Coronavirus is a disaster, a well-known area of the insurance industry. Yet risk experts are the target of much criticism. Their reputation has been damaged due to the almost general absence of pandemic risk cover in business interruption insurance in the event of an epidemic intended for restaurants. The problems go far beyond this very specific case. The Covid-19 is also “a legal and technical headache in classic insurance cases. Even insurers have not thought of all the direct and indirect aspects of a pandemic, “say Olivier Huet and Evelyne Boyer, insurance expertise professionals at Sedgwick, in Paris.
The case of a fire before the pandemic
Indeed what happens, for example, to the reimbursement of claims such as fire or civil liability at the time of the coronavirus? If a restaurant suffered a fire in January and had to reopen a few days after the obligation to close due to containment, will it be compensated? The operating loss insurance has the particularity that no compensation is paid until the activity has restarted.
In this case, the restaurant is prevented from restarting. Will the insurance pay? Should we reimburse the amount provided if it had reopened when it did not reopen? The insurer is not sure that it will reopen, because it does not know if the restaurant has the kidneys strong enough to pass the course of the pandemic. Site extensions are possible, for example in the event of a frost period. But, because of the imposed confinement, should this delay be taken into account? Is the pandemic a case of force majeure or not? The answer is open, according to Olivier Huet.
This example of an indirect effect on a restaurant can be extended to other establishments, for example a DIY store or a hotel.
A need for causation
AXA, the Swiss market leader, replies that the granting of cover in accordance with the operating loss – fire insurance requires a causal link between a material damage occurring following an insured event and the interruption of ‘exploitation. AXA covers loss of income caused by material damage occurring during the warranty period.
However, AXA does not respond to circumstances which have no adequate causal link with the material damage. If the operation is not resumed after the harmful event, AXA will only reimburse the costs actually continuing to run, insofar as they would have been covered by the gross profit in the absence of interruption. The probable duration of the interruption then serves as the basis for the calculation, within the limits of the warranty period. In the event that the warranty period should be exceeded due to the business closure ordered by the Confederation, AXA will examine a possible extension.
The questions are also legal, according to Evelyne Boyer. If the new loss of operating loss related to the pandemic is not the cause of the event that generated the operating loss, what will the case law say? Courts may take the original cause into consideration.
Take the example of a person who suffers bodily injury following an automobile accident (original claim). She goes to the hospital where she has a nosocomial infection. Is this second incident linked to the original accident? The question will arise in particular for companies producing basic necessities which could not resume activity due to repairs to their production tool during containment.
The case of perishable goods
Because of the pandemic, it is also possible that fruit, flowers or other perishable goods can no longer be sold. Does the insurance reimburse if it is not in a contract? Damage to goods resulting from business closings due to the coronavirus is no longer covered by AXA epidemic insurance since March 11, 2020 (the date of the proclamation of the pandemic by WHO). This insurance effectively excludes pathogens for which the WHO level 5 or 6 of pandemic alert is declared on a national or international scale, according to the insurer.
Near La Mobilière, Cédric Zermatten, member of the management, indicates that in the framework of epidemic insurance, and subject to all insurance coverage, fresh products which could not be consumed for reason for the orderly closure of the ‘establishment (eg a restaurant)’ may be covered by the loss of product indemnity as variable costs not saved ‘.
Store closings can also worsen water damage. If the manager does not pass every day in his stall because of confinement, he will not discover the damage until late, so that the damage may be much higher, warns Olivier Huet.
A solid branch
If the time is right for questioning, insurance is solid, analysts said. Since the financial crisis, annual solvency tests have been carried out. Switzerland introduced the Swiss Solvency Test (SST) in 2011, the EU the Solvency II test in 2016. These guidelines have “prepared the industry for the current situation,” according to Morgan Stanley. The capital assessment is thus tested on the basis of various catastrophe scenarios (stock market fall, sharp rise in rates). Listed insurance has a solvency rate of 150% in 2019 while the required level is 100%, notes Niki Schuler, industry analyst with Albin Kistler. “All are well capitalized,” he continues.
Morgan Stanley analysts point out that the profits of life insurers are more at risk than those of the non-life industries, which are more vulnerable to falling bond yields. The Covid-19 death rate is very high, but “life insurers use very conservative assumptions in their models,” analysts said.
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