May 21, 2022
  • May 21, 2022

COVID-19 damage escapes property insurance coverage

By on May 4, 2021 0

Owners of commercial buildings find that their insurance does not cover business disruptions caused by the pandemic.

CHANSOM PANTIP / iStockPhoto / Getty Images

Insurance exists to cover some of the risk for owners, managers and tenants of commercial buildings, but most policyholders find that the insurance they have does not cover them against damage caused by the COVID pandemic. -19.

Class actions have been launched against insurers in Canada and abroad, primarily to seek compensation for business interruption due to forced shutdowns, which insurers say is not covered by most plans. .

While observers wait for these cases to be resolved, industry players say the sector has been operating in an increasingly difficult environment for several years. These factors, more than COVID-19, are likely to affect insurance products and prices available to commercial real estate companies, they say.

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No coverage for COVID-19

“There really is no coverage for COVID. Viruses, anything unrelated to property, are very difficult to insure and are [generally] are not covered by insurance, ”said Neil Lacheur, Director and Executive Vice President, Property Management Services, Canada, for Toronto-based commercial real estate services company Avison Young.

Even if insurers were to offer products in the event of a pandemic, pricing them would be difficult.

“Insurance works on the principle of looking back and determining the frequency and severity of losses, then projecting what they might be over the next 12 months when pricing a policy. assurance. So in terms of pandemics, in particular, there is no historical track record, ”said Peter Kennedy, national director, real estate practice, for Aon Canada, a leading insurance broker.

The insurance industry started with fire coverage, says Kennedy, and physical damage is still the backbone of coverage.

“In the 1800s, people bought fire insurance. And then they added business interruptions years later, and other things, like floods and hailstorms, windstorms and things like that.

But for businesses shut down by broad government mandates, shutdown clauses usually don’t apply. “So the challenge you face with COVID-19 in many cases is when the government says to shut down a city or region, there is no physical damage to the locals, so the policy doesn’t ‘is not triggered, ”he said.

What drives the rates up

While players in the commercial real estate industry agree that the pandemic is not a major factor of concern for insurance, the insurance market has undergone rapid changes over the past two years, particularly in redesigning products and increasing premiums.

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An increase in catastrophic and other events has increased costs for the insurance industry, while a low interest rate environment has reduced investment returns, said Jeffrey Charles, Managing Director of Arthur J. Gallagher Canada Ltd., a risk management and insurance brokerage firm. .

“The build-up of attrition losses is as serious as the single catastrophic events today,” he says, referring to events such as the recent ice storm in Texas, which are not considered feline events or catastrophic, but add up to massive losses.

“It’s not a major windstorm, it’s not a flood, it’s not a forest fire, all of which would be classified as a catastrophic event. … But it’s actually an accumulation of attritional losses. The Texas situation is going to include several hundred, if not thousands, of individual losses which all add up to a staggering total number. The numbers represent a total loss of about $ 20 billion, he adds. “And this is something that is going to have an impact on property insurers and underwriters.”

This is happening globally, which is also affecting the Canadian insurance market. And reinsurers, which are insurance companies that insure the risks of other insurance companies, are also affected, pushing up prices, adds Charles.

Along with the low interest rates that affect the returns on the investments insurers make with the premiums they collect, insurers manage costs and returns “by changing their price or changing the amount of insurance they are.” ready to put on the street for a given risk. , says Charles. “And those two things create challenges for the real estate operator.”

In this climate, it is important for real estate companies to reassess not only their insurance policies, but also their relationships with their insurers, and the information about their assets available to their insurers, he adds.

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Real estate risks

“The things we worry about are fire, flooding, water – water from below, water from above. These are the fundamentals against which we manage [through capital improvement and ongoing maintenance] and fundamentally insure against, ”says Mr. Lacheur.

The risk varies by type of building and depends on the location of the assets.

“Industrial buildings are quite simple,” says Lacheur. “They have a roof, walls and a few basic systems. The risk is that if you have a 50 story office building and you have a water event on the 50th floor, it’s potentially catastrophic as it could easily affect 20 or more floors of tenant space. And each of these events becomes insurable.

Each part of the country has its own set of risks, says Kennedy. “The risk of an earthquake on the west coast, much of British Columbia, is a much greater concern for people with assets in this region, as is the Ottawa Valley Corridor and from Quebec City, which is a secondary seismic zone. The risk of flooding is a challenge for people who have assets near major rivers, like Calgary and… the Saguenay River region. … then you have hail [and tornado] the risks are greater in the meadows and the risks of forest fires are more frequent where you are surrounded by forest. On the east coast, you have a hurricane risk.

Lessons from the pandemic

“The lesson to be learned [from COVID-19] is that everyone needs to focus on all sorts of outcomes and probabilities of whatever may happen, and… figuring out what we can do to mitigate that risk. Either in a practical sense or on a risk transfer basis, which is essentially what insurance is, ”Kennedy said.

But, because it would be prohibitive to act and insure all the risks, it is important for companies to have a broader enterprise risk management plan, he adds.

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“The risk is only growing in importance and will continue [to do so] for the foreseeable future, ”Kennedy said. “The world is just a riskier place, as we’ve seen, and that manifests itself in a lot of cases in your insurance costs. And real estate is just as much, if not more sensitive to all of this, as it is prevalent across the country. “