Shutdown insurance: rescue or risk?

How COVID-19 presents new challenges for policyholders and insurance companies

COVID-19 is associated with serious losses for many companies. It is therefore imperative to check insurance policies and to make claims under them if necessary. The question of insurance coverage is particularly controversial in the context of shutdown insurance policies for both policyholders and insurance companies alike. It is to be expected that this issue will soon be deliberated by the courts. 

The World Health Organisation declared a pandemic on 11 March 2020 due to the spread of COVID-19. According to many insurers, pandemics amount to so-called “accumulation risks”. These are risks which, if they materialise, will give rise to massive events of damage that jeopardise the business model of diversification of risk. In contrast to many natural disasters, pandemics are characterized precisely by the fact that they can potentially take place without regional limitations. In addition, in the event of serious disease progression, there is a risk of double insurance, e.g. in the case of life insurance. Both of these factors mean that many insurance companies have to be extremely cautious about covering pandemic risks. If covered, insurers are theoretically threatened with massive payment obligations.

Shutdown insurance with and without escape clauses

With regard to commercial customers, the “shutdown insurance” model is particularly interesting. Will this be effective in times of COVID-19? Basically, shutdown insurance should provide insurance cover for the financial consequences in the form of loss of earnings and wage costs of the employees when a business operation has come to a standstill or been disrupted due to an official order. The benefits are usually limited to a 30-day period of losses. So far, so good.

The crux of the insurance policy

Some insurance provisions refer to the Infection Protection Act (InfSG) and link the insurance cover to the presence of a notifiable disease according to section 6 InfSG. These policies often also contain an exemplary catalogue of illnesses (“escape clause”) that are intended to trigger the insured event. However, there are also insurance conditions that refer to an exhaustive list (at least in terms of wording) of certain diseases in cases of which the insurance company should intervene. Due to the novelty of the virus, Covid-19 is not included in such conditions.

Insured event or not?

In both cases, the question arises whether a novel virus, which was not known to either the policyholder or the insurer or even to specialised virologists at the time the contract was concluded, triggers the insured event. Certainly this question cannot be answered in a general way for all policies. Moreover, the views already expressed in this regard are diametrically opposed. In any case, there could be a tendency to include an escape clause in the conditions for the inclusion of novel diseases and thus COVID-19. Independent of this, the German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft e.V.) (GDV) also draws attention to the fact that the prerequisite for insurance cover is usually an individual official order issued by the authorities to a specific company affected by an illness. The GDV therefore doubts whether the closure of companies which are not themselves affected is covered by this.

Cooperation of individual insurers

Despite the unclear legal situation, some insurers, together with the Bavarian Ministry of Economic Affairs, DEHOGA Bayern and the Vereinigung der Bayerischen Wirtschaft e. V., agreed in early April on a general recommendation for the (Bavarian) hotel and restaurant industry, according to which at least a part of the damages of the affected companies will be covered by the insurers. It is doubtful whether such solutions will also exist for other industries on a nationwide basis.

New hardship

In connection with shutdown insurance, policyholders could also face another dilemma: The Federal Employment Agency - it is reported - appears to take the view that insurance cover due to shutdown insurance can stand in the way of the granting of reduced working hours compensation (see also the Act on the temporary improvement of the regulations for reduced working hours compensation due to the crisis). 

Avoid premature action at all costs

For companies, a legal review of the corresponding insurance contracts is recommended, especially at the present time. Insurers are required to keep a close eye on further developments in decided case-law and legislation. Ultimately, firm clarification of the legal position, which in the current situation would at least also have a signalling effect, can only be achieved if a dispute is brought before the courts.

We have compiled on our website comprehensive information and recommendations for action in response to the legal implications arising from the coronavirus pandemic: https://deutschland.taylorwessing.com/en/coronavirus