Cedric Stephens | Business interruption insurance debate unsettled

RISKS & INSURANCE

Member of Parliament for South St Catherine Fitz A. Jackson started a public conversation in this newspaper on April 29.

COVID-19, government policies and its responses to the resulting economic fallout, the local banking and insurance sectors, small, medium, and even large businesses and business interruption insurance, were among the things that formed part of the discussion that he started.

One of the three pillars on which the MP built his argument was that existing business-interruption policies – BI insurance – provide coverage against pandemics like COVID-19.

“These insurance provisions were intended to protect businesses from financial losses that can cripple their operations and undermine their ability to pay workers, settle other financial obligations, and keep the economy going. This is essentially what insurance policies are for, providing financial coverage against losses that can occur from no fault of the insured,” Jackson said.

A similar debate is currently under way in the United States and the United Kingdom. It is about whether BI insurance provides coverage against pandemics like COVID-19.

On the one side are those arguing, like the MP, that such protection exists. They consist of policyholders, consumer groups, some state legislators and other interest groups. Arguing against them are mainly the insurers and/or their lobby groups.

Standing in the neutral corner, in the case of the UK, is the insurance regulator, the Financial Conduct Authority (FCA). The sharp divergence in opinions suggests that, perhaps, Mr Jackson should have adopted a more nuanced position about the scope of business-interruption insurance given the fact that it remains unclear which side will win the debate.

A few facts about BI insurance in Jamaica are also required in order to properly frame the conversation that Mr Jackson has started.

In July 2001, there was a massive fire that destroyed the Portmore Mall. Scores of occupants from the SME sector were among the tenants. Seventy-five per cent of them did not carry insurance on their inventories and other assets and sought government bailout.

Very few of the insured businesses bought BI insurance. It is not known if the proprietor’s rental income, which is often the subject of BI policies, was insured. Recent informal surveys suggest that nearly two decades after that fire, BI insurance remains undersold.

Because BI insurance is generally not understood by insurers and brokers, it is seldom sold. The consolidated industry statistics for 2018 support my opinion. It lists only six types of insurance, namely: motor, residential property, commercial property, employers’ liability, public and other liability, and all others. BI insurance is not listed as a separate category. It is not clear whether it is grouped with commercial property (32 per cent of the total) or is included in all others (8 per cent).

Only a small part of the non-life segment’s $14 billion claims payout would be for BI insurance claims.

Lending institutions are ignorant about BI insurance. While they invariably require asset coverage, they seldom mandate BI insurance even though the latter would guarantee the borrower’s ability to make loan payments in the event of property damage that disrupted business operations.

The main buyers of BI insurance tend to be large, sophisticated, and publicly owned companies.

The protection that is afforded under the BI insurances that I have seen over the years is triggered by physical damage to insured assets like buildings, inventories, and other property. Disruption of business operations by infectious diseases is usually excluded.

And, BI insurance contract wordings differ between insurers. It would, therefore, be unwise to express opinions about coverage details without careful analysis.

The UK regulator, to use a cricket metaphor, has played the COVID-19 BI ‘ball’ with a straight bat. It says that it is seeking court action “to resolve uncertainty on business-interruption cover and bring clarity on specific policy clauses”. the FCA’s goal is to resolve doubt for businesses that are facing uncertainty on their BI insurance claims following lockdown in that country.

The FCA’s interim CEO also said in the statement: “We have been clear that we believe in the majority of cases, business-interruption insurance was not purchased to, and is unlikely to, cover the current emergency. However, there remain a number of policies where it is clear that the firm ( i.e., insurer) has an obligation to pay out on a policy. For these policies, it is important claims are assessed and settled quickly.”

MP Jackson suggested that the amounts to be settled under local BI policies “can be substantial”. He offered no information that explains why he arrived at that conclusion. In the meantime, the Insurance Association of Jamaica, the Insurance Brokers Association, or the Financial Services Commission have not entered the conversation. Why not?

Some of my critics are likely to argue that I am being partisan or that I should not have entered what is probably a political conversation. I would say to them: check the headline of the article that I wrote on April 3, 2017. It read: Insurance buyers need a Fitz Jackson in the House.

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