The current situation in Europe and in France in particular has emerged as a major concern for most businesses. The order of governmental authorities to suspend “non-essential” activities has generated business interruption and consequently strongly hit the businesses. The debate is harsh in France on whether insurance companies should cover their insureds’ losses.
Business Interruption (“BI”) coverage (in French “pertes d’exploitation”) is most often included in property insurance contracts. The coverage is usually triggered when the insured’s business is interrupted by a physical damage to the insured’s property. Contamination which spreads to become pandemic does not correspond to a physical damage.
In order to be covered the business should be affected in itself by a physical damage, for instance if a listeria bacteria affects the premises and renders them unusable for the business (one can imagine a food industry plant where sanitary and hygienic constraints are very stringent): in this example, one could most probably consider that there is a physical damage, which is the cause of the BI. However, if the BI is caused by a disease which affects employees to the extent that the business must be interrupted, it is doubtful that it would be covered, considering that the BI is a part of property insurance, which means that the BI is covered provided it is a consequence of a damage affecting the property of the insured (not his employees).
One should consider thoroughly each insurance policy on a case by case basis. Some policies include BI coverage without a physical damage (in French: “sinistre sans dommage”), for instance in case of a “denial of access” due to a physical damage in the “vicinity” of the insured premises, and not in the premises themselves, or if the denial of access is the result of an order of governmental authorities (as is currently the case in relation to COVID 19).
Based on this kind of policies, a court case has been recently initiated before French Courts against AXA by an insured party (source: BFM Business), whereas other insurers (like BPCE) have been reported to accept in principle that these kind of policies could be triggered. Even in this situation, lots of policies provide for exclusion of indemnification in case of pandemic due to viruses.
AXA’s defence against this action, as we know it, is not based on an exclusion clause, but on fundamental principles of insurance, in particular that the coverage should be admitted only when the cause of interruption is not systemic, i.e. It does not impact all the companies or businesses in one or several countries (or around the world as in the situation we are currently facing) but only some of them in specific places and due to specific events. The reason is that insurance’s function is to mutualise risks. This principle would be flouted if insurance could be triggered in systemic situations. According to Laurent Granier, CEO of GENERALI in France, admitting systemic events such as the COVID 19 pandemic in property insurance would use up equity capital of all insurance companies in France (source: Argus de l’Assurance, 9 April 2020).
Participation of insurance companies in systemic risks is an exception. Therefore, it does not stem from the contracts but from legal dispositions. An example is given in the event of natural disasters. Article L125-1 of the French Insurance Code stipulates that if an insurance policy covers BI, this cover is extended to natural disasters, provided the event is recognized as such by a decision of the governmental authorities. This example of a systemic risk covered by insurance shows that the coverage does depend on a decision taken by state authorities. From an insurance standpoint, the systemic nature of the event justifies that the government should assess if the insurance sector must be mobilized to cover it, precisely because it is not the purpose of insurance to cover systemic risks. This is why this specific risk is financed by a specific premium, which is added to the standard premium, and a percentage of the premiums are paid by insurers to a special fund set up by the State, which acts as a “last resort insurer” for systemic risks.
From the French perspective again, it is worth noting that there is little of not no doubt that sanitary disasters do not fall within the definition of natural disasters as defined in article L125-1 of the Insurance Code. There are currently discussions going on between the government and insurers to set up a legal regime for pandemics similar to the one for natural disasters, which would be financed by a supplementary premium, the whole system being guaranteed by the State in last resort.