A rapidly spreading coronavirus outbreak in Wuhan, China has disrupted businesses operating in the region, many of which have been shut down completely. Affected companies should review their insurance policies particularly with regard to extensions to see if they are covered for the resulting loss of revenues and costs.
Toward the end of December 2019, authorities in Wuhan, Hubei province, announced a cluster of cases of pneumonia, later identified as a new coronavirus which can, in some cases, cause the patient’s death. As the virus spread around the globe, the World Health Organization (WHO) has declared this a global emergency. Many companies decided to shut down their offices and production sites completely as a precautionary measure to protect their employees, help contain the epidemic, while the city was put on lockdown.
Wuhan is the capital of the Hubei province which serves as a manufacturing hub for many companies operating for example in the auto and transportation sectors. Many foreign firms have decided to evacuate their staff. As a result, production has come to a halt (opens a new window) and each day adds further losses, some of which may be covered by insurance policies.
For international companies, policies that may respond to the event are likely to have been issued locally in Greater China as part of their Global Master programmes.
As policies are tailored to the needs of the individual companies, exclusions and limits vary, but there are a few general points that are worth mentioning from a property and casualty (P&C) insurance perspective which may be helpful for a first assessment:
Contagious disease coverage for business interruption (BI) is not commonly available since the SARS outbreak in 2003, which shares many similarities with the Wuhan virus outbreak. Even if coverage is available, there may be a sublimit or restrictive terms.
Most policies trigger coverage for BI only after the policyholder has experienced a direct physical loss to the premises in question caused by a covered peril, which in this case would require that a virus contamination caused the temporary closure of the premises.
BI coverage may also extend to temporary closures due to “dependent properties,” such as a major supplier to the policyholder. In addition, coverage may be extended when civil authorities prohibit access to the policyholder’s premises due to a direct physical cause of loss of another property.
Some BI policies may have extensions like a contingent time element, denial of access (non damage), public service extension, ingress-egress extension, loss of attraction extension, or public authority extension which may, to certain extent, provide possible coverage for BI caused by contagious disease. However, it’s important to review the extensions carefully as well as the overall BI definition to see if the trigger is restricted to BI caused by physical damage only. There may be a specific contagious disease exclusion too.
Extensions may refer to specific radius e.g. 1 mile or more generic “within the vicinity”.
Contagious disease may not be considered as an exclusion under a public liability or a commercial general liability policy. It may appear that there is coverage if an insured is found liable for accidentally spreading the disease.
Companies outside China whose production is impacted by a supplier in China is unlikely to be covered for the resulting revenue losses as territorial limits are likely to apply.
Policyholders should look at their contracts with customers and suppliers as these will likely contain force majeure clauses giving them temporary relief from compliance with normal time and cost/payment requirements.
A careful review of the terms and conditions of your P&C insurance policies is essential if there is a claim resulting from or related to a contagious disease.
The outbreak of contagious diseases can take a tremendous economic toll, and most standard insurance policies exclude communicable diseases’ outbreaks. A good pandemic business continuity plan (BCP) can help a business operation to better prepare in the event of an outbreak. A pandemic BCP should lay out how a business will continue to provide essential services through a sustained period with significant employee absenteeism. The plan should also specify measures for how the business will minimize the risk of contagion among employees. The Lockton risk management team offers a collection of analytical tools and methods that can help our clients identify and mitigate the risks they face.
For further information, please contact:
Olive Lam
Senior Vice President
Claims and Risk Management - Greater China
Tel: +852 2250 2810 (Direct)