It’s the elephant in the room. Insurance carriers today – thanks to the immense challenges triggered by the COVID-19 pandemic – are extremely reluctant to bind or offer new commercial insurance policies with business interruption coverage included, especially in the hospitality industry.
Their reluctance is centered around ‘uncertainty’ (a horrible word in the ears of actuaries, underwriters, and risk managers). The COVID-19 pandemic is shrouded in uncertainty. We have no idea how long the public health crisis will last, whether there will be a second wave, what the eventual socio-economic impact will be, and what role the insurance industry will ultimately have to play in the recovery.
Since the virus outbreak picked up in mid-March, pandemic-related litigation has been coming thick and fast, with many businesses (especially those in the hospitality industry) suing insurers over denied business interruption (BI) claims after they were forced to close or dramatically reduce operations to prevent further spread of the disease. The vast majority of those BI claims have been denied because traditional BI insurance will only trigger is there’s a direct physical loss to property. Viruses and bacteria are typically excluded.
This has left thousands of businesses deep in the red. Many are now looking for cost savings and are open to dropping some insurance coverage if that means they can save a quick buck. But Doug Jones (pictured), co-founder and managing partner of Florida-based JAG Insurance Group, cautions against any drastic, short-term insurance decisions.
He told Insurance Business: “If you’re a hotel or a restaurant, you have a policy in place and you’re thinking about letting it go, understand that it might very well be impossible for you to buy another policy in six months’ time. We’re seeing this specifically in the small restaurant business. At JAG, a lot of our clients are larger hotel chains who can weather a few months of slowdown, but it’s the mom and pop shop restaurants and the small franchises with five or 10 locations that have really taken a beating. They’re the ones who are desperately trying to find cost savings.”
As Jones pointed out, if businesses decide to drop their BI coverage, they may find it very difficult to secure a new policy in the near future. The same challenges exist for new businesses, who may perhaps want to purchase BI coverage, but due to the challenging market conditions, they either cannot secure the coverage or they cannot get adequate limits.
“I’ve insured large hotels where maybe eight months ago I would have had six or eight carriers giving me an option, and now I’m down to one,” commented Jones. “In April, I went to market with a new hotel that had just finished construction – and nobody wanted to put up the BI limits that the lender required of this hotel. The carriers just weren’t interested. Luckily, in that scenario, this was an almost two-year construction project (the structure is worth over $100 million) and we’d been working with a carrier for such a long time, and forecasting the insurance for this client, that we were able to get the carrier to stick to the indications they had made.
“That was April, and it’s still uncertain where the industry is going with this. If that had come up today, I don’t know if we would have achieved the same result. What I will say is that, ultimately, in our business, anything can be done for a price. But I know for a fact that getting BI, especially high BI limits in the hospitality industry, is hard right now – and it’s only going to get harder. Because of that, I think folks need to think twice about where they allocate the money they have to spend on risk transfer.”
