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After Covid-19: Business interruption insurance for companies (Free translation)
Link of the article column on Chef d’Entreprise
The majority of companies are insured against operating losses, but under certain conditions that have triggered an unprecedented controversy, forcing the Minister of the Economy and Finance to intervene.
Coverage for operating losses that is broader than it appears to be
Almost all businesses, regardless of size, are covered by a so-called “property damage” insurance policy, which includes coverage for contractually guaranteed damage such as theft, fire or water damage. The majority of these insurance policies also include business interruption coverage, which covers businesses against substantial gross margin losses following the occurrence of a loss. Business interruption is therefore covered provided that it is the consequence of a guaranteed material loss such as those mentioned above. However, insurers have collectively communicated on the fact that the operating losses of businesses in the current crisis would not be covered. Justice has just affirmed the opposite in a decision condemning Axa to compensate a restaurant owner closed down during the crisis, in a very high-profile decision that forced Axa‘s CEO, Thomas Buberl, to intervene. The latter indicated that “less than 10%” of policyholders were concerned by this case. Less than 10% represents tens of thousands of companies.
Guarantee possibilities
There are, however, two cases in which such losses are well covered, despite the absence of material damage. The first is that of the guarantee of business interruption without damage, which requires the existence of a contractual cause, for example the administrative closure of the business. The second, more frequent, is that of a guarantee of business interruption which is presented as subordinate to damage, but whose awkward drafting has detached the guarantee of business interruption, which thus becomes an autonomous guarantee. However, French law provides that doubt in contractual matters is always interpreted in favor of the insured. The insured may then avail himself of his business interruption coverage, even in the absence of guaranteed material damage.
Commercial gestures or risk reduction?
The insurance community usually speaks as one. However, it is breaking up today because the operating losses resulting from the current crisis are massive and concern all sizes of company. For example, MAAF has announced that the compensation for its restaurant customers who have taken out a guarantee covering operating losses without direct damage will reach a total of 190 million euros. As a commercial gesture, Crédit Mutuel-CIC has announced that it will pay its customers who have taken out professional multi-risk insurance with business interruption a reminder premium of between 1,500 and 20,000 euros, depending on the professionals concerned, i.e. an average of 7,000 euros paid to each insured, for a total amount mobilized of 200 million euros.
However, some competitors suspect that Crédit Mutuel-CIC is limiting its risk by having its customers sign the acceptance of these “reminder premiums” so that they do not claim the compensation due to them under the “awkwardly drafted” contract. The mutual banker is said to have organized this manoeuvre in order to reduce a heavy bill, when the commitments of Crédit Mutuel‘s 30,000 policyholders are estimated at almost 2 billion euros.
Record compensation for all sizes of companies
From the point of view of the insured company, the compensable operating losses are not negligible, irrespective of the size of the company concerned. For example, a furniture and household appliances shop with an annual turnover of €12 million suffers a loss that makes part of its business impossible. While the store only has a turnover of €2 million in the year following the damage, the loss of earnings expert deducts compensation of €1.5 million. In another sector, a plastics manufacturer with a turnover of 8.5 million euros per year receives a claim that paralyses its entire activity for 3 months and thus generates an indemnifiable operating loss of 3 million euros.
For example, nearly 35,000 bakeries and pastry shops also had to face a considerable reduction in their activity due to containment measures. Let’s take the example of a bakery with a normal turnover of 500,000 euros per year and an 80% drop in activity over 3 months. After applying a margin rate of 30%, the compensable operating losses reach 30,000 euros.