This is part 11 of a series of articles on the impact of COVID-19 in the banking and insurance sector with inputs from leading BFSI experts of the Manipal Global Academy of BFSI. Read part 1, part 2, part 3, part 4, part 5, part 6, part 7, part 8, part 9 and part 10 here. This article was written by N S Prakash, a faculty member at Manipal Global Academy of BFSI.
It is hotly debated topic worldwide that, should the insurance companies who have given coverage in respect of damages to properties be made liable to pay for losses arising out of business closure compelled by Government Regulations.
While, there is no doubt whatsoever that, trading communities and factories have suffered huge losses due to reduced turnover and/or output, the policies taken by these organizations are for loss or damage to physical property only caused by listed perils such as fire, lightning, riots, storm, flood etc. Along with the insurance for properties, there is a policy which covers loss of profit following reduction in turnover/output/revenue etc. This policy is called as Fire Loss of Profit (FLOP) which will pay the claim only in the event of there being a damage payable under Fire Policy for the Property and also consequently reduction in Gross Profit due to reduction in turnover or output or revenue.
There is no property damage due to COVID-19 nor it is a specified peril which can trigger such property damage and hence there is no coverage for any consequential loss. Fire Policy and FLOP policy goes in hand and hand. This is called ‘Material Damage Proviso’.
Due to the advent of new innovative covers, new types of covers/riders stand added to FLOP policy referred above. These policies do offer compensation for the reduction in profit even when there is no property damage to their insured’s (Policyholder’s) property. They are a) Supplier’s Premises Extension; b) Customers Premises extension. Under this, if we talk about Supplier’s premises extension, if there is a loss or damage in the supplier’s premises who supply raw materials to our insured person, we still pay the claim as long as the cause of damage in supplier’s premises is one which is covered in the policy issued to our insured for their location.
Point to note here is that, we do not look at, whether there is any insurance to Supplier’s premises. We pay compensation to our insured for the reason that, the production comes to standstill in our insured’s premises as there is no supply of raw material and therefore the Gross Profit for the FY gets affected. The Customer’s extension applies exactly opposite when customers are not able to take delivery of Finished Goods manufactured for them due to some damage to their plant operating peril being one covered in our insured’s policy.
There is one more provision called ‘Denial of Access’ as per which under a Loss of Profit policy, to give an example, if the insured factory cannot be run for few days or weeks due to employees not being able to come to the factory, the resultant loss is paid for. However, sole reasons for non-functioning of the factory is specified in policy like flood or riot etc within 2 km radius of the factory and such flood or riots are the risks which are also covered in basic Fire policy for property which have potential to cause property damage. So, when it comes to issues related to Coronavirus disease, this is not something which can directly result in apparent or visible damage to property and hence as per the practice there cannot be loss of profit cover also since it is not consequential damage triggering from property damage.
Further, point to note is that, epidemics like COVID-19 results in a loss on war-like proportions. Normally, the insurance fund cannot take care of such a massive proportion of losses and the same are not factored into pricing also. The point to ponder about is when this virus has resulted in huge losses in every nook and corner of the globe, is it possible for insurance companies to offer adequate compensation.
Insurance covers (even with reinsurance covers) are not meant to take care of a situation like this, unlike flood or earthquake which are restricted to one or two districts or states or territory.
Nevertheless, the impact of COVID-19 like situation can be covered under Event Insurance say like Wimbledon Tennis match, IPL Cricket match etc if properly envisaged so that, the organizers’ losses can be minimized.
About the Author
N S Prakash has been in the insurance industry for 30 years in various roles and capacities at both public sector and private sector companies. He has work experience in PSU for 18 years and worked in two private insurance companies for 9 years. The roles he had served include Head of Underwriting-Fire & Engineering, Product Development. He also served as Principal Officer and CEO of a Broking Company. From July 2017, Prakash is working in Manipal Global Academy of BFSI as Associate Dean in General Insurance Vertical.