chains.

The disruption of operations poses the greatest financial risk to most businesses. Business interruption, or BI, insurance replaces lost income when an insured property loss causes the business to reduce or suspend its operations. This may sound like the perfect solution for COVID-19 induced losses, but it really isn’t.

BI coverage is triggered when a covered peril causes damage to the insured property. The damage must be sufficient to render the property unusable. A standard policy, for example, would cover lost income if the operations are interrupted because a manufacturing facility was destroyed by fire. Coronavirus-related claims are unlikely to cause the property damage needed to trigger BI coverage. Even if facilities such as offices or warehouses, or inventories such as raw materials, are rendered unusable by COVID-19 contamination, business interruption coverage would be unlikely. Standard policies typically contain exclusions for bacteria, viruses and other pollutants.

Global attorneys Jones Day see things differently.

“In the event of a claim for coronavirus-related business interruption,” they say, “certain insurance carriers may dispute whether this ‘physical loss’ requirement has been met. Policyholders should keep in mind, however, that courts across the country (in the US) have not settled upon a uniform rule for when an insured property has suffered a ‘physical loss’. Courts in a number of jurisdictions have determined that contamination and other incidents that render the property uninhabitable or otherwise unfit for its intended use constitutes a ‘physical loss’ sufficient to trigger business interruption coverage. The determination of whether ‘physical loss’ has occurred will, therefore, continue to require a close examination of the particular facts of each case.”

Supply chain insurance is optional for businesses wanting broader business interruption coverage. Policies are written to name specific suppliers, manufacturers, etc. and to cover negotiated perils, including pandemics. Unfortunately, the breadth of coverage provided by supply chain insurance comes at a cost. Premiums are often high particularly for smaller businesses.

Local businesses do not buy or, to put it more accurately, are often not sold BI insurance. In instances where it is sold to operators in the hospitality industry, interruption caused by local infectious diseases is provided. Claims resulting from pandemics are usually excluded.

Case 3: Cancellation of special events

Event cancellation insurance is designed to cover circumstances beyond the control of the organiser that necessitate the interruption, abandonment or cancellation of a business-related function or event. Unfortunately, it’s too late now to purchase coverage for cancellation caused by COVID-19. Policies issued prior to the outbreak, however, may cover cancellations, at least for now.

It would be of interest to know whether this type of coverage was bought by the organisers of Champs.

The organisers of the Cannes Film Festival in France found out in February that that was hardly the right time to seek insurance during a global pandemic. They rejected an offer from their insurer against epidemics and pandemics. Coverage was offered for only €2 million when the budget for the 2020 event was €32 million.

The insurer was politely saying no to them. Fortunately, the organisers have reserves that will allow them to operate for at least 12 months if this year’s festival is cancelled.

Case 4: Liability for negligently exposing third parties to COVID-19

As the incidence of coronavirus illness increases in Jamaica, businesses, particularly those in the hospitality industry, could face claims from infected guests that they allegedly failed to exercise reasonable care in guarding against, or warning of, the risk of exposure to coronavirus. Third-party or public liability insurance is intended to protect businesses against third-party claims for bodily injury resulting from exposure to harmful conditions.

Finally, I have not seen any advisory from the health or life insurance players or their lobby group, the Insurance Association of Jamaica, to the effect that medical expenses that are incurred as a direct result of COVID-19 or deaths caused by the virus would not be reimbursed under health and life insurance plans.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com