Insurance in The Time of Covid-19
About Jules Hendrix, MS AFIS CLCS
Jules is the Agency Owner of Crow Insurance Agency a local insurance agency in Middletown Delaware providing home, auto, farm, crop, business, personal, and life insurance for New Jersey, Pennsylvania, Delaware and Maryland customers.
Jules brings an expert ag focus to her agency’s portfolio. She is an Elite Farm Certified Agent with Nationwide Agribusiness, holds a Masters Degree in Horticulture and Agronomy from the University of California-Davis, has years of experience working in the ranch and farming community, and has authored a book on Crop Risk Management for insurance professionals.
The Covid-19 pandemic has been a difficult time for everyone. Businesses have suffered due to this disruption, with some closing altogether. This has raised questions about insurance coverage for business losses, specifically the business interruption provisions of property insurance policies, which about 30% of small businesses have.
Covid-19 was not on anyone’s radar, and we’ve had no business experience with a nationwide health crisis since 1918. In most cases, virus-related losses are not covered under business interruption policy provisions. Most insurers have stated that although there may not be coverage, they will still evaluate claims on a case-by-case basis. Some courts and legislatures are considering whether insurance companies should pay for COVID-19 business losses, whether covered by the policy or not.
Property insurance covers losses to property; if there is a fire at your business, insurance will pay for repairs so you can resume operations. Business interruption coverage extends your property insurance to include payments for loss of business income while your property is being repaired. These provisions generally do not cover damages resulting from the pandemic because the shutdown losses did not result from physical damages to property.
Insurance works by determining the probability and consequences of an insured event. The insurer collects premium payments, and out of the pool of money this creates, pays claims to those persons who suffer an insured loss. Premiums are based on several factors, such as the likelihood of the damage occurring, the cost of the damage if it does occur, and the number of insured persons paying premiums.
Insurance is available for almost anything. There is insurance for rockets used to put satellites into orbit. Companies insuring these rocket launches must balance out the risks (about 1 in 20 launches fail) and the costs of potential damages (a communication satellite alone might cost $300 million). Because of this, the insurance premiums for rocket insurance are high ($15 million or more per launch), and few insurance companies want to take the risk, since one or two extra claims will put the insurer out of business.
Since these risks must be carefully calculated, insurance contracts tend to be very specific, so that the insurer can anticipate the claims it may need to pay. Businesses buying insurance must also take this risk analysis into account. It would be nice to be insured against anything bad that might happen, but it costs money. Is the risk great enough, and the consequences serious enough, to be worth paying for insurance against it? Earthquake coverage is a good idea in California, but it’s expensive. It’s also available in Mid-Atlantic states, and much less expensive, but are earthquakes enough of a risk to be worth paying for it here? This is why it’s important to work closely with an insurance agent: to understand the coverages available and make informed decisions about balancing risks and costs.
The harder it is to evaluate a risk, the more expensive the premium will be, and the harder for a business to know if the coverage is worth buying. Would you have paid an extra premium to be insured against a virus pandemic in June of 2019? And how high would this premium have had to be to provide sufficient funds for claims payments for every business affected?
Some people were insured against the pandemic - the Wimbledon Tennis Tournament was. After the SARS outbreak in 2003, Wimbledon paid about $1.9 million a year in premiums to insure against the tournament being cancelled due to a virus outbreak. That policy paid out $142 million this year – in retrospect, that was a good investment, although it would have seemed like a crazy waste of money if COVID-19 hadn’t happened. And how many businesses have millions to cover an insurance premium?
Options to insure pandemics are currently being discussed within the industry and throughout our courts. The best preparation for businesses now is to carefully review your policy with your agent, so you understand available coverages, and can make informed decisions about risks and costs. Difficult times call for trusted advisors.