The article is written by Bhawana Sharma of Law Center- II, Faculty of Law, Delhi University. The article talks about how insurance markets have been affected due to coronavirus.

Introduction

Coronavirus (COVID-19), initially emerged from China and has now gradually taken over the entire globe, affecting more than 3.4 million people across the world. The pandemic has not only affected the survival of humans but has also threatened the survival of the world’s biggest economies. The virus has forced countries all around the world to impose lockdowns, shutting down business and industry for a prolonged period of time. Companies both big and small, shops and even individuals, have incurred a major hit to their fiscal status due to business interruption losses. The losses caused due to the interruption are very likely to result in companies filing insurance claims to reclaim their “Loss of profit”.

Furthermore, the pandemic has not only affected more than 3.4 million & counting but has also taken lives of more than a million which gives a peek into the upcoming health and life insurance claims and suits that the insurance industry might have to face. 

The global impact of COVID-19 shall give rise to various claims under commercial and household insurance such as travel, employment, health, life, business interruption, the current article aims to make a few observations that might be seen in the insurance market concerning commercial insurance and health insurance sector as and when the condition improves. The article has been divided into two parts, the first part dealing with the commercial disputes involving the insurance claims and the second part trying to cover the upcoming trend of buying health & life insurance.

Insurance claims and loss of profit 

To understand how the claims processed by corporate organizations against insurance companies what is important is, to know the term “Loss of profit”. 

What is Loss of Profit?

Although a concrete definition has not been provided, Loss of profit can be said as the profit or revenue lost due to some business activity or inactivity in business (Business Interruption) usually due to unforeseeable circumstances. The profits can be claimed by businesses if there exists a clause in an insurance policy indemnifying such loss. It is also necessary to understand that loss of profit should not be confused with loss caused by damage as loss of revenue/profit is not an actual or physical damage but an opportunity cost lost. Loss of profit as a concept was first given in Robinson v. Harman (1848) 1 Ex 850; wherein it was held that the plaintiff is to be placed in the same position as he would have been had the contract been performed by the defendant. This basic principle, also known as reinstatement, is generally followed by courts and tribunals while dealing with claims of loss of profit. In the western nations, the business organizations are commonly provided with insurance policies that are not limited to only “physical” or “property” damage, but in India, for an organization to claim such loss it is imperative for the party claiming the amount to show “Direct Physical” damage or “Property” loss.

What to expect?

In the present scenario, as a precautionary measure, the lockdown imposed by the governments of various countries has put a pause to the movement in the commercial trade/market, resulting in the frustration of various contracts which in turn has caused huge losses to the organizations. Quite a few companies are eyeing their claims under what is known as loss of profit (supra) and insurance companies (insurers) are expected to be facing a tsunami of such claims. Many companies had taken insurance policies to cover loss arising due to certain unforeseen circumstances but because many commercial insurance policies do not provide business interruption coverage for losses occasioned by COVID-19 related shutdowns, there will be mounting legislative and regulatory interpretations and “the question now is whether Coronavirus is covered by such policies?”. In various other countries, Business Interruption Insurance can be issued as a separate stand-alone policy, but in India, it is incorporated in Material Damage, Machinery, fire and Boiler Explosion Policy.

Most of the business interruption coverage included in commercial property insurance policies is only triggered if there is actual physical damage to the property of the policyholder insured under the policy. There are differing opinions and theories on whether the “defilement” of a property by a bacteria or virus would be considered physical damage to the property, leading to coverage for any consequential business interruption.

Before getting into the global take on insurance coverage of loss of profit, it is important to briefly understand what is “Direct Physical damage”. Many of us may argue that the stock stored in warehouses or other storage houses which could otherwise be sold and gained revenue/profit from such sale could not be sold due to the lockdown is also a physical damage and the insured should be covered for the loss, but the damage shall be considered a physical damage only if it has been caused by fire, flood or any such agents and a policy covering loss caused from such agents have been taken by the insured and also if it contains a clause to reimburse the insured even for the lost profit and not only the damage received. As per a definition given by IRMI (International Risk Management Institute), Direct physical loss can be defined as ‘physical damage to property, as distinguished from time element loss, such as business interruption or extra expense, that results from the inability to use the damaged property’. Furthermore, various decisions have been given by the American Courts such as in Universal Image Prods. v. Chubb Corp. A respiratory bacterial infection had spread in the ventilation system of the insured’s building and an immediate shutdown was required, the courts denied the claim for loss as the damage was not ‘tangible or structural’ in nature. Similarly, in Eight Circuit in Pentair v. American Guarantee and Liab. Ins. and Newman Myers Kreines Gross, P.C. v. Great Northern Ins. Co. A similar observation was given by the courts that a loss is not ‘Direct’ or “Physical’ in nature if it is not resulting in ‘actual demonstrable harm’, a loss of function cannot be claimed as a direct physical loss if the property is not been able to be used for the ‘intended purpose’. Although there may be various arguments in favor and against the definition on the basis of aforementioned decisions, one can say that ‘Physical Damage’ is usually the damage which can be seen with the naked eye but the cover and interpretation of such loss also depends from policy to policy.

Prevailing theories

In the USA, various theories have been developed and contradicted over the years dealing with this issue, few of them namely “The Reasonable Certainty” and “The New Business Standard”.

The reasonable certainty is a standard adopted by the US courts wherein they expect the party claiming the damage to prove the damages to a reasonable certainty as the lost profits are speculative and subjective. Although the term is used frequently, the meaning of ‘reasonable certainty’ (or its variants) is not subject to any consistent or concrete definition, and little guidance has been provided by the courts as to whether and how this standard differs from generally applicable burdens of proof or standards of admissibility. Not every state subject lost-profits/revenue claims to the reasonable certainty standard. Some courts will allow a lost-profits claim as long as there is a “rational basis” for calculating such damages. Experience suggests that courts, in fact, seek to base their decision on corroborative evidence so as to estimate the amount of damages while only taking the aid of the ‘reasonable certainty’ test to settle the question of causation. 

The application of “The New Business” standard is usually avoided by the courts as  this rule prohibits a plaintiff from recovering any lost profits for a newly established enterprise: “New business, or an existing business with a new product, cannot recover lost profits because the future profits of a new business are uncertain.”  In an article published in fall of 2007 by Mr. Joseph Wylie and Christopher Fahy discussing about “Proving and Defending loss of profit”, it extensively discussed the New Business Standard which stated that in  Washington, although purporting to retain the new business rule, has written into that rule an exception that makes it very similar to the reasonable certainty standard. Under Washington law, the new business rule allows recovery of lost profits where “a reasonable estimation of damages can be made based on an analysis of the profits of identical or similar businesses operating under substantially the same market conditions.”

In other countries like The UK, The Association of British Insurers have rolled out a statement stating that majority of the companies will not be able to claim any loss caused due to lockdown or closure as preventive measures against COVID-19, the Big companies “may” have some claim over closure extension. The Insurance Association of Australia has also indicated that the companies shall not have any compensation for loss occurred due to business interruption resulting from “quarantinable disease” unless an actual physical damage has been received.

In India as well, the claims for loss of profit/revenue have not been approved unless such loss is covered under fire or theft or a comprehensive insurance policy and physical damage has been caused due to the above-mentioned reasons.

Therefore, it can be conveniently said that, although the Insurance companies post COVID are looking at a tsunami of claims and litigation but as seen from the explanations above, unless some actual physical damage has been faced by the insured, no other claims of loss of profit/ loss of opportunity cost shall be entertained.

Insurance claims & Health insurance

Health insurance is an insurance product that covers medical and surgical expenses of an insured individual. It reimburses the expenses incurred due to illness or injury or pays the care provider of the insured individual directly and life insurance is the one wherein an individual pays the premium for the policy and on the death of that individual the premium paid of the insured is paid back to his family members or the people he has nominated. 

Before a person signs up for Health insurance, an overall health check-up is done as it sets a benchmark against which insurers measure the health of the prospective policyholders. These tests bring to attention any existing medical conditions and illnesses, which enable insurance companies to provide applicants with the most suitable cover.

With the rapid increase of coronavirus cases, various health insurance claims have been filed to cover the expenses that occurred throughout the treatment. Many insurance companies have also come out with “coronavirus health insurance policy”, which is especially for the treatment of the coronavirus. Some private health insurers had already made voluntary changes to their coverage to address services related to COVID-19. This includes increased provision of telehealth and efforts to limit deductibles or other cost-sharing for COVID-19 related health costs. The important question that is being raised is “Whether the existing health insurance policies cover the treatment cost?” as COVID-19 is a new disease, therefore, it shall not be treated as pre-illness and in majority of the cases if an individual has a pre-existing health insurance then his treatment shall be covered under the pre-existing policy but in case the person buys a health insurance after being diagnosed with the virus then such claim shall not be entertained. 

As per the variables and statistics observed previously after or during a global pandemic, a global spike had been observed in the purchase of health and life insurance. During SARS, which extended from November 2002 to July 2003 a spike of 40% in short term health policies and 34% in long term health policies was observed by the Chinese Insurance companies. Similarly, as per a study in Financial expressduring MERS (Middle East Respiratory Syndrome) which Spread rapidly in Saudi Arabia during 2QCY13 to 3QCY14. Bupa Arabia which is one of the largest health insurers, reported 44% and 81% y-o-y growth in premiums during 2013 and 2014. Overall industry health insurance premiums increased 22% y-o-y in 2014 compared to 14% CAGR over 2010-13 and 2% CAGR during 2015-19. Even in the current scenario in India, there has been an increase of 30% in the purchase of health insurance due to COVID-19 as compared to the market ratio before COVID-19 which stood only around 19% (approx.).

Therefore, it can be concluded that even though there will be a lot of pressure on the health insurance sector of the insurance market to pay off the health claim of its consumers, a potential overall rise is expected in the health insurance sector.

Readers’ take away

To summarize, the fact that while uncertainty prevails regarding what shall be the court’s stand in deciding either in favor or against the payment of insurance claims of loss of profit, as per the previous trends and precedents decided, the claims and lawsuits regarding the loss of profit or revenue shall not be entertained under the insurance laws but in my opinion and understanding, a party may claim such loss under contract law (Section 73 and 74 of The Indian Contract Act) if the party can convince the court that such loss is more of a “damage” suffered than lost profit or revenue.

However, from the point of view of health insurance, even though a lot of concerns are raised regarding the health insurance sector getting bankrupt due to the plethora of claims by the consumers being affected by the pandemic, by the studying the previous trends, it is seen that there seem to be a rise of awareness amongst the consumers w.r.t the importance of health insurance. Therefore, an increased investment or purchase of health insurance is expected.

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