Insurance considerations for Canadian manufacturers during the COVID-19 pandemic

April 17, 2020

MAN_13Apr20_COVID-19_Insurance-Considerations_LandingPage_679x220.jpg

Manufacturers are looking at ways to manage the COVID-19 crisis as they continue operations where possible, or curtail their business where they must. One source of relief may be their insurance coverage. Described below are some insurance considerations you should be aware of before you decide whether or not to initiate a claim.

Policies for commercial properties

In most cases, business interruption coverage is triggered if there are income losses because of physical damage to the assets of the insured or to the assets of a key supplier to the insured. But the definition of physical damage isn’t always clear. Some courts have ruled that contamination may be considered physical damage if the property isn’t usable or habitable. If contaminates a building, you may be able to argue that the building has sustained physical damage.

The specific language of the policy will determine whether or not you’re covered. Some policies may or may not have clauses that include business interruption caused by an outbreak. These clauses are often found in endorsements (also called riders) issued years after the main policy.

Courts tend to rule in favour of the insured if there are any ambiguities in the policy, which means it’s often worth filing a claim if you’re unsure whether or not you’re covered.

Civil authority coverage

In a property policy, there’s typically a section that responds to interruption by civil authority. This is usually defined as an “actual loss as insured hereunder during the period of time…while access to the ‘premises’ described in the declaration page(s) is prohibited by order of civil authority.”

While this coverage is usually limited to circumstances where there’s been damage or physical loss, the definition often varies by policy. Coverage may apply if business operations are restricted by a government order that prohibits access. This is even more important after provinces have ordered shutdowns of non-essential businesses.

In the COVID-19 crisis, we have seen two important complications regarding civil authority.

The first complication is if a business voluntarily closes for safety reasons before the government deems it to be a non-essential business. The insurer could claim that there’s no coverage even after the government order, but it’s best to consider that coverage applies as of the date of the mandatory closure. There may be a good public policy argument that coverage should apply when the business closes because the measures were taken to reduce the potential harm to employees.

The second complication is if a business is subject to a partial closure order (a production closure while shipping and receiving are still allowed, for example). If coverage applies to a full closure, there’s a good argument that it should also apply to partial closures to make up the difference between ordinary and reduced operations. If the business closes entirely because a partial closure isn’t practically or economically viable, there’s a good argument that this will help reduce business losses and it should be covered.

If civil authority coverage applies will depend on the wording of the insurance policy. Still, it might be worth filing a claim if it’s unclear whether or not coverage is clearly defined.

Next steps

While there often isn’t a clear answer about whether insurance coverage applies, we recommend that you evaluate policies with your legal team, insurance broker, and claim consultants to learn more about the terms and conditions. If you believe that you have suffered a loss due to , you should consider submitting a claim or let your insurer know you plan on submitting one.

Once you understand the policy’s wording and what your insurer requires, you should track the financial impact of the outbreak that fit within those conditions. All incremental and unexpected costs should be documented, including those related to cleaning and disinfecting premises, overtime pay, and crisis management.

These incremental costs should be easy to spot and tracked separately from your normal operating costs. It’s a best practice to set up a separate general ledger account to record these costs, as well as keeping record of the business impacts (such as declining earnings and cancelled orders).

It’s important to separate incremental costs from expenses related to betterment since those costs might not be reimbursed by insurance. From an accounting perspective, the incremental costs should also be tracked separately so they can be amortized properly. This, along with supporting information, will help make the claims process more expedient and effective.

If some costs aren’t covered, it can help inform risk management and mitigation strategies. Also, some costs may be recoverable through government incentive programs.

How BDO can help

Learning how to determine revenue and earnings declines as a result of the pandemic is crucial when minimizing the financial implications. Our team of Manufacturing professionals has helped a number of clients solve these problems. Contact us to find out how we can help your business.