With business operations dramatically interrupted by the COVID-19 virus outbreak, questions have arisen about the extent of business interruption (BI) coverage. A new AM Best commentary states that the complexity of business interruption insurance may prove to be a boon for attorneys as insureds and insurers disagree about coverage.
The Best’s Commentary, titled, "Social Inflation May Affect COVID-19 Business Interruption Losses," states that insurers likely will continue to suffer potential BI and related contingent business interruption (CBI) losses until the COVID-19 situation abates. Under normal circumstances, BI or CBI would apply until any limits or sublimits were reached and during the entire "period of restoration." With the impact of COVID-19 likely to continue developing over the coming months or longer, it is impossible to be certain how long the "period of restoration" will be for these businesses. AM Best expects defense and containment costs to see a noticeable uptick. With the impacts of social inflation becoming more severe in recent years for insurers due to shifting jury demographics, legal judgments may be more unfavorable to the insurers than in prior years.
Many BI and CBI policies require direct physical loss or damage as a prerequisite to coverage, so where no physical damage has taken place, BI or CBI coverage may not apply. In some instances, BI would apply if there were a denial of access provision, which could provide for coverage when the government prohibits access to the property. Whether such provisions will apply to a given BI or CBI claim is subject to the specific wording of the policy. Businesses ceasing operations voluntarily are unlikely to recoup loss costs because of the voluntary nature of the closure. The insurance industry learned from the 2003 outbreak of severe acute respiratory syndrome (SARS) that communicable diseases can be a material cause of loss, so many policies may exclude communicable diseases.
Some property policies contain limited fungi, bacteria or virus coverage. Such policy provisions can either limit or exclude coverage from losses caused by a virus. These provisions can create ambiguity in coverage and may require courts to step in and interpret, so it is feasible that virus-related losses could be covered while bacteria-related losses are excluded. Additionally, federal and state governments are addressing possible benefits payments to businesses as an alternative to insurance coverage for COVID-19-related losses. Should proposed legislation become law, insurers would on the hook for losses that otherwise would have been excluded. If the majority of COVID-19 business economic losses are left uncovered by the primary market, it is possible the U.S. government could create a federal backstop.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=295862.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
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