As SMBs Grapple With Virus, No Assurance From Insurance

The coronavirus continues to have reverberations across the global stage, and is especially impacting developed economies, and in particular, the small businesses that are a key foundation of  those economies.

To get a sense of how smaller firms are being impacted, in a situation that is fluid on a day to day (hour by hour?) basis:

Last Friday, the National Federation of Independent Business released data, gleaned from a survey of 300 responses from firms with up to 120 employees, that showed at least some impact from the virus.

As reported, the NFIB found that owners remain concerned about disruptions. The data no doubt is a bit dated only a few days since publication — headed into a weekend of slashed Fed fund rates, quantitative easing and more negative news — but it shows SMBs bracing for impact.

The NFIB reported that about 23 percent of small- to medium-sized (SMBs) are being negatively impacted. Of the 73 percent not (as of then) impacted, about 43 percent said they would be hurt if the virus spread, or spreads broadly in their geographic areas through the next three months. Of those already impacted, 39 percent have experienced supply chain disruptions and 42 percent cited slower sales.

Insurance 

One backstop here — one fervently hoped for by these same small players, may not be a backstop at all.

That would be insurance, of course, a supposed buffer against disruption, against supply shocks, against the vagaries of doing business across a global landscape.

One thing’s for certain — that insurance claims will rise.  The outcome — whether those claims will be satisfied — is far from certain. Disruption insurance is meant to help insulate against unforeseen events.

And,  as Zenefits reported last week, most smaller firms include at least some form of disruption insurance, which may, for example, include coverage against natural disasters.

Communicable diseases?  Perhaps they’re covered.  But perhaps they’re not, in an age where past epidemics (SARs among them) may have steered insurance firms to narrowly define parameters of what they would — and wouldn’t cover — in the event new health crises threatened the economic well being of smaller companies.

And here, then, lies the eternal tug of war when it comes to insurance. Those who take out policies do so because they want at least some financial balm to financial loss. The insurance companies themselves typically try to define events through at least some risk-adjusted lens, with an eye toward minimizing their own financial exposure.

Zenefits noted that SARs helped reshape disruptions policies so that they exclude at least some types of disasters, including communicable diseases. And the precedent has been set (through court rulings) that insurance carrier liability is limited to a “trigger date” that is limited to the disruptions that occur after a disease has been “required by law to be notified to an authority” — in this case, as Zenefits has noted, Jan. 8 is the date at which COVID-19 has been classified by authorities as a notifiable disease.

But insurance companies, as the site noted, also have been able to pre-negotiate the amounts for which they are liable, which in effects caps liability, or a specific number of days of outage. Business disruption coverage also may cover only physical damage to property, or to inventory — impacts not felt during a pandemic, where the absence of foot traffic and consumer spending, cripple income statements and balance sheets but leave the physical plant untouched. There’s also contingent business interruption insurance, which a company can take on, and which is applicable in the event that the shutdown is down the supply chain, but impacts the insured firm.

In an interview with the Wall Street Journal earlier in the month, Kirk Pasich, a Los-Angeles based insurance recovery attorney, said “there is no guesswork here. There will be insurance coverage disputes.” That assessment came as companies had already been filing claims tied to business interruption insurance, and those claims were already being rejected.

The impact, of course, will be huge. In a March report titled “Coronavirus: The World Economy at Risk,” the OECD estimated that a long-lived epidemic could slash global economic growth to 1.5 percent, from a previous 2.9 percent forecast. With the global economy at about $86 trillion, as estimated by the World Bank, the impact could be more than $1 trillion.

In an interview with The New York Times, Christian Ryan, with the risk advisory firm Marsh, brokering policies with reinsurance firm Munich, has said that insurance that would have covered firms for epidemics, has seen a surge in demand. But new policies will not cover COVID-19, he told the Times, as “we can’t insure a burning building.”