With the restaurant industry on its knees, many are hoping that insurance companies will step in and pay business interruption to help them recoup their losses.
Even restaurants with comprehensive business interruption clauses in their policies are struggling to get their insurance companies to pay out. The suspension of many court services due to the pandemic hasn’t helped. Many insurers are invoking ‘Force majeure’ to avoid liability for a restaurant’s losses due to the coronavirus pandemic. Force majeure is invoked when unexpected external events prevent a party to a contract from meeting its obligations and therefore protect it against liability for non-performance).
When the UK government was dragging its heels in officially imposing a lockdown on the country’s pubs and restaurants, we were told, it was to indemnify the insurance companies against any liability for loss of earnings. The government relented eventually, imposed the lockdown, but not before allowing the virus to spread, the result of which could leave the UK with the highest amount of Covid-19 casualties in Europe
In the United States, some high profile cases are taking the fight to their insurers, such as Thomas Keller’s lawsuit against his insurance company in California. The chef is also part of an initiative, the Business Interruption Group (BIG), to coordinate efforts and advocate for “federal subsidies for insurers that pay Business Interruption losses caused by the Coronavirus”. Failure for insurers to pay up will result in the group bringing “BIG legal action in every state”.
With the eventual Business Interruption costs set to run worldwide into the trillions, the insurance industry is already bracing for a tsunami of lawsuits and not just from the hospitality industry but for every single effected sector.
Unfortunately for many restaurants, if their policies include a clause that indemnifies the insurer from payments due to a pandemic, there may not be much hope that they can recover their losses. Many insurers added them after the SARS, MERS and Avian flu outbreaks. However, this could indicate that the coronavirus pandemic was not unforeseeable, negating the legitimacy of any force majeure invocation.
Politically, however, there is a will to see the insurance industry carry the can for the coronavirus crisis. In the United States, several states have enacted bills to force insurers to payout. The National Restaurant Association has pushed state governors to force insurers to cover restaurants with business interruption policies if they have been shut down in response to state or city safety measures. Bills exist in the states of Ohio, New Jersey, Massachusetts, and New York and if those bills are passed into law, you would most likely see other states follow suit.
In Canada, a number of the country’s top indemnity insurers have been hit with a class-action lawsuit.
“Indemnity insurers are wrongfully refusing to honor their contracts,” said E.F. Anthony Merchant, a solicitor who works for Merchant Law, a Victoria, British Columbia-based law firm told Insurance Journal. “Business owners intended their insurance to cover against this. Insurance companies should pay.”
Merchant explained that many business interruption policies use language that excludes airborne viruses. However, the COVID-19 virus can be transferred via handrails and keyboards, for example, so the virus should be part of Business Interruption property damage coverage.
“This is really the key to the claims,” said Merchant. “They are property restricted claims.”
In addition, he said, many BI policies he has examined don’t actually exclude pandemic viruses and therefore should pay the claims as policyholders expect, rather than trying to escape the claims by declaring force majeure.
There is the possibility that forcing the insurance companies to cover BI costs could destabilise the entire insurance industry and from an industry perspective, that is government shirking its own responsibilities.
“One has to consider the government as insurers of last resort in these matters,” says Stuart King, Founder and CEO Babel Cover. “Therein lies the political crux of the situation.”
“One has to also further consider the fact that policy holders pay insurance premium tax with its purpose to respond to instances where uninsured persons cause accidents to others. A sort of guarantee fund so to speak. I suppose this is where, if any, uninsured losses might be covered. But it is not entirely clear as to the use of such fund in this instance.”
“In Ireland for non-life insurance a levy of 3% is applied to insurance premiums,” says king.
“Elsewhere in Europe, that amount is upwards to 20%. With annual global premiums of $10 trillion there is a large amount of taxes collected. It can only be supposed a portion might be best set aside for the one in one hundred year losses such as a pandemic.
Just as in 2008 when the financial system crashed and the banks were bailed out for the state, if the insurance industry was forced to cover coronavirus claims, the cost would ultimately be moved on to the taxpayer.
“Ultimately the taxpayer foots the bill either by bailing out capital lost by insurers (as they did with banks), funding their failure through higher premiums, or, losing out by insurers declination of claims which one supposes according to the terms signed up to, they are perfectly entitled to do.
“One can only rationalize such bills will be repaid via increased corporate or personal taxes, or, increased insurance policy levies."