by Lana Fadel, Deputy Head of Legal Knowledge at SADER Legal

As the world is massively putting in efforts to combat COVID-19, the economy has been suffering all around the globe, and it is yet to increase as the virus continues to spread affecting business practices and operations, travel restrictions, institutions shut and many other procedures due to countries implement lock down measures to circumvent the spread of the pandemic. The impact of the virus on businesses have been raising questions as to whether insurance companies will compensate the losses caused by the pandemic. Businesses have always relied on insurance companies when disasters of any kind strike, which is what makes the yearly insurance payments worth paying, for a key safety net. However, does an insurance contract really cover a pandemic, an event in which every country and business in the world have been affected by?

An insurance contract is a contract that arises between an insurance company and a natural or legal person. Insurance contract are set to be contracts of adhesion, meaning that the applicant shall either accept or reject the policies proposed by the insurance company.[1]

The first party usually engages in the contract in order to provide specific compensation to the second party, who would be the insurer, in exchange for a specific allowance in the event of damage or loss caused due to an accident, illness or death. Therefore, insurance contracts usually cover physical losses, which is what essentially determines how much the insured would be compensated.[2]

However, insurance contracts are not usually designed for systematic risks, which are risks that are imposed on an entire market segment, emerging aggregated outcomes.[3] Insurance companies could simply face bankruptcy from the total claims due to the international impact. This is one of the most critical issues faced by insurance companies. Albeit both individuals and business have been suffering financially, there is not much an insurance contract can cover due to the pandemic as insurance contracts merely focus on specific force majeure and unforeseen events such as the case of fire for instance or the occurrence of a natural disaster such as an earthquake.[4]

According to article 950 of the Lebanese Code of Obligations and Contracts,” insurance is a contract in which a person (insurer) commits to, in consideration of a remuneration called premium or contribution when certain contingencies relating to the chattels or the insured party takes place”.[5] This article focuses on the damages caused to tangible goods and not on economic losses that have emerged due to certain delays caused by a pandemic. According to article 966 of the Lebanese code of obligations and contracts, the most important obligation on the insurance company is to pay the amount of insurance agreed upon in the contract to the insured or the beneficiary once the insured risk has occurred. The guarantor is liable for the loss or damage caused by force of majeure, an unexpected incident or a secured error.[6] This portrays that under the Lebanese law, which is based on the French law, no specific definition has been given for force majeure nor as to what constitutes a force majeure scenario. This would be subject to the courts’ discretion and doctrines. Thus, whether Lebanese insurance companies will consider the pandemic as a force majeure instance will be subject to the clauses in place as well as the courts interpretation.

In reference to other countries and what measures the authorities have been discussing, a confusion remains all across the globe as to how to deal with a sudden pandemic. Let us take both France and the United Kingdom as an example.

In France for instance, insurance contracts are usually enforced in a similar manner as the Lebanese ones, where material damage should be caused by an unforeseen scenario affecting business activities in order to get compensated[7]. That being said, as insurance contracts are not designed to cover systematic risks and its physical damages, some insurance companies do offer the presence of a clause that would cover businesses in the event of “temporary business interruption activity”.[8] Even then, it is not a guarantee that insurance companies could cover pandemics since material damage should be produced. French authorities have met this week to discuss the consequences resulted from the pandemic and how preventative measures could be enforced in efforts to support companies who been struggling from business interruption.

As for the United Kingdom, in which the insurance companies also offer business interruption compensation, albeit caused by physical damage, the government has shed a light of hope behind the pandemic darkness when it declared COVID-19 as a ‘notifiable disease’ giving businesses the prospect that insurance companies may respond to losses caused by the virus.[9] These include losses that potentially affect the business revenues such as disruption to supply chains and even customer or workforce illness. However, businesses should be able to provide proof that the coronavirus has in fact resulted in any insured losses which is particularly challenging since the virus seems to be affecting multiple business areas which could not have possibly been thought of.

To that end, while insurance is typically aimed at providing financial assistance in times of crisis, the world has been witnessing slightly different forms of catastrophic events that should be hovering innovative risk transfer solutions to provide safer measures in times like these and minimize economic losses.[10] As insurance companies do not cover systematic risks, it is time that insurance policies take the form of parametric measures, in which payments are made on the basis of triggering events using a parameter. In other words, it is an insurance program that is paid using an index rather words. It is a simpler process that provides the insurer certainty as to what his/her insurance policy covers. Time and cost efficiency are also key players in choosing parametric insurance over traditional insurance policies.

Nevertheless, the world is indeterminate as to what the future holds after the coronavirus pandemic, but in terms of insurance policies, it is undoubtedly certain that insurance companies will have to alter and adapt to the life cycle and events that the world has been witnessing. For now, it is yet to be declared in each jurisdiction as to whether insurance policies will be covering COVID-19 losses.