Tag Archives: business interruption

COVID-19 Trio Tops Global Business Risks

A trio of COVID-19-related risks heads up the Allianz Risk Barometer 2021, reflecting potential disruption and loss scenarios that companies are facing in the wake of the pandemic. Business interruption (with 41% of respondents citing it as a risk) and pandemic outbreak (at 40%) are this year’s top business risks, with cyber incidents (40%) ranking a close third. The 10th annual survey on global business risks from Allianz Global Corporate & Specialty (AGCS) incorporates the views of 2,769 experts in 92 countries and territories, including CEOs, risk managers, brokers and insurance experts. 

The COVID-19 crisis continues to represent an immediate threat to both individual safety and businesses, reflecting why pandemic outbreak has rocketed 15 positions up to #2 in the rankings at the expense of other risks. Prior to 2021, it had never finished higher than #16, a clearly underestimated risk. However, in 2021, it’s the #1 risk in 16 countries and among the three biggest risks across all continents and in 35 out of the 38 countries that qualify for a top 10 risks analysis. Japan, South Korea and Ghana are the only exceptions. 

Market developments (#4, at 19%) also climbs, reflecting the risk of rising insolvency rates following the pandemic. According to Euler Hermes, the bulk of insolvencies will come in 2021. The trade credit insurer’s global insolvency index is expected to hit a record for bankruptcies, up 35% by the end of 2021, with top increases expected in the U.S., Brazil, China and core European countries. 

Further, COVID-19 will likely spark a period of innovation and market disruption, accelerating the adoption of technology, hastening the demise of incumbents and traditional sectors and giving rise to new competitors. Other risers include macroeconomic developments (#8, at 13%) and political risks and violence (#10, with 11%), which are, in large part, a consequence of the coronavirus outbreak, too. Fallers in this year’s survey include changes in legislation and regulation (#5, with 19%), natural catastrophes (#6, with 17%), fire/explosion (#7, with 16%) and climate change (#9, with 13%), all clearly superseded by pandemic concerns.

Pandemic drives disruption — now and in the future

Prior to the COVID-19 outbreak, business interruption (BI) had already finished at the top of the Allianz Risk Barometer seven times, and it returns to the top spot after being replaced by cyber incidents in 2020. The pandemic shows that extreme, global-scale BI events are not just theoretical but a real possibility, causing loss of revenue and disruption to production, operations and supply chains. 59% of respondents highlight the pandemic as the main cause of BI in 2021, followed by cyber incidents (46%) and natural catastrophes and fire and explosion (around 30% each).

In response to heightened BI vulnerabilities, many companies are aiming to build more resilient operations and to de-risk their supply chains. According to Allianz Risk Barometer respondents, improving business continuity management is the main action companies are taking (62%), followed by developing alternative or multiple suppliers (45%), investing in digital supply chains (32%) and improving supplier selection and auditing (31%). According to AGCS experts, many companies found their plans were quickly overwhelmed by the pace of the pandemic. Business continuity planning needs to become more holistic, cross-functional and dynamic; monitor and measure emerging or extreme loss scenarios; and be constantly updated and tested and embedded into an organization’s strategy. 

Cyber perils intensify

Cyber incidents may have slipped to #3 but remain a key peril, with more respondents citing it than in 2020 and still ranking as a top three risk in many countries, including Brazil, France, Germany, India, Italy, Japan, South Africa, Spain, the U.K. and the U.S. The acceleration toward greater digitalization and remote working driven by the pandemic is also intensifying IT vulnerabilities. At the peak of the first wave of lockdowns, in April, the FBI reported a 300% increase in incidents alone, while cybercrime is now estimated to cost the global economy over $1 trillion, up 50% from two years ago. Already high in frequency, ransomware incidents are becoming more damaging, increasingly targeting large companies with sophisticated attacks and hefty extortion demands, as highlighted in the recent AGCS cyber risk trends report

See also: 3-Step Framework to Manage COVID Risk

Risers and fallers 

Macroeconomic developments is up to #8, and political risks and violence (#10) returns to the top 10 for the first time since 2018, reflecting the fact that civil unrest, protests and riots now challenge terrorism as the main exposure for companies. The number, scale and duration of many recent events, including Black Lives Matter protests, anti-lockdown demonstrations and unrest around the U.S. presidential election, have been exceptional. As the socioeconomic fallout from COVID-19 mounts, further political and social unrest is likely, with many countries expected to experience an increase in activity in 2021 and beyond, particularly in Europe and the Americas.

Changes in legislation and regulation drops from #3 to #5 year-on-year. Natural catastrophes falls to #6 from #4, reflecting the fact that, although aggregated losses from multiple smaller events such as wildfires or tornadoes still led to widespread devastation and considerable insured losses in 2020, it was also the third consecutive year without a single large event, such as Hurricane Harvey in 2017. Climate change also falls to #9. However, the need to combat climate change remains as high as ever, given that 2020 was the hottest year ever recorded. 

To learn more about this year’s findings, please visit Allianz Risk Barometer 2021.

Outlook for Business Interruption Litigation

The first COVID-19 business interruption claim met defeat in a Michigan courtroom three months ago. Since then, courts throughout the country have wrestled with similar motions to dismiss filed by insurance companies.

As summarized in the attached chart, 11 courts have ordered a dismissal. while four court orders have denied the insurance company’s motion and allowed the policyholder to proceed to the discovery phase.

Summary of COVID-19 Business Interruption Rulings (Sept. 30, 2020) from Jason Schupp

These 15 rulings fall into three general categories.

1. The Policyholder Alleges COVID-19 Did Not Cause Physical Damage

Direct physical loss or damage is a prerequisite to recovery under standard business interruption coverage. Nine courts have dismissed complaints where the policyholder pointed to a state or local government’s lockdown order – not the virus – as the cause of its loss. In all but one of these cases, the policyholder had been trying to avoid the policy’s virus exclusion.
So far, this argument has only worked in a state court in Hackensack, NJ. In Optical Services v. Franklin Mutual, the court saw “an interesting argument … that physical damage occurs where a policyholder loses functionality of their property and by operation of civil authority such as the entry of an executive order results in a change to the property.” While characterizing the argument as a “novel theory of insurance coverage,” the court found the policyholder should be given the opportunity to develop a factual record to support its argument. Certainly not a ringing endorsement of the approach, but a chance to keep moving forward for now.

2. The Policyholder Alleges COVID-19 Caused Physical Damage

A more successful strategy is to allege COVID-19 causes property damage. The same federal judge in Missouri has twice found allegations that “COVID-19 attached itself” to property as sufficient to survive a motion to dismiss. To keep their cases alive, policyholders must still convince a judge or jury that COVID-19 really did attach to property and that the resulting damage caused a suspension of business operations. Significantly, the policies in both cases did not contain a virus exclusion.

See also: COVID-19: Implications for Business Models

3. The Policyholder Attacks the Virus Exclusion

Three cases have taken the virus exclusion head-on — two have lost. Federal judges in Florida and California both found the policy’s virus exclusion clearly applies to bar the claim. Another federal judge in Florida was not so sure.

In Urogynecology Specialists v. Sentinel Ins., the court seemed uncomfortable with a virus exclusion applying to “fungi, wet rot, dry rot, bacteria or virus.” Specifically, “COVID-19 … does not logically align with the grouping of the virus exclusion with other pollutants.” Accordingly, the policyholder has been permitted to proceed into the discovery phase. Two days earlier, the California court in Franklin EWC v. Hartford found this same language to be plain and unambiguous.

Importantly, the other Florida finding that the virus exclusion is unambiguous looked at a different formulation of wording. In Martinez v. Allied Insurance, the court considered an exclusion applying to “”[a]ny virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

So, what do we know about COVID-19 business interruption claims?

  • The most reliable formula to survive a motion to dismiss seems to be a policy unencumbered by a virus exclusion coupled with an allegation that COVID-19 itself caused property damage. The hard work follows as the insurer and policyholder litigate the science of the virus and the precise reason the business shut down.
  • Prospects to survive a motion to dismiss appear far less promising if the policy contains a virus exclusion. Two doors have recently cracked open just a sliver. First, the policyholder can launch a frontal assault on the virus exclusion as unclear or ambiguous. The argument almost always fails – decisively – but some wording variations may lead a judge to at least pause. Second, the policyholder can point to the lockdown order (not the virus) as the cause of “property damage.” This tactic draws attention away from the virus exclusion but invariably runs into a wall of deep judicial skepticism — except when it doesn’t.
  • More than 1,000 COVID-19 business interruption lawsuits remain pending in court throughout the U.S. At this point, no court of appeals has yet to touch a COVID-19 business interruption case. While we can start to see some edges of the litigation landscape, we are a long, long way from having a clear picture of how COVID-19 business interruption claims will ultimately resolve.

Optimizing Insurance’s Role in the Pandemic

The nature and scale of the risk of future pandemics far outstrips the insurance industry’s capabilities, so any public-private partnership must make the most of them.

COVID-19 has revealed the expansive landscape of pandemic risk. The federal government has already committed $2.2 trillion to fund pandemic relief programs for individuals, businesses and state and local governments, just for 2020. Congress is currently debating whether to commit an additional $1 billion or $3 billion, with an outcome probably somewhere in between.

Meanwhile, policymakers, commercial interests and the insurance industry have been working through how to prepare for the risk of another pandemic in the years ahead. While they may argue about how much capital the insurance industry should be asked to put at risk against future pandemics (ranging from $0 to $50 billion), even the most aggressive proposals would transfer only about 1% of foreseeable losses to insurers.

Further, those proposals would direct all of the insurance industry’s pandemic risk capacity to take on “business interruption” losses. For example, the Pandemic Risk Insurance Act would give large corporations the tools to make up for lost profits and reduced executive compensation during a pandemic. The proposed Business Continuity and Protection Program, as well as Chubb’s Pandemic Business Interruption Program, would provide benefits similar to those recently paid out under the Paycheck Protection Program.

None of these proposals address any of the other foreseeable pandemic exposures such as third-party liability claimsworkers compensation claims or the cost to remediate contaminated property.

See also: How Risk Managers Must Adapt to COVID

Without a doubt, the insurance industry’s role is severely constrained compared with the enormous scale of the pandemic risk. Accordingly, policymakers must thoughtfully position insurance industry capabilities where they can have the greatest impact for those individuals, state and local governments and businesses suffering financial loss during a pandemic.

The Pandemic Risk Landscape is an effort to provide policymakers and other stakeholders with a practical tool to assist them to consider the optimal positioning of the insurance industry’s capabilities within a public-private partnership. Equipped with a view of the full scale and range of exposures to financial loss confronting families, governments and businesses, policymakers may continue to conclude business interruption is the single best target of insurance industry resources within a public-private partnership. Or, they may find at least some of those limited resources should be allocated to other stakeholders and other exposures to loss.

5 Pitfalls on Business Interruption Claims

At the 2018 RIMS annual conference, Christopher Loebler from the firm McCarter & English discussed business interruption claims.

Business interruption usually falls within your property policy. The coverage is triggered by a property loss from a covered peril under the policy that shuts down your business for a time. One in five U.S. companies sustain a loss in this area with an average claim of more than $2 million.

Oftentimes, losses are less obvious, more complicated and larger than the property claim. Unfortunately, the focus on the front end tends to be on the property loss when any incident occurs.

See also: How to Assess Costs of Business Interruption  

Five Pitfalls on Business Interruption Claims:

  1. Failure to include an insurance coverage lawyer on your crisis response claim. Policies tend to be long and complex, so you need someone who has read the policy in advance of the incident to now how to best respond.
  2. Issuing a press release can directly undercut the insurance claim. After an incident, the typical reaction of a company is to issue a press release letting people know that the business can still operate. Later, when you try to file a business interruption claim, the carrier pulls out that press release and questions coverage.
  3. Failure to understand what is privileged communication. Questions should be asked through your lawyer under privilege, not through you broker. Communication with your broker is not protected by privilege.
  4. Failure to communicate. You have an obligation to communicate with the carrier, including putting iut on prompt notice. However, you need to make sure you are not giving it information that can be used against you without going through your attorney.
  5. Failure to retain a forensic accountant. A forensic accountant is an expert in both the policy and making claims. The accountant knows exactly what information is needed to maximize recovery.

NOTE: Claim preparation expenses are usually covered under the policy. This includes the forensic accountant but not attorneys.

Also, you can add contingent business interruption coverage to your policy. This coverage would apply if one of your key suppliers suffered a loss that would be covered under the policy and that particular loss disrupted your business.

When Not to Trust Your Insurer

What is your insurance company telling you about your business interruption values?

In preparing annual business interruption values and exposure analysis for clients, we have noticed several red flags that indicate something may be wrong with how these values are being reported to the insurance company. It’s not so much what the insurance company is telling you about your business interruption values, but what it is not telling you.

Here are three red flags insurance companies are waving by not saying anything:

Great Rates – “We are paying a lot for insurance, but we are getting a great rate!”

Beware, great rates for property policies have the potential to be misleading. The business interruption values are one of the many variables in determining rates. If you are over-reporting your values and the insurance company realizes it, your rate will appear better than others reporting more accurate values. Sure, a better rate may sound like a win, but it may just mean that the insurance company is calculating your values for you. Just as you wouldn’t trust a car salesman when he says you’re getting a great deal, you shouldn’t rely on the insurance company to do the same.

See also: How to Assess Costs of Business Interruption

Free Services – “Our insurer analyzes our values for free.”

The insurance company may actually offer to calculate your values for you – for free. Everybody loves free things, right? Unfortunately, the insurance company will use a benchmark approach to underwriting your risks combined with COPE data and any other information you provide. The result will likely be a higher business interruption value that is not representative of your exposures. When your story is vague, the insurance company will make assumptions about your business based on what others are doing. Let all of your hard work creating incident response plans, business continuity plans and other contingency plans pay off where it can have a direct effect on your premiums.

No Resistance – “The insurance company accepts what we give them for BI Values.”

Watch out – if there are no questions or pushback on your values, that can mean one of two things: 1) you have done your values perfectly and they require no explanation, or; 2) you are reporting higher values than what your insurer is calculating. If you have done your values perfectly, congratulations on being one of a kind. More likely, the insurance company has calculated your values at a lower level than you have. If this is the case, wouldn’t you want to know?

At the end of the day, no one is more qualified to value your business interruption risks than the people who run your company, but you have to know the criteria being applied and how to apply them. Underwriting is a mysterious process, so it’s better for your bottom line to take the mystery out of it by bringing clarity to your business interruption values. If you leave it up to the insurance company, chances are that the number is going to be higher than it should be.

Don’t expect insurers to guide you to the answer that is best for you. They have a different agenda and process. They will categorize and group your risks based on some information, but if you do not provide what they need, they will default to general assumptions. You may get lucky and end up with a reasonable assessment of your risk. Or you can have a say in your luck by matching your opportunity with preparation.