The coronavirus and insurance cover for business interruption
guidelines for reviewing insurance coverage
***** Update from 12.03.2020: Requirements regarding the mortality rate *****
On 11 March 2020, the WHO has officially classified Covid-19 as pandemic desease. We expect the Robert Koch Institute (RKI) to follow the WHO’s opinion. Thus, the pandemic risk exclusion most likely applies to events having occurred after 11 March 2020.
With the spreading of the coronavirus (SARS-CoV-2/Covid-19) business closures due to the epidemic will become more likely. Insurance coverage can compensate companies for their loss of earnings in connection with infection-prevention measures. Therefore, companies and insurers have reason to preventively review their coverage strategies in the event of the insured’s business interruption due to Covid-19 infections.
The scope of insurance protection for business interruption because of epidemic events depends on the specific terms of the relevant insurance policy. With this article, however, we intend to raise awareness as a preventive measure and at a general level among key decision makers in companies and insurers regarding the relevant topics.
1. Overview of the relevant insurance products
Business interruption policies on the basis of FBUB 2010 or AMBUB 2011, the relevant standard terms and conditions published by the Gesamtverband der Deutschen Versicherungswirtschaft (the general association of the German insurance sector), usually do not include epidemic-related closures within basic cover. According to these terms and conditions, the insured event occurs if the business is interrupted due to damaged property. That is unlikely to apply in the case of business interruption due to infection-prevention measures. Preventive orders by the health authorities prohibit the staff (among other things) from going to the business premises. They do not affect the material integrity of the company. If Covid-19 breaks out in the company, the pathogen directly harms the staff. The material substance of the operating equipment on the other hand is not impaired by the virus.
If Extended Coverage components or All-Risk policies were agreed upon, the insurance protection extends further. Whether business interruptions caused by Covid-19 are insured under these policies depends on the risk description in the specific contract. If the insured event does not prerequisite impairment of the material substance, coverage of a Covid-19 infection may apply. Insurance protection is possible in particular if
- epidemics and/or infections are expressly listed as an insured risk, or
- there is all-risk coverage in place.
The inclusion of CBI-losses extends coverage to business interruption because of insured risks affecting suppliers and/or customers. Examples are given in the association recommendations SK 8403 and SK 8404. However, the latter also require property damage in the supply chain.
Food processing companies have often hold independent business closure insurance policies. These insurance products compensate for loss of earnings in the event of intervention by the competent authority in the insured company or insured permanent establishment based on the German Public Infection Prevention Law (IfSG). The IfSG authorises executive administration measures for the prevention and containment of certain compulsorily notifiable diseases within the meaning of sections 6 and 7 IfSG. Section 30 IfSG permits in particular the imposition of (obligatory) quarantine on affected people. SARS-CoV-2/Covid-19 is not listed in sections 6 and 7 IfSG. Instead, the German Federal Ministry of Health expanded the scope of application of the IfSG to the pathogen in the Coronavirus Notification Regulation (CoronaVMeldeV) of 30 January 2020. Closures are therefore conceivable because of a Covid-19 infection on the basis of the IfSG. With a view to coverage under the business closure insurance, the wording of the relevant description of risk is decisive. Some terms and conditions specifically list the diseases which are covered by the policy. This list is usually taken from an (old) version of the IfSG which was valid at the time the policy was taken out. For this reason it is unlikely that the risk description contains an express reference to the (novel) coronavirus. Instead, cover for official measures due to SARS-CoV-2/Covid-19 depends on the extent to which the policy considers ongoing developments of the IfSG in its wording.
If suspected cases of SARS-CoV-2/Covid-19 occur in a company, the insured should closely coordinate all steps with the business closure insurer. That is especially necessary if the management is considering temporary interruption of operations at its own initiative before a regulatory authority takes action. The latter may be advisable in certain circumstances for reasons of occupational safety. Without intervention by public authorities, the insured event is not triggered according to most business closure terms. This means that businesses are faced with a gap in coverage. Given that early quarantine measures help minimise damage in the company, it may be possible in this scenario to find amicable solutions together with the insurer.
Companies whose business depends on key personal or certain public events may possibly have covered their loss in a special contingency insurance policy and/or dread disease insurance. Covid-19 infections may trigger the insured event of those contracts.
Coverage under all the aforementioned insurance products may depend on a pandemic risk exclusion eventually included within the terms and conditions. The boundaries of the term pandemic are vague. In any case, such wording prerequisites that
- the pathogen spreads worldwide and
- the individual sources of the epidemic can survive independently.
Whether there are additional requirements regarding the mortality rate of the pathogen has not been conclusively clarified yet by German case authorities. One indication to predict prospective case law would be the official language of the relevant health organisations. The WTO has not yet proclaimed a pandemic in connection with SARS-CoV-2/Covid-19. However, representatives of the organisation are speaking of a ‘health emergency of international scope’. The Robert Koch Institute (RKI) predicts that a pandemic ‘may occur’ in connection with the pathogen (as of 3 March 2020). In a litigation on insurance coverage, the burden of presentation and proof is on the insurer regarding the conditions for a coverage exclusion. If an insurer intends to refuse coverage because of the pandemic clause, it will therefore have to demonstrate and prove that at the time of the insured event, SARS-CoV-2/Covid-19 counted as a pandemic under the exante state of scientific research. Policyholders and insurance companies should therefore observe the WTO and RKI reports on the situation attentively.
2. Recommended measures for ensuring insurance protection
Companies can take precautions for any insured events in connection with the coronavirus. In addition, they should analyse their relevant policies promptly.
- Normally, the terms provide for the policyholder’s duties of notification and cooperation. It is advisable to include the fulfilment of these conditions in the company’s general emergency plans in connection with a possible coronavirus infection.
- If the terms do not waive the statutory provisions on the aggravation of the risk (sections 23 et seq. German Insurance Contracts Act, VVG), the company should review possible notification obligations. Note that also a substantial enlargement of the company since taking out the policy can be counted as an aggravation of the risk in certain circumstances. The latter is an issue for young companies in particular.
- Business closure insurance normally requires the observance of safety regulations in connection with the insured event and cooperation by the company with the regulatory authority. To safeguard coverage, it is therefore important for the company to document these measures carefully and to cooperate closely with the insurer in the event of a claim.
- Under certain conditions, section 56 IfSG provides for damages claims against the public institutions of those affected. These claims may pass to the employer in accordance with section 56(5) IfSG. As a consequence, the insurer obliged to assume liability is entitled to the claims in the insured event in accordance with section 86 VVG. If the insurance contract provides for safeguarding duties of the policyholder for rights of recourse, the company must ensure and document the protection of such rights.
In conclusion, the German insurance market at present offers only few insurance products that expressly and comprehensively provide coverage for the disruption of supply chains by the coronavirus. One focal point of our advice for companies is therefore to identify the extent to which parts of existing insurance programmes provide cover. The last resort is to liquidate losses via credit loss insurance in the aftermath of an event of default.
Please feel free to contact us at an early stage already to check your insurance programmes accordingly.
Any questions? Please contact: Thomas Heitzer or Oliver Sieg
Practice groups: Insurance & Reinsurance, Litigation, Arbitration & ADR