The following article was originally posted on the Applied Systems blog.
Besides the tragic loss of life, infectious disease outbreaks can also take a tremendous economic toll. Businesses lose both employees and customers to illness. Government shutdowns are ordered. Supply chains are disrupted. Physical distancing is recommended. Quarantines are enforced.
When the public is apprehensive during a health crisis and government restrictions on business activity are ordered, the effects can be felt on your firm’s bottom line. Commercial general liability, property and workers’ compensation coverage may offer some protection for your business, but it’s unlikely they provide adequate coverage for a widespread outbreak like COVID-19.
While some large international firms buy coverage for communicable diseases, most standard business insurance policies exclude such outbreaks to keep costs low. Previous viruses, such as SARS, MERS, Ebola and Zika, have also led insurance companies to be cautious about their exposure, with specific virus exclusions added to most basic policies.
At this point in the COVID-19 outbreak, it’s impossible to add or locate new pandemic coverage of any kind. Most businesses will not be able to rely on their standard insurance policies to adequately protect against current coronavirus-related losses.
Swift, global threat
The increasing reliance of businesses on technology, frequent and unrestricted travel and far-reaching supply chains mean that an outbreak in a single geographical location can have global repercussions. And the spread of the virus happens quickly.
Potential risks for your business include:
- Reduced customer demand.
- Loss of workforce due to illness.
- Increased employee absenteeism and lower productivity due to family care obligations, physical distancing and fear of infection.
- Reputational damage if your organization’s response to an outbreak is seen as ineffective or if its communications are seen as incomplete or misleading.
- Operational disruptions, including mandated closings and delays in your supply chain.
Before future outbreaks like COVID-19 occur, you can protect your business and employees by reviewing existing policies and looking into additional coverage to fill gaps.
Limitations of business interruption policies
Commercial property insurance policies often include business interruption (BI) coverage, which pays out lost income and extra expenses incurred from a covered loss. Business interruption policies protect the cash flow and profits of the business. The aim is for you to be placed into the same position after the loss that you would have been in if the loss had not occurred.
But this coverage traditionally doesn’t extend to disease outbreaks. Standard BI would offer little protection as an outbreak wouldn’t produce a physical loss that triggers coverage.
In the wake of the COVID-19 outbreak lawsuits are being filed arguing that the coronavirus is a type of “direct physical loss or damage” that would require insurance companies to pay. It’s unknown how courts may interpret challenges to policy provisions in the aftermath of COVID-19.
Some business property and BI policies include specific time element coverage for “infectious disease outbreaks/notifiable disease,” typically under clauses for communicable disease cleanup, removal and disposal, and interruption by a communicable disease. However, without such language, coverage is unlikely to be triggered.
For example, coverage wouldn’t be triggered simply by fear that a communicable disease may be present in or near your property, thereby leading to employee absences or diminished customer traffic.
Endorsements, non-standard policies
Business interruption policies can vary widely. Prior to an identified outbreak, they can generally be endorsed and extended in ways that offer extended coverage. Other, non-standard policies also exist in the marketplace that could satisfy this coverage need.
Parametric insurance policies might be available in your state that provide coverage for disease outbreak risk without physical damage triggers and can help you fill coverage gaps that are present in current BI policies.
Parametric coverage works by using a pre-determined parameter, i.e., a metric or an index, which could see the presence of a pathogen and trigger the policy.
For example, various parametric products are available that provide financial protection to U.S.-based businesses affected by an infectious disease outbreak. The policies use a parametric trigger provided by an epidemic risk-model. The products are designed especially for industries that depend on people to show up, like hotels and sporting events.
The products attempt to gauge public fear and behavioral change in the wake of an epidemic outbreak. Indexes are possible because of advances in disease tracking and reporting, software machine learning and artificial intelligence. Alerts by health authorities and fatality counts can be used to measure the size of an outbreak.
Other potentially useful business coverage
Other types of business insurance coverage that may protect you against infectious disease outbreaks include:
Commercial general liability (CGL). Designed to cover against claims alleging that your business’ conduct caused bodily injury, such as sickness or disease resulting from exposure to harmful conditions. Since most claims by sickened non-employees fit this description, commercial general liability coverage may be a key source of protection if an infectious disease exclusion isn’t part of your policy.
Directors and officers (D&O). These policies protect the personal assets of corporate directors, officers and their spouses who might experience financial loss if an outbreak halts business operations.
Environmental/pollution. Environmental insurance will often provide coverage for bodily injury and property damage liability, as well as coverage for clean up and business interruption, among other things.
Whether this kind of insurance extends to losses caused by a disease depends on the policy and its definitions. It would, for one, need to define a “pollutant” broadly enough to include disease agents like a virus or bacteria.
This may not always be the case. For example, some environmental policies affirmatively provide coverage for damage arising out of Legionella bacteria, but that’s it. The specifics of the policy matter.
Event cancellation. Coverage for this type of claim is generally restricted to the necessary cancellation of an event by order of a government authority. In other words, if a quarantine was mandated in your community and your business was forced to close, an event cancellation policy may reimburse your business for losses.
Workers’ compensation. An outbreak of any infectious disease could involve workers’ compensation. In this case, exposure to the cause of the outbreak while on the job would trigger the coverage. A receptionist being exposed to a sick customer and being infected is an example of this type of exposure. Workers’ compensation may also be triggered if an employee contracts the illness from a co-worker.
Protecting your business from the unknown, such as the COVID-19 outbreak, can be a difficult task. The standard commercial property and general liability insurance policies may not adequately cover damages to your business.
As the current coronavirus outbreak progresses, it’s important to follow how the insurance industry responds and how policy provisions are interpreted and perhaps even changed. Be sure to analyze your coverages and understand how each might be expected to respond to any future infectious disease outbreak.