IMPACT ON LATIN AMERICA AND ARGENTINA1
SUMMARY: I. Introduction. – II. Uninsurable risk. – III. Coverage for small and medium-sized enterprises (SMEs) and business interruption. – IV. Legal actions in the international market regarding insurance for SMEs and the impossible correspondence with Latin American reality. – V. Final comments on the international insurance market. – VI. Conclusions
Coverage offered by many business interruption insurance policies and how this type of risk is or is not covered by insurance companies should be noted since the most important damage sustained by small, medium and large companies results from the impossibility of developing their industries and marketing their products and services, or as a consequence of the reduction of such market due to the measures implemented by governments.
I. Introduction
Even though several months have now passed since the World Health Organization (WHO) classified the outbreak of COVID-19 as a pandemic, global numbers of infections and deaths continue to rise and the situation still seems far from being under control.
The measures implemented by the different countries intended to reduce the spread of the disease and thus avoid the collapse of health systems are still in place and many regions that seemed to have overcome the problem have been forced to go back and insist on policies aimed at reducing the circulation of people and, with it, the growth of a new epidemiological curve. Let us recall that during the pandemic popularly known as “Spanish flu” –perhaps the one most comparable to the current one – the second outbreak was even stronger than the first.
Such measures have inevitably impacted on the business sectors, resulting in a deep drop in their income and a generalized increase in their losses. Small and medium-sized businesses have had to resort to state aid, although in many cases this has not been sufficient and has forced many of them to close their doors permanently. Even the largest companies, including multinationals, have had to resort to different forms of credit and loans to cover their expenses and guarantee the payment of their employees’ salaries.
Despite all this, neither job losses in the millions around the world nor the loss of value of companies and their asset values in international markets nor the growth of inequality and poverty levels has been avoided.
Insurance market has not been unaffected by the impact of the pandemic, and has been exposed to an unexpected situation in the face of which it has been forced to adopt various measures aimed at guaranteeing the solvency of insurance and reinsurance companies, as well as the subsistence of the link between insurers and policyholders.
The news on this topic is permanent and comes from different parts of the world. United States and Europe, among others, provide the insurance market with regular news regarding the discussion on the coverage of claims for any damage suffered by different businesses during the pandemic and as a result of the confinement measures implemented by several governments.
Likewise, realities vary significantly in the different continents if we take into account the greater or lesser development of the insurance market, its economic capacity and the variety of existing products, which results in uneven consequences as regards the existence of coverage for damage resulting from COVID-19.
In this sense, coverage offered by many business interruption insurance policies and how this type of risk is or is not covered by insurance companies should be noted since the most important damage suffered by small, medium and large companies results from the impossibility to develop their industries and marketing their products and services, or as a consequence of the reduction of such market due to the measures implemented by governments.
Thus, those adversely affected have resorted to insurance contracts with their insurers so as to find some kind of economic palliative that would allow them to get through the current situation in the least damaging way possible and even more so to survive until the present reality returns to a kind of “new normal”.
In spite of this, many policyholders have encountered obstacles in obtaining the indemnity sought, and this is related to the uninsurable nature of the pandemic risk and the impossibility of the insurance market as a whole to face any damage suffered as a result of the spread of the coronavirus and, especially, of the consequent measures implemented by governments.
Based on the above, several debates and discussions have arisen at the international level, bringing about the filing of multiple claims intended to elucidate whether this type of cases are covered as the policyholders claim, particularly, in relation to the insurance contracts that may be applicable in Latin American with the so-called comprehensive commercial, multi-risk business or commercial, business insurance and SME insurance, among others.
Throughout this paper we will try to unravel the similarities and disparities between the issues raised in the United Kingdom, France, Germany and the United States in relation to the realities of Latin America.
II. Non insurable risk (1)
Several months after the classification of the COVID-19 outbreak as a pandemic, the whole world has become familiar with terms that have become part of everyday usage, such as virus, confinement, epidemic (2), pandemic (3) and contagion curve, among others. Day by day, most of the programming of the audiovisual media deals with this issue, with the economic impact being one of the most resounding facets in recent times.
The loss of jobs, the reduction in the value of companies, the bankruptcy of small and medium-sized enterprises, the increase in the poverty rate and the fall in the gross domestic product of countries reflect, broadly speaking, the consequences of this pandemic and, in particular, the measures that governments have had to implement to reduce its impact on the health system.
The European experience in countries such as Italy and Spain served as a warning for the American continent, leading many of the countries in the region to implement severe measures aimed at slowing down the level of contagion among their populations, including prohibition of activities, reduction of working hours and strict confinements. However, many countries have not been able to effectively reduce the number of daily deaths resulting from this pandemic, and countries such as the United States and Brazil report high numbers of daily infections and deaths. This is not necessarily or at least not only due to a late or ineffective response on the part of governmental authorities, but also to a consideration of the economic impact that strict measures could entail. Thus, considering the effect that a strong economic recession would have, many countries such as those mentioned above preferred to implement less drastic measures, pointing to individual responsibility of each member of their population, even if this implied a greater number of infections and deaths, but anticipating a quicker recovery and/or a less dramatic fall.
The risk resulting from the adoption of this type of policy is clear and open to question, and should be deeply considered further on.
However, just as we speak of the risk of public policies to fight against the pandemic, it is appropriate to differentiate this basic concept of risk and, instead, to adopt an appropriate view for the insurance market, the legislation and the regulations applicable in insurance law. In this connection, risk may be defined as the possibility of a harmful event occurring, either to an individual and/or his/her property. On this regard, it is an event that may have a financially adverse effect.
However, it is well known that not every risk is insurable but that, in the first place, it must respond to a lawful interest. The insurable risk, as such, implies a feared event of uncertain type but of possible occurrence. It is an element not only necessary but essential to consider a valid and effective insurance contract. In other words, without insurable risk there is no insurance contract or the insurance contract is null and void.
Academic legal opinion and case law have stated that the insurable risk brings together features and peculiarities such as: i) objectivity, i.e., beyond the control of the parties; ii) uncertainty, i.e., the time when it will take place is unknown; iii) frequency, i.e., the probability of occurrence of the loss; and iv) dispersion, i.e., the risk must not be generalized.
This conceptualization of risk is not only related to the theory of risk and insurance law, but it is also an aspect considered by insurance companies when underwriting risks with their clients. In the light of a pandemic, we can see how many of these characteristics are not accurately present, which makes us consider that we are facing an uninsurable risk.
On this regard, for instance, from the perspective of frequency, a pandemic constitutes a risk that is impossible or almost impossible for insurance companies to foresee. Similarly, from the point of view of dispersion, it is well known that insurance companies consider various criteria when defining their strategy to underwrite and issue policies, such as, among others, the possibility of occurrence of a loss (frequency) and the amount of premiums to be paid accordingly. The economic solvency of a company engaged in the insurance business depends on this to a large extent, so that insurance companies are not able to satisfy their obligations if the risk is of a generalized type. Therefore, these companies offer coverage for risks the occurrence of which does not imply a generalized impact on their policyholders. In other words, an insurer is unable to face a generalized level of compensation to its clients at the same time owing to the same risk, and this is why this risk is considered uninsurable and, consequently, the insurance market is not willing to provide insurance coverage. If an opposite position were to be held, this would imply, on the one hand, opposing the conceptual logic of risk and, in particular, the need for such risk to be dispersed; on the other hand, it would also oppose the commercial logic of the business of insurance companies, since a non-dispersed risk whose occurrence would be unleashed would lead these entities to make disbursements that would jeopardize their economic capacity.
That is why a risk such as the pandemic is included within the category of fundamental risks, that is, risks the occurrence of which would result in losses that are incalculable for insurance companies and, therefore, not amortizable, insofar as such risks exceed their calculation capacity, resulting commercially uninsurable.
This is an essential aspect for the business of insurance companies, since, when calculating the amount of premiums, insurance companies consider parameters such as the term of the insurance, the sum insured, administrative expenses, management expenses, applicable taxes and, mainly, the probability of occurrence of the event or incident covered by the insurance, i.e. the risk, will occur.
By fundamental risks, we mean particularly those risks caused by nature that affect a great number of individuals and companies. Their occurrence implies countless losses and that is why the actuaries of insurance companies in charge of establishing the criteria for the determination of the premium are not able to set a model. This leads to their rejection as a commercially insurable risk, as in the case of climate change and nuclear risks. Pandemics, due to their unpredictable and unforeseeable nature, do not comply with the principle of losses of a few policyholders (4), and therefore they do not make up, in general, an insurable risk in the insurance market.
This does not mean that there are no policies that may provide coverage for this type of risk, since indeed, there are companies that, exceptionally and through specifically designed policies, provide their clients with coverage. The consideration above implies that, as a principle, we are facing an uninsurable risk; therefore coverage may only exist if it is so expressly stated in the policy. Consequently, coverage of a pandemic is not inferred, it is not induced, nor is it construed from the clauses of a policy, but must be derived verbatim from its content (5).
III. Coverage for small and medium-sized enterprises (SMEs) and business interruption
III.1. Coverage for SMEs in Latin America
Small and medium-sized enterprises (SMEs) in Latin America may purchase a limited range of insurance policies to guarantee coverage for their business and operations, both with respect to damage to their property and their civil liability against third parties.
This type of coverage is especially designed for small and medium-sized businesses, such as restaurants, bars, clothing stores, among others. In Latin America this type of coverage is called “comprehensive commercial insurance” (6), “all risks” (7), “multi-risk business” (8), “multi-risk commercial” (9), “business insurance” (10), “business insurance” (11), “SME insurance” (12) and/or “multiple business insurance” (13), depending on each country.
These insurance policies provide coverage for water and fire damage, theft, debris removal and civil liability. Likewise, as a general principle, the aforementioned insurance policies do not provide coverage for business interruption or loss of profits, but rather this consists of an additional type of coverage that must be requested by the policyholder and must be expressly provided for in the policy, with the consequent increase in the premium cost that this type of additional coverage entails, therefore finding this coverage in Latin America constitutes an exceptional situation rather than a rule.
III.2. Business interruption coverage in the context of SMEs in the United Kingdom, the United States, France and Germany
Unlike what is stated above for Latin America, one of the coverages most frequently found in the policies offered to SMEs in the more developed insurance markets is precisely the so-called business interruption. In this way, insurance companies undertake to indemnify the policyholder for losses suffered as a consequence of the total interruption or reduction of the normal course of their commercial operations, thus compensating the net income lost.
Its effective application depends on the configuration of a direct physical damage, loss or destruction, which has, in relation to the COVID-19 pandemic, been discussed in different specific cases around the world. On the one hand, it should be noted that, as regards the COVID-19 pandemic, damage to property cannot be considered. In this respect, in general, insurance policy clauses refer to property or physical damage so as to provide coverage, either at operational level or as an expressly defined concept. In insurance purchase matters, this type of concepts must be construed in accordance with custom and practices, where property damage is usually associated with physical damage, which explains the reason for the existence of additional coverages aimed at correcting the lack of coverage for any damage not related to property. Therefore, since the presence of the virus in the property of the policyholder does not cause any physical damage, there would be no coverage under this type of policy.
On the other hand, not only there must be a (property) damage, but it must also be direct in nature; in other words, there must be a relationship or link of immediacy between the loss and the risk that would have caused it. It may be concluded that COVID-19 does not generate a damage and, even if the notion of damage were to be construed in a broad sense, this damage would not be of a direct type. It is not the virus that generates an economic detriment to the property, but the governmental measures implemented to counteract its effects on people’s health. From another point of view, between COVID-19 and the loss of income of the policyholder there is an intermediate element: the policy adopted by government authorities, be it the confinement, the prohibition of activities or the reduction of working hours, among others. The existence of this element is what defines the indirect nature of the effects of COVID-19. There is no business interruption due to the pandemic, but rather due to the measures implemented by governments to fight it. Consequently, there is no direct link. This logic is the one followed by other types of risk which, as such, are not usually covered, such as terrorism, civil commotion and war, among others, that is to say events that may indirectly cause damage to the policyholder and which, except for additional coverage, are not covered.
Therefore, in view of the principle of non-coverage of this type of risks, insurance companies offer additional coverage (14), among which it is worth mentioning the so-called non-damage business interruption (15), that is to say, coverage provided for any damage or loss caused by the interruption of business or anticipated loss of profit with no direct damage from risks that must be expressly defined in the policy.
In this regard, the contrast with our region is clear. The most developed insurance markets show products that generally include business interruption among their insurance coverage for SMEs, while in Latin America this type of coverage is an exceptional situation by virtue of a request expressly made by the policyholder. Just as coverage for business interruption is exceptional, the case of more specific coverages such as the so-called non-damage business interruption is practically not offered in any of the products of the Latin American countries, with few exceptions and for specific businesses (16), under the unavoidable principle that there must be physical damage for the business interruption coverage to be activated.
Based on the above, the vast majority of Latin American SMEs are not covered for the losses suffered as a consequence of the interruption of their businesses as a result of the measures implemented by the government authorities in the context of the pandemic and, therefore, we will not find in our market any coverage for loss of profits caused by situations such as those arising from COVID-19.
IV. Legal actions in the international market regarding insurance for SMEs and the impossible correspondence with Latin American reality
IV.1. The action for a statement of certainty filed in the United Kingdom
The most resounded case in the United Kingdom to date is the one started with the filing by the Financial Conduct Authority (FCA), that is, the highest financial authority in the United Kingdom, the main goal of which is to ensure the proper management of the financial market, aiming at the protection of consumers and the market, and the boost of competition.
In fact, on June 9, 2020, the FCA filed a petition for a statement of certainty (17) before the High Court of Justice of England and Wales (“High Court of Justice”), seeking a decision on the doubts arising from the business interruption and non-damage business interruption coverages included in the insurance policies. This latter coverage is provided in a wide range of policies commercial combined (18), hotels & guest house (19), fire (20), security (21), offices & surgeries (22), property owners (23), among others.
When considering the so-called non-damage business interruption coverage, we refer to a specific coverage provided for any damage or loss arising from the interruption of business with no direct damage, as long as it arises from risks expressly provided for in the policy, such as a strict government order that affects the ordinary course of a business or trade. Its viability depends on the exact combination of the elements foreseen in the clauses of the policy. As regards the example above, it is important that the order imposed by a competent government authority may not be legally evaded by a policyholder.
Discussions have arisen on this last point, mainly in the United Kingdom, where many of the measures implemented to mitigate the spread of the disease (closure of stores and social distancing) have simply consisted of government recommendations, but not of orders or prohibitions, hence this additional coverage would not be applicable.
Expressly related to the coverage of non-damage business interruption, the FCA analyzes certain words and terms used in the policies and the construction of such words and terms that it considers reasonable, namely:
A. Orders and prohibitions. One of the ways in which this type of coverage works is on the basis of a prohibition from an authority. In this regard, the FCA understands that, when speaking of prohibition, an act with legal force is not necessarily required, but simply a prohibition arising from any authority, which a reasonable citizen would understand as a prohibition. The FCA cites as an example the two-meter social distance between citizens established in the United Kingdom as a recommendation, which in itself has no legal force. This argument has been rejected by insurers, pointing out that an authority may make some kind of recommendation but, if it has no legal force, it does not fall under a prohibition and therefore there is no coverage;
B. Prevention or hindrance of access or use of premises. Regarding this coverage, in the understanding of the FCA, hindrance is anything that hinders the use of any premises, including the request of the British authorities that citizens remain in their homes. This argument is also rejected by insurers, since the coverage is aimed at a legal or physical impossibility to access the premises. In relation to prevention, the FCA argues that even those premises that were allowed to remain open suffered a prevention or impediment of use of the facilities, as a result of government instructions to keep social distancing, self-confinement and to perform duties from home thus reducing the number of people who can access stores. Again, this was rejected by the insurers, who point out that this coverage is limited exclusively to the inability of the policyholder to access or use the facilities; and
C. Proximity. In some cases, the insurance policies require the policyholder to determine the impact, occurrence or incidence of the risk (in this case, of COVID-19) within a specific proximity or radius of the insured facilities, often as a determining cause of the acts of public authorities that interrupt or interfere with the insured’s business. In this regard, the insurers point out that this coverage is aimed at a specific incident, such as an explosion or a terrorist attack, which could affect the use of the facilities, for example, if they are located within a police cordon that prevents access after the event. In this sense, the insurers point out that the actions of the UK government cannot be considered a consequence of a specific and localized incident of such disease.
In order to file the action, the FCA contacted different insurance companies (24) and analyzed a hundred policies, which were reduced in their different variants and designs to a total of seventeen different formats, to be considered by the High Court. The filing focuses particularly on small and medium-sized enterprises, arguing their limited knowledge in insurance matters, so it is understood that, in relation to large companies, the resolution to be adopted in the framework of this filing may not be sufficient.
Another issue the FCA pointed out in the filing was that if the insurers intended not to cover risks such as a pandemic, considering prior events such as the Spanish flu or SARS, such exclusion should have been expressly provided for in the policies.
On September 15, 2020, the High Court handed down its judgment on the motion filed by the FCA (25). The 162 pages’ resolution details the circumstances surrounding the case, starting with the summary of the facts that preceded the filing, from the first cases identified in the city of Wuhan, China, and continuing with the implementation of measures by the UK authorities and the subsequent classification by the WHO of the COVID-19 outbreak as a pandemic. Among the measures implemented by the UK authorities as the contagion curve grew in that region, the High Court highlights the recommendations and guidelines such as social distancing and self-confinement, as well as certain orders including the closure of businesses or restrictions on their operation, such as restaurants, cafes, pubs, public establishments, museums, casinos, hairdressing salons and gyms, among others.
Subsequently, the decision of the High Court focuses on the analysis of the wording of the clauses of the different policies in relation to the so-called non-damage business interruption coverage. For such purposes, it transcribes the wording of each of the applicable clauses, carefully analyzes the terms and definitions used, and finally considers the arguments raised by each of the parties.
Relying on the analysis developed, the High Court considers that the policyholders who have subscribed most of the policies analyzed are covered and that, at the time of being indemnified, they must be placed in the same position in which they would have been provided there had been no COVID-19.
In order to reach the above conclusion, the High Court analyzed a series of issues and set up a series of features to be satisfied for the coverage to become effective, including the following:
A. There must be evidence of an incident that leads a competent authority to make decisions preventing access to the policyholder’s premises;
B. Restrictions implemented by the competent authority must be in response to the local occurrence of the disease;
C. Reference to competent authority includes any authority, including the central government, with the power to impose local restrictions on the use of facilities;
D. Restrictions must result from orders issued by any competent authority and not from recommendations or advice, and therefore the ruling classifies the several types of businesses covered by each type of measure into seven different categories;
E. Regarding proximity, it was held that any outbreak of COVID-19 is of such a nature that its occurrence is expected to have an impact on policyholders and their businesses, so that any occurrence within England and Wales would fall within the proximity requirement; and
F. As regards causal link, the ruling stated that the requirement of business interruption or interference after the occurrence of a disease does not entail an immediate connection but a broader one, so that such a link through decisions made at national level in response to the outbreak of the disease satisfies the policy requirement to provide coverage.
However, it should be noted that, owing to the diversity of the policies analyzed, some coverage was also rejected, as is the case of the policies issued by Zurich UK and Ecclesiastical Insurance.
Likewise, insurers affected by the resolution have stated that the decision of the High Court favored only those policyholders who have been actually affected by the government orders to close stores and under specific circumstances.
Notwithstanding this, it is expected that some of the insurance companies will appeal the decision adopted by the High Court, which will mean that the insured parties will still not be able to receive the indemnity claimed until such appeal is resolved2, without prejudice to the possibility that some of these companies may advance a possible negotiation with their insured parties.
Although the value of the shares of the insurance companies was affected by the decision of the High Court, such value managed to recover after the impact of such decision on the insurers was duly quantified, considering also that many of the most onerous claims would not be affected by the decision of the High Court.
IV. 2. Jurisprudential criterion in the United States
In the United States, as an example, we may find policies such as general liability (26), commercial property (27) or, for specific cases such as restaurants or similar businesses, business owners policy (28) or BOP. BOP is the result of the conjunction of the first two, offering small businesses a comprehensive coverage of their commercial operations.
Based on the above, and within the framework of the COVID-19 pandemic, businesses such as restaurants (29) or casinos (30) have filed claims against their insurers, and requested the judicial authorities involved in the proceedings to assert the existence of coverage for any alleged damage caused by the pandemic.
Among such cases, it is worth mentioning the decision issued on July 1, 2020 in the case “Gavrilides Management Co., LLC v. Michigan Insurance Co.”, where the existence of coverage for business interruption was rejected based on the non-existence of physical damage, as well as the exclusion expressly provided for any damage caused by virus or bacteria being applicable.
Decision was the same in the case “Social Life Magazine, Inc. v. Sentinel Insurance Co.”, dated May 14, 2020, in view of the lack of proof of physical damage in order to obtain the coverage claimed.
In the case “Diesel Barbershop, LLC v. State Farm Lloyds”, on August 13, 2020 a new decision was issued in line with the previous resolutions, ratifying once again the non-existence of business interruption coverage for those cases in which there is no physical damage.
To date, there is an estimation of around one thousand claims filed in the United States in relation to COVID-19 and, as regards business interruption there is a broad majority opinion in favor of the rejection made by the insurers.
IV. 3. A high profile case in France
In France, we find insurance policies generically called multirisque et perte d’exploitation (31), intended to provide various types of businesses such as restaurants and similar businesses with coverage such as property damage, civil liability and occupational risks, among others.
In May, a Parisian court admitted the claim filed by the owner of four restaurants located in Paris, acknowledging the existence of business interruption insurance coverage for losses caused by government measures to close pubs and restaurants within the framework of the COVID-19 epidemic.3
Through this resolution, the court ordered the insurer to respond for the two-month loss of income sustained by the affected restaurants. In this respect, the insurer stated that the policy covering the owner of these restaurants had a wording that represents only 10% of the owners of this type of businesses, and added that, without prejudice to appealing the ruling, the insurer is trying to reach an agreement, both in this case and with the rest of the owners with similar policies.
Needless to say, the above is an exceptional situation, as explained by the insurer, and is in line with a product offered in an insurance market much more developed than any of the Latin American countries.
IV. 4. The situation in Germany
In the case of Germany, many of the policies taken out by policyholders include coverage for business interruption as a consequence of infections and diseases. In this regard, many insurance companies have negotiated settlements with their policyholders, while others have opted to take their claims to court. In some of these cases, the courts have ruled in favor of the policyholders, considering that there is coverage for losses suffered as a result of confinement measures implemented by governmental authorities.
IV. 5. Impossible correspondence of European and United States laws with the Latin American reality
As has already been pointed out above, it is important to take into consideration that any resolution adopted in the previously mentioned markets will not be applicable at domestic level (that is, in the different jurisdictions of Latin America), based on the consideration of the various differences existing between one region and the other, as well as between their respective insurance markets and the type of products (insurance policies offered in one or the other market).
Firstly, we start from the differences between legal systems: on the one hand, common law, where case law and customary law constitute the main source of law, as opposed to the European continental law system, where the law and the statutory rules are the main source.
Secondly, as outlined in point III above, the development of insurance market, stronger in Europe and the United States than in Latin America, with more varied products and, consequently, providing greater coverage. Thus, in the more developed markets, policies are taken out by small businesses such as restaurants, cinemas and pubs, among others, which offer much broader coverage than even large local companies may take out. Thus, while a restaurant in a U.S. town may have a policy with coverage broad enough to cover business interruption, in Latin America, where generic policies such as fire, comprehensive commercial and comprehensive liability are underwritten, business interruption coverage is an exception. It should be considered that Latin America represents only 3% of world insurance premiums.
Argentina, for example, is no exception to the above, therefore policies offered in its market (comprehensive commercial insurance) do not include coverage for business interruption or loss of profits, as a general principle, let alone coverage for non-damage business interruption. Regarding coverage for non-damage business interruption, it must be considered the provisions of Section 61, Insurance Law No. 17,418, which establishes that the insurer shall not provide coverage for loss of profits unless it has been expressly so agreed by the contracting parties.
The above paragraphs explain why the resolution adopted relying on the claim filed by the FCA in the United Kingdom, as well as other decisions in the aforementioned markets, may not be transferred to Latin America.
On this last point, it should be stated once again that coverage for business interruption is not applicable in the context of the COVID-19 pandemic, since the virus itself does not cause physical damage nor does it cause such damage directly. In such a case, it is the mandatory governmental measures which could lead to a loss of income for the policyholder, but which, as such, do not fall within the coverage defined in the business interruption policies. For this reason, in the insurance markets of Europe and the United States, additional coverage (non-damage business interruption) is included, the very existence of which justifies the lack of coverage for this type of cases under the generic business interruption coverage. Of course, the additional coverage will only be applicable as long as the necessary conditions laid down in their wording are met, and which was the main reason for analysis in the ruling issued by the High Court of the United Kingdom based on the claim filed by the FCA.
However, such additional coverage is practically not found in the Latin American insurance market, and this is why this last resolution in no way affects the main conclusion, i.e., the non-existence of coverage under the concept of business interruption and, therefore, the lack of coverage for the policyholder in general owing to the government measures affecting the normal operations of small and medium-sized enterprises in Latin America.
Consequently, beyond the theoretical discussions and legal contrasts between the international insurance markets and those of Latin America, in actual facts, difference is significant and, therefore, discussions such as those raised in the United Kingdom may have little effect in Latin America.
Accordingly, save for a few exceptions that have not even received relevant public treatment, there have been no significant jurisprudential developments in Latin America to date. This is due to the characteristics of the insurance market in the region, starting with its lower level of development compared to the large European and U.S. markets. Meanwhile, in addition to the jurisprudential debates, the insurance market in the United States and Europe (mainly the United Kingdom) is offering daily scoops, either through executive decisions or parliamentary debates that require insurers to provide a specific response to their policyholders, or through the creation of joint public-private cooperation spaces that allow these companies, with the assistance of the government structure, to respond to their clients.
In conclusion, if there is one element that we may validly extract from the news coming from the more developed markets and which may have an impact on the Latin American markets, it is that, if the existence of an additional coverage such as the non-damage business interruption coverage is recognized, which comes to make up for the lack of coverage offered by the business interruption coverage, then it is clear enough that the business interruption coverage, i.e., the only one offered in Latin America, does not cover the losses caused as a consequence of the government measures within the framework of the pandemic, which is no longer a question linked to the contractual conditions and becomes a problem of the lesser development of the insurance market, which does not have sufficient capacity to face disbursements of this magnitude.
V. Final remarks on the international insurance market
The unpredictable nature of the COVID-19 pandemic has led the insurance companies in the international insurance market to reconsider various issues related to their daily operations, assuming the potential that this type of risk could occur again in the future.
The impossibility of foreseeing this type of risk has led these companies to reformulate the way in which this type of risk should be dealt with and, in particular, how to calculate potential losses in the case of similar risks against which coverage may be granted by means of specific products intended for sectors that may purchase such products.
In fact, the risk of a new pandemic being covered, as mentioned above, could lead companies to make millionaire disbursements that could jeopardize their financial stability. Therefore, these companies consider the need to set up a public-private partnership with Government participating in the insurance market, which will allow not only to define guidelines and objective criteria to respond to this type of events, but also to guarantee a correct assistance to the policyholder and an economic support for the possible disbursements that the insurance companies must make to respond to the claims of their clients.
In this regard, some of the world’s insurance industry leaders have stated that a possible way of facing the risks of a pandemic in the future would consist in the creation of a public-private partnership in which insurance companies could begin to provide coverage for this type of risk at an adequate price, with the government assuming the exposure to tail risk (32). This model would be a replication of other associations that have been set up after similar catastrophes, such as what happened after the terrorist attack in the United States on September 11, 2001 and the passing of the TRIA (Terrorism Risk Insurance Act), and also other examples such as the CEA (California Earthquake Commission), EQC (Earthquake Commission, in New Zealand) and FloodRe or Pool Re in relation to flood risks and terrorist attacks in the United Kingdom.
On the other hand, on July 9, 2020, Swiss Re published a report analyzing the prospects of the insurance market after the COVID-19 pandemic (33), summarized in the following paragraphs:
a. The demand for insurance will be drastically reduced in 2020 as a consequence of the pandemic, with worldwide premiums in life insurance reducing by 6% and in the rest of the products by 0.1%;
b. The most affected products in life insurance will be savings products, while in other insurance products, those most affected will be travel and commercial products;
c. The volume of insurance premiums worldwide will recover to pre-COVID-19 crisis levels by 2021;
d. Led by China, emerging markets will underpin the global market with a 1% increase in total premiums in 2020 and 7% in 2021; and
e. Tightening rates in commercial lines will contribute to non-life product yield, and increased risk awareness due to COVID-19 will support premium growth in many lines of business over the long term.
The experience of the COVID-19 pandemic has led (re)insurance companies to consider the possibility that this type of risk may recur in the future on a more regular basis, taking on the character of an event that may become almost normal (34).
In view of this, companies foresee the design of new marketable products that consider the coverage of pandemic risks, in exchange for a premium at a higher cost, protecting small businesses such as pubs, restaurants, hairdressing salons and car dealerships, as well as those companies that provide e-commerce services in the purchase and sale of products and merchandise, including film and television productions, among others.
Another innovative product that is becoming relevant in current times consists of insurance for organizers of cultural events transmitted through streaming platforms, based on the risk of possible technical problems that may arise during the transmission.
The impact of the pandemic may also be reflected in other pre-existing products, such as, for example, motor insurance, where the marketing of usage-based insurance has skyrocketed. This type of insurance and its related premium is based on aspects such as time, distance, behavior and place of driving of the vehicle, as result of which the premium may vary according to the alteration of any of these factors, thus resulting in a possible saving for the policyholder.
VI. Conclusions
The risk of pandemic constitutes an uninsurable risk for several reasons: i) it constitutes a fundamental risk, unforeseeable in nature; ii) it lacks the dispersion characteristic of an insurable risk; iii) the virus does not generate physical, tangible damage; and iv) no direct causal relationship exists between the pandemic and the damage claimed by the policyholder.
The above has been largely ratified by (re)insurance markets worldwide, where companies have not only publicly declared the pandemic as an uninsurable risk but have also expressed their concern about their insolvency in the event of being forced to make massive indemnity payments.
This explains the request expressed by these companies to government authorities for the design of an integration scheme between them and the government in order to be able to provide a response to policyholders without jeopardizing the companies’ economic capacity.
The new jurisprudential developments in the European and U.S. markets are attractive and worthy of consideration, but divorced from the reality of the Latin American insurance market. The products and the range of coverage offered by the most developed markets are far from the current situation of the local market, where the products are more limited and the coverage is more reduced. In this sense, and without prejudice of remaining attentive to any other relevant judicial decision, it should be taken into consideration that the format of the policies underwritten in the Latin American markets offer limited coverage for SMEs, and include business interruption as an additional and exceptional coverage that certainly requires the existence and proof of a direct physical damage, since the coverage known as non-damage business interruption is practically not commercialized in the region.
The prospects for recovery of the insurance market during 2021 provide some relief for a sector of the economy that since the beginning of the pandemic has been under strong pressure, not only from policyholders’ claims, but also from state authorities that, without considering the capacity and financial solvency of insurance companies, have tried to require companies to respond to all those claims related to the pandemic by passing laws retroactive in nature, that force them to disburse large millions for a risk that, clearly, is not insurable and, therefore, was not covered.
The commercialization of new products and also the modifications suffered in those pre-existing products are phenomena that must be addressed and that come to accelerate a process that had already been developing in the last years, linked to the technological development and the need to design products tailored to the real needs of each particular client.
While it is clear that the higher the coverage, the higher the premium cost for the policyholder, it is also true that current circumstances show the need to weigh these risks going forward, assessing what are the current costs and future benefits of paying a higher premium that provides coverage for economic losses resulting from risks that, until now, seemed impossible, while insurers must assess whether they have the appetite to insure the pandemic risk and how to do so without jeopardizing their solvency.
(NOTES)
(*) Lawyer (UCA, 1998); specialist in insurance and reinsurance law; Professor of Insurance Law at the Universidad Católica Argentina; postgraduate professor of Insurance Law at the Universidad Católica Argentina and the Universidad de San Andrés; international lecturer in insurance markets in Germany, Spain, United States, United Kingdom and Switzerland; former president and vice president of Insuralex Global Insurance Lawyers Group and member of the board of directors of AIDA Argentina.
(**) Lawyer (UBA, 2017); specialist in Insurance and Reinsurance Law; member of Insuralex Global Insurance Lawyers Group.
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- ARGAÑARAZ LUQUE, Martín G. – BONINA, Sebastián, “Impacto del COVID-19 en los contraltos de seguro todo riesgo operativo y todo riesgo construcción” [Impact of COVID-19 on all risk operational and all risk construction insurance contracts”, LA LEY, 08/25/2020, 1; AR/DOC/1812/2020; id., “[Impacto del COVID-19 en el Mercado asegurador argentino: daños a la propiedad” [Impact of COVID-19 in the Argentine insurance market: damage to property], elDial.com, 06/25/2020, DC2B1F.
(2) Disease that spreads in a country, community or region, simultaneously affecting a significant number of people.
(3) Epidemic disease that extends to several countries, affecting almost all individuals within the same town, region or country.
(4) The insurance is a capital mutual fund made up of the premiums paid by all the policyholders, out of which losses of a few policyholders are paid. If, instead, the loss of all the policyholders had to be paid at the same time, the insurer would not have the capacity to do so and would go bankrupt. In this regard, statistics on frequency, seriousness and costs of claims are used to maintain the composition of that mutual fund, which, in turn, is subject to regulations issued by governments aimed at maintaining adequate solvency of insurers.
(5) For example, Wimbledon tennis tournament was canceled because of the pandemic. Since 2003, and in exchange for an additional premium, the organizer, All England Lawn Tennis Club (AELTC) requested its insurer to include a clause to cover virus-related losses as a consequence of the concerns arising from the SARS outbreak of 2002. This additional coverage allowed AELTC to cancel the tournament, knowing in advance that losses from said cancellation would be compensated by its insurer.
(6) Argentina, Paraguay and Uruguay.
(7) Ecuador and Peru.
(8) Costa Rica.
(9) Panama.
(10) Venezuela.
(11) Brazil.
(12) Colombia.
(13) Mexico.
(14) The following are examples of additional coverage: i) coverage for any damage caused by decisions or orders issued by civil or military authorities prohibiting access to the facilities of the policyholder, known as Civil Authority Coverage; ii) provider coverage, where the insurer indemnifies policyholder against the loss of gross profits suffered as a result of or interference with the business caused by loss or physical damage and or damage to property on the premises of client or direct providers; and iii) non-damage BI extensions, that is, coverage provided for any damage or loss caused by business interruption or anticipated loss of profit without physical damage.
(15) Business interruption with no damage.
(16) Chile and Peru.
(17) A sort of certainty statement.
(18) Combined shop insurance
(19) Insurance for hotels and inns.
(20) Fire insurance.
(21) Security insurance.
(22) Commercial insurance.
(23) Insurance for business owners.
(24) MS Amlin Underwriting Limited, Arch Insurance (UK) Ltd. QBE UK Ltd, Royal & Sun Alliance Insurance plc (RSA), Zurich Insurance plc, Argenta Syndicate Management Ltd, Ecclesiastical Insurance Office plc and Hiscox Insurance Company Ltd.
(25) See https://www.fca.org.uk/news/press-releases/result-fca-business-interruption-test-case and https://www.ft.com/content/6eaab06d-463e-4e7a-871e-5bbeb7a-a510b.
(26) Liability insurance.
(27) Commercial insurance.
(28) Insurance for business owners.
(31) Multi-risk insurance.
(33) See https://www.swissre.com/media/news-releases/nr-20200709-sigma-4-2020.html.
1 Argañaraz Luque, Martín G. – Bonina, Sebastian. “A propósito de las acciones legales iniciadas en el Reino Unido, Francia y los Estados Unidos por seguros de interrupción de negocios en el marco del COVID-19. Su impacto en América Latina y Argentina”. December 3, 2020. Special contribution to La Ley. All rights reserved (Law 11.723). Online quotation: AR/DOC/3373/2020. Translation prepared by sworn translator.
2 Authors’ update note: on January 15, 2021, the UK Supreme Court handed down its judgment in the FCA Test Case by virtue of the appeals filed by the parties, available at: https://www.supremecourt.uk/cases/docs/uksc-2020-0177-judgment.pdf.
3 Authors’ update note: on December, 2020, this decision was overruled by the Court of Appeals, excluding coverage.
By Martín G. Argañaraz Luque and Sebastian Bonina
Martín G. Argañaraz Luque
Martín G. Argañaraz Luque
Sebastian Bonina
