NOTE: This is part three of a series designed to present thoughtful topics that will affect insurance claims arising from the current pandemic.
As each day passes, it becomes more apparent that there will be massive economic consequences stemming from the local, national, and global response to COVID-19. Setting aside the myriad of coverage hurdles for new insurance claims caused by COVID-19, there is a more immediate issue at hand. Changing market conditions due to COVID-19 have the potential to materially affect open (ongoing) and new (non-COVID related) business interruption claims. As government agencies institute policies, closing and/or restricting businesses and movement of the population, there will be substantial impacts on the nation’s economic activity.
In general terms, the intent of commercial property insurance is to indemnify against losses sustained as a function of covered peril to covered property. Business interruption loss is measured as a function of continuing operations, if any, deviating from probable levels but-for such property damage. And therein lies the issue, estimating a business’s probable experience but-for covered peril to covered property will warrant consideration of COVID-19 factors; how, and to what extent, will vary case by case.
As a starting point, experts may evaluate how a business tracks with broader economic patterns and thus how its operating results are expected to change in the context of the COVID-19 economy. Some industries, for example, may be largely unaffected by COVID-19 factors; or even benefit from them. Retail grocery stores and healthcare facilities are, or are likely to, see a surge in demand. On the other hand, restaurants, sports, music, and the tourism industry are clear victims of the changing tide. At the time of this publishing, less obvious patterns have yet to emerge but are likely to sprout in energy, manufacturing, and durable goods.
Incorporating COVID-19 factors into a business’s expected operating results but for covered peril to covered property may also involve a more finite evaluation of unique conditions applicable to a named insured. For example, understanding how production and revenue would be impacted by work from home initiatives may warrant a deeper dive into understanding workflow processes and the technology available to support it. It may involve incorporating periods of closure by government mandate unrelated to covered peril to covered property. It may include evaluating how unit pricing is likely to change with changing demand.
These examples highlight the new and unique challenges to measuring business interruption losses in a COVID-19 world. Economic data that can be used to address these complexities may be readily available. In other instances, it may not be readily available for months after the fact. Such record availability constraints will warrant careful coordination and constant communication between insurance professionals and financial damages experts tasked with measuring these claims.
Having a secondary event impact an industry while measuring a business interruption loss is not uncommon. The COVID-19 outbreak, however, is likely to present the most wide-ranging example in recent history. The most important question to answer is not if COVID-19 will be factored into the loss measurement, but instead how and to what extent. The answer will rest in case-specific details. While there is much uncertainty in recent events, you can certainly rely on financial damages experts to help provide clarity.
J.S. Held is the world’s leading multi-disciplinary expert services firm specializing in all aspects from property damage, to environmental issues, forensic accounting, equipment and production lines, and more. J.S. Held experts were leaders on some of the most complex claims in history, including 9/11, hurricanes, and wildfires, and have extensive experience understanding and accounting for extraordinary post-catastrophe circumstances. Our experts work seamlessly together to provide the highest quality verifiable and supported conclusion on the most complex assignments.
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View article one: "The Effect of COVID-19 on the Insurance Claims Market"
View article two: "The Effect of COVID-19 on Time Element Claims"
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