Why Many Insurance Companies Are Not Paying Business Interruption Claims During Pandemics

Business interruptions caused by pandemics like the COVID-19 virus have highlighted a critical issue in the insurance industry. Many businesses find themselves in a challenging situation where their claims for business interruption losses are denied. This article explores the reasons behind this and provides insights on what business owners can do.

The Two Principal Reasons for Denial of Claims

There are two main reasons why insurance companies may not be paying business interruption claims during pandemics:

1. Physical Damage Requirement

Insurance policies generally stipulate that business interruption coverage is only triggered if there is some form of physical damage to the business premises. This physical damage could be caused by a natural disaster such as a flood or fire. However, the coronavirus and other viral infections do not typically result in such physical damage, which means that many pandemic-related business interruptions do not meet the criteria for payment under the existing policies.

2. Pre-existing Exclusions and Risk Assessment

Insurance companies are highly risk-conscious entities. In most cases, policies specifically exclude coverage for claims resulting from general outbreaks of viral or bacterial diseases. These exclusions are put in place to manage financial risk and ensure that premiums are kept low for businesses. As a result, if a pandemic is explicitly excluded, the insurers are under no legal obligation to pay out for such claims.

Challenges Faced by Businesses

Despite the clear stipulations in many insurance policies, some businesses may find the terms vague or believe they are covered. For instance, a renewed policy may not have explicit exclusions for pandemics, or the terms may seem ambiguous. In these cases, businesses may believe they are entitled to coverage, even if the policy does not explicitly mention it.

How Insurance Companies Should Respond

Given the unprecedented nature of pandemics, it is crucial that insurance companies do not overly scrutinize claims. Insurers should consider paying claims that are reasonably valid, unless the terms of the policy explicitly exclude them. This approach aligns with the principle that everyone is in this together and promotes mutual understanding during challenging times.

The Government’s Role

While it is ultimately the responsibility of businesses to understand their insurance coverage, the government can play a role in supporting businesses during pandemics. Instead of overriding non-applicable private contracts, governments should work with insurers to provide voluntary funding to help businesses. This approach is better for financial stability and for the reputations of insurers.

Conclusion

The lack of coverage for business interruption claims during pandemics is a complex issue. While insurance policies are designed to protect against specific risks, pandemics challenge these assumptions. By understanding the reasons behind the denial of claims and considering more inclusive approaches, both businesses and insurers can navigate these challenging times more effectively.