Access the financial damage

As authorities react to the Coronavirus outbreak originating from Wuhan, China, and its growing impact on world health, individual corporations and industries as a whole also are moving to mitigate any potential impact this health crisis may have on their business operations. Many major corporations have acted to protect staff by temporarily shuttering operations in China and advising against travel to the area.¹ Retailers and other consumer-facing entities have temporarily closed store fronts in affected areas to minimize the spread of the virus.² These interruptions to normal business operations are serious, and have real financial implications for individual companies and the economy. Global financial markets already have reacted to the ripple moving through international trade routes as a result of factory shutdowns and new regulations stopping or slowing the movement of goods out of China and the surrounding nations.³

Along with the direct business losses suffered in the immediate area of the outbreak, corporations and their insurers must take care to evaluate additional exposures several steps removed from Wuhan, including those felt outside China and beyond the region. Following the international community’s quick reaction to halt the spread of the virus, for instance, U.S. and European-based businesses are facing restrictions on international travel and disruptions in supply chains,⁴ reflecting how heavily international companies and markets depend on Chinese manufacturing and consumer markets in support of profitable revenue.⁵ With some estimates projecting the health impact of the virus will be felt well into Q2 of 2020, companies and insurers will continue to feel the economic effects of shuttered operations and the anticipated delay of Chinese imports/exports well into the future.

Companies impacted financially by the Coronavirus likely will look to their insurers to recover. Much like other globally felt disasters and crises, the Coronavirus outbreak and resulting losses will give rise to important insurance coverage issues, particularly over recovery for business income losses. Insurers will need to evaluate resulting claims carefully in light of the scope of insuring agreements, operation of exclusions, conditions and limitations in the policy, and the facts of each claim.

Commercial policyholders will likely point to “business interruption” or “contingent business interruption” coverage in making a claim for recovery of their lost business income. While business interruption coverage addresses lost profits caused by damage to the policyholder's own property, contingent business interruption coverage addresses a policyholder's losses resulting from interruption of suppliers' or customers' business because of damage to their property. A threshold issue is therefore a determination about whether there has been any damage to an insured’s property, or whether only indirect losses are at stake.

Further, insurance policies at issue may contain exclusions that preclude coverage. There can be no coverage for lost business income if the policy excludes coverage, even if the lost income resulted from damage to property. For example, common exclusionary language included in event cancellation and contingency policies precluding coverage for loss stemming from “communicable disease” or similar events, may apply here.

Courts have addressed disputes concerning more tangible, property-based business interruption losses and those rulings may be instructive. In a 2004 ruling in City of Chicago v. Factory Mutual Insurance Co., a federal judge ruled that there was no coverage for business interruption losses by Chicago's airports from the 2001 Federal Aviation Administration order to halt all flights because the policy excluded coverage for “indirect or remote loss or damage.” The 1972 U.S. Court of Appeals for the Seventh Circuit ruling in Diamond Shamrock Corp. et al. v. Lumbermens Mutual Casualty Co., held that the insured had no right to recover its business interruption loss because the damage was caused by fire, a risk expressly excluded in the business interruption policy.

the first in a series on companies in the 21st century, we assess how the economic value that companies create flows to households in the 37 OECD countries, and how these flows have shifted over the past 1 year COVID-19.