Why COVID-19 Damages Are Not Covered by Business Interruption Insurance

Corporate Business Interruption Insurance Requires Physical Damage Such as Fire or Flood for Payout
Research Begins on Products Covering Epidemic Losses

[Image source=Yonhap News]

[Asia Economy Reporter Ki Ha-young] Amid the suspension of operations at companies due to the impact of the novel coronavirus infection (COVID-19), calls are growing to provide insurance coverage for such cases.

According to the insurance industry on the 1st, domestic non-life insurance companies currently offer a minimal "business interruption insurance" that pays insurance benefits only when operations are suspended due to accidents involving physical damage to the insured party or supplier. This insurance covers business interruption losses caused by physical damage within the business premises and is provided as a special contract of fire or machinery insurance or in the form of comprehensive property insurance.

However, the subscription status in Korea is minimal. According to the Korea Insurance Research Institute, as of the end of 2018, the number of business interruption insurance contracts was only 1,458. Considering that there were 6.25 million active companies in Korea at that time, this is an extremely small number. The reason is the stringent conditions. The conditions require direct physical damage within the business premises, losses caused by the insured risk, losses resulting from business interruption, and loss of income. Furthermore, even if physical damage occurs to the insured party or supplier, business interruption losses are not covered if the loss is due to war, riots, terrorism, nuclear weapons and radiation, confiscation by lawful authorities, or orders from public institutions. Even if subscribed to business interruption insurance, it is difficult to receive compensation for damages caused by COVID-19. Most business interruption insurance pays benefits only when direct physical damage such as fire or flooding occurs.

In particular, there are currently no insurance products that compensate for losses when supply chains are cut off or business premises are forcibly closed due to infectious diseases or trade sanctions, resulting in business suspension.

The industry holds the view that it is difficult for private insurance to cover damages caused by infectious diseases like COVID-19. An industry official said, "Even in countries like the United States where business interruption insurance is well established, damages caused by infectious diseases are not covered," adding, "There are no statistics, and it is difficult to calculate premiums because the outbreak of infectious diseases cannot be predicted."

Low domestic awareness of the necessity of business interruption insurance, regardless of infectious disease status, is also cited as a cause. Another industry official said, "If there is market demand, insurance companies have no choice but to develop insurance products," adding, "Since domestic companies and the government place low importance on managing business interruption losses through insurance, insurance companies are inevitably passive in developing related products."

In fact, in countries such as the United States, the United Kingdom, Australia, Canada, and France, business interruption coverage is provided as a basic coverage in most corporate insurance policies, resulting in high subscription rates. 73% of the support and compensation paid to companies affected by the 9/11 terrorist attacks came from insurance subscribed to by the companies. Among these, business interruption insurance accounted for the largest share at 33%.

Song Yoon-ah, a research fellow at the Korea Insurance Research Institute, pointed out, "It is difficult for private insurance to sufficiently cover business interruption losses caused by large-scale disasters with high market failure potential such as trade sanctions, terrorism, and infectious diseases, so government intervention in the insurance market can be considered."

Meanwhile, the Korea Insurance Research Institute has decided to start research on insurance products to respond to infectious diseases like COVID-19. One insurance product under consideration is "parametric insurance," which pays insurance benefits according to predetermined variables and models.

This content was produced with the assistance of AI translation services.