Property

Property Insurance and COVID-19: Can insurance cover business losses?

The massive spread of COVID-19 has a very significant impact on the world economy. Even though in the countries that were the earliest affected by COVID-19, such as China and South Korea, the increase of positive COVID-19 patients has started to show a decline, but in other countries, including Indonesia, this trend is still showing an increase. The Indonesian government is still trying to suppress the number of people affected by COVID-19, one of which is through an appeal for physical distancing. The appeal for physical distancing can be interpreted as a limitation on community activities outside the home. This has resulted in business disruption in several sectors, such as restaurants and hotels, which experienced a significant decline in turnover^[1].

The COVID-19 pandemic also has an impact on the obstruction of the supply chain for raw materials for the processing industry in Indonesia. Two industrial sectors affected include pharmaceuticals and textiles. Both sectors have been recieveing supply of raw materials from China. As an example, as much as 60-62% of the supply of raw materials for the pharmaceutical industry comes from Hubei province, which is the epicentre of the spread of COVID-19^[2]. The uncertainty of the delivery of raw materials can certainly cause business disruption to industry players.

The business disruption that occurs due to COVID-19 raises a question about whether the loss due to the business interruption can be covered by insurance or not. As we know, in property or property insurance, loss due to business interruption is one of the objects covered in Section II of the PAR policy published by Munich Re. In the Munich Re standard policy, business interruption that can be guaranteed by the insurer is a business interruption caused by damage or loss of property guaranteed in Section I of the policy, as stated below:

“The insurer shall indemnify the insured for a loss of the interest insured unless specifically excluded if at any time during the period the property insured under the property damage section suffers loss or damage indemnifiable under the property damage section or which would have been indemnifiable under the property damage section but for the application of a deductible, thereby causing an interruption of or interference with the business insured.”^[3]

 

The business disruption that occurs due to the COVID-19 pandemic case does not involve any damage or loss of material experienced by business professionals. This means, if the policy used in an insurance coverage is a standard Munich Re policy, the loss arising from the business interruption cannot be covered by the insurer. In addition, it is also important to know that all losses caused by infectious diseases, such as COVID-19, cannot be covered because they are included in the exception to generally accepted standards^[4].

The coverage in an insurance coverage can be wider than the coverage stated in the standard policy through the application of further clauses or extension clauses. One of the further clauses that could be related to business disruption due to the spread of COVID-19 is infectious or contagious disease, food or drink poisoning; murder, suicide policy extension clause. The clause is shown below:

“Loss as insured by this Policy resulting from interruption of or interference with the business directly arising from an occurrence or outbreak at the Insured’s premises only and limited to :

 

Closure or evacuation of the whole or part of the Premises by order of any Government, Local Government or other Statutory Authority consequent upon :
 

1.     (a) Any occurrence of Notifiable Disease (as defined below) at the Premises,

 

        (b) Any discovery of an organism at the Premises likely to result in the occurrence of a Notifiable Disease,

 

2.     Food or drink poisoning

 

3.     The discovery of vermin or pests at the Premises,

 

4.     Defects in the drains or other sanitary arrangements at the Premises,

 

5.     Any occurrence of murder or suicide at the Premises,shall be deemed to be loss resulting from Damage to the property used by the Insured at the Premises.”^[5]

 

In the context of COVID-19, the clause above allows the insurer to compensate for business losses suffered by the insured due to the closing of the insured's place of business by the government as a result of the existence of “Notifiable Disease” in the area where the insured's business is located. Thus, there are at least three conditions that must be met so that business disruption due to the spread of COVID-19 can be covered by the insurance company.

The first requirement is related to business closure as a result of an outbreak. Business interruption can be borne if the closure of the place of business is carried out on the basis of instructions from the government. If the business closure is carried out on the basis of the initiative of the owner or business actor in order to prevent the spread of disease, therefore the resulting loss cannot be covered by insurance^[6].

The second requirement is that COVID-19 must be included in the Notifiable Disease category. In this clause, Notifiable Disease is defined as a type of disease which based on legislation must be reported to the government. This notifiable disease does not include SARS, AIDS, H5N1, H1N1 and mutases from H1N1. Thus, if it is medically stated that COVID-19 is still classified as SARS disease, COVID-19 cannot be included in the Notifiable Disease category. Thus, the insurer is not responsible for business interruption coverage.
 

Still related to Notifiable Disease, the time the government declared that COVID-19 was a Notifiable Disease was also very important as a reference in determining when this clause would work. If business disruption has occurred before the government declares COVID-19 as a Notifiable Disease, then the losses incurred cannot be borne^[6]. For example, the SARS case that occurred in Hong Kong since February 2003 caused many hotels to make business interruption claims to insurers. The Hong Kong government granted the status of Notifiable Disease for SARS on March 27, 2003. Insurers denied any business interruption claims that occurred before March 27, 2003^[7,8]. For additional information, the UK declared COVID-19 a Notifiable Disease on March 5^th 2020^[9].

The third requirement is that Notifiable Disease must be confirmed to have infected the place of business which is the object of coverage. An outbreak of Notifiable Disease at a premise can be indicated by the presence of an employee who is positive for COVID-19. Generally, after there is information regarding a Notifiable Disease outbreak at a place of business, the place of business will immediately be closed (lockdown) and then carry out a thorough cleaning.

Through the explanation of the clause above, it can be concluded that a hotel or restaurant that has decreased turnover as a result of the implementation of physical distancing does not make the insurance party responsible for making payments for the losses suffered. This is because the hotel and restaurant are still operating. In other words, the business disruption experienced is not due to the insured being unable to operate temporarily as a result of Government instructions to restrain the spread of COVID-19, but because of the reduced number of people traveling to restaurants and hotels

Apart from the clause above, there are several other further clauses related to infectious diseases. These clauses have an essential similarity to each other and the majority both use the term "Notifiable Disease". However, each clause version has a different version from each other^[9]. In one version, Notifiable Disease is defined as a disease that is included in the list of diseases listed in the wording. In another version, Notifiable Disease refers to confirmation from the authorized Health Agency. This means, to decide whether a business loss can be insured or not, it really depends on the follow-up clause used in the agreed policy.

There are also several clauses that relate to business disruptions that occurred due to the COVID-19 pandemic, especially those related to the flow of supplies of materials or raw materials as well as the supply of water, electricity and other public facilities. These clauses include the Contingent Business Interruption Endorsement, Suppliers and Customers Extension Clause and Public Utilities Clause. The three clauses extend the business interruption coverage to cover disruption due to the insured person not getting supplies of raw materials and / or energy. However, it is quite clear in the three clauses that losses can be borne if the supplier experiences physical damage or loss of material that occurs on the supplier's premise. Damage or loss causes the supplier to be unable to provide for the insured's needs. This means that since the COVID-19 case has no impact on damage or loss of material, the three clauses do not apply.

Researchers from the Bandung Institute of Technology predict that the peak number of daily COVID-19 cases will take place between the end of March 2020 and April 2020^[10]. Even though so far, the property insurance sector has not been significantly affected by COVID-19, insurers need to review the clauses that may be related to this pandemic, so that insurers can estimate the extent of the impact and immediately take steps to maintain solvency ability.

 

 

Reference :

 

[1]       https://news.detik.com/berita-jawa-timur/d-4944857/dampak-corona-merembet-ke-pengunjung-hotel-dan-restoran

 

[2]     https://bisnis.tempo.co/read/1312168/dampak-corona-pasokan-bahan-baku-manufaktur-mulai-terganggu 

 

[3]       Polis PAR Munich Re Standar

 

[4]       https://www.aon.com/getmedia/9fc16e65-c428-4145-b1d7-f1fa4f554a07/Property-And-Coronavirus-Coverage-Considerations-Jan2020.aspx

 

[5]       https://ahliasuransi.com/infectious-or-contagious-disease-food-or-drink-poisoning-murder-suicide-policy-extension-clause/

 

[6]       https://www.mayerbrown.com/en/perspectives-events/publications/2020/03/covid19-and-insurance-coverage-for-businesses

 

[7]       Han, Yong Qiang. Policyholder Reasonable Expectations (2016).

 

[8] https://www.oliverwyman.com/content/dam/marsh/Documents/PDF/UKen/Misadventures%20in%20Business%20Interruption%20(BI)%20Insurance%20Cautionary%20Tales%20from%20Real%20Disputed%20BI%20Claims-02-2015.pdf

 

[9]       https://www.rpc.co.uk/perspectives/insurance-and-reinsurance/covid-19-risk-update-for-uk-insurers/

 

[10]     https://bandung.kompas.com/read/2020/03/19/07434391/peneliti-itb-prediksi-puncak-penyebaran-covid-19-berakhir-april-2020