Can Insurance Really Save Retail and Hospitality from the Coronavirus Pandemic?

The virus is likely to result in billions in losses for the retail and hospitality sectors. Here's what coverages could protect them.
By: | March 16, 2020

Globally, COVID-19 is resulting in millions, if not billions, in losses for the retail and hospitality industries. Flight prices are dropping and retailers are seeing less foot traffic as people opt to stay inside and self-quarantine to avoid the risk of contracting the disease. 

Tour operators globally have been cancelling inbound tours from China, airlines have been restricting flights and countries, including the U.S., are temporarily banning foriegn nationals who have visited China from visiting, according to CNN. Given that Chinese travelers account for $277 billion of the $1.7 trillion spent on international travel, their absence is likely to put a huge dent in tourism revenue.

President Donald Trump has also restricted travel from most of Europe. The restrictions apply to non-U.S. citizens who in the past two weeks have been in European nations that are part of the Schengen Area, which is an area of 26 countries that generally allow free and open movement across their borders.

The countries that make up the area are Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherland, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and Switzerland.

Britain, Croatia, Cyprus, Ireland, Turkey and Ukraine are not included in the ban.

Conferences, games and events are also being tested by the disease. South by Southwest cancelled it’s event for 2020, leaving Austin without the nearly $300 million in revenue the event typically generates for the local economy. 

The NBA also suspended its season after a player tested positive for coronavirus; a move that’s expected to result in major financial setbacks for the league.  

As a result of these losses, many retail, hospitality and entertainment companies are turning to their insurance policies for protection, only to find that they don’t have the coverage they thought they did. 

“It is absolutely critical that companies closely review all policy language,” said attorney Selena Linde, a partner in the Insurance Recovery practice at Perkins Coie. Linde spoke during a recent webinar on what coverage options retail and hospitality employers have during the virus.  

“While certain insurance policies, like event cancellation and supply chain trade disruption policies, will likely cover coronavirus claims, it will be more difficult to establish coverage under your company’s traditional policies.”

Exposures Retail and Hospitality Companies Could Be Facing 

Trip cancellations, a decline in tourism, and countries begin to declare public emergencies.

“For the hospitality industry, tourist destinations traditionally visited by Chinese travelers have so far been hit the hardest and we are just seeing loss numbers showing up for Italy and other areas where quarantines have been put into effect and travelers are canceling plans,” Linde said. 

“Losses are expected to be significantly larger than SARs as the outbreak and the fear of illness spreads and flights and tours continue to be canceled.”

Hotel chains are already being hit with Wyndham closing 1,000 of its hotels in China and Hilton and Hyatt also experiencing closures, according to Linde. 

As more governments declare public emergencies or, in the case of Italy, shut down all shops and restaurants, losses will continue to pile up. 

Small businesses, such as bars and restaurants, are being tested as governments and health professionals recommend social distancing to slow the spread of the virus. 

On the supply chain side, mass hoarding of products like soap, toilet paper and cleaning supplies can make it difficult for businesses to stay open and maintain their cleanliness standards. 

In addition to the risks of the virus itself, retailers and those in the hospitality industry may also face lawsuits from guests, patrons and shareholders based on their response to the epidemic.  

Guests could bring lawsuits against hotels or retailers, for example, if they claim the company knew an employee was infected with coronavirus and didn’t properly alert its patrons or take appropriate precautions. “That’s going to be a big one,” said attorney Stephen Raptis, partner in the Insurance Litigation Practice Group at Hayes and Boone

These types of suits are already appearing. A couple is currently suing Princess Cruises for $1 million after they contracted the virus on a cruise. The claim the company’s approach to safety was insufficient and put them in danger.

Another type of suit companies could face is shareholder derivative lawsuits. If a company’s shareholder alleges that they mishandled the virus and as a result the stock dropped. 

“I think that companies whose stock prices are already suffering generally as a result of the decline in the stock market are likely to get shareholder derivative suits,” Raptis said.

Coverage Options

Property policies and business interruption coverages may cover some of the costs the retail and hospitality sectors are facing due to coronavirus.  

“Most companies will look to their business interruption policy,” Raptis said. “Most companies as a part of their property policy have business interruption and contingent business interruption coverage.”

The biggest obstacle companies will face when trying to activate their business interruption coverage will be whether or not coronavirus caused any direct physical loss to their business, Raptis said. 

“Let’s say you’re a hotel and you’ve had an individual who have known to have contracted COVID-19 on your premises, I think there’s going to be a pretty good case to make that those individuals being on your premises and contaminating them with the coronavirus is an actual, physical loss,” he said.

“There’s some pretty good case law in certain jurisdictions that basically say that when the property becomes unusable because of this type of event that it constitutes direct physical loss.”  

Another options is turning to endorsements within a policy that provide for communicable disease coverage.

“If you have that, it typically won’t require direct physical loss, it will only specify certain diseases,” Raptis said. 

Communicable disease coverage may help some in the retail and hospitality sectors navigate these potential losses, but it’s important to read the policy carefully. Some policies may specify that they only cover the actual presence of a disease, and not the suspected presence that is driving many to stay inside.  

Event Cancellation Policies: Where is Your Coverage?

Event cancellation is another area where the retail and hospitality industries could be hit. Hotels and event centers often make a lot of money hosting conferences and special events and local retailers benefit from the swell of consumers when an event comes to town.   

The cancellation of conferences and other events due to coronavirus could be covered under policies that cover the cancellation, abandonment, curtailment, postponement or relocation of the insured event.

Here’s how to tell which coverage area your event falls under:

Cancellation: Cancellation coverage is fairly straightforward. It takes place if an insured event is unable to be held at it’s scheduled date and time. Cancellations require that the event has not yet started and, in many cases, will not be held.

Abandonment: Abandonment coverage applies to events that started, but are unable to continue to unforeseen circumstances. Linde broke it down this way: “If you have to close the event, that’s your abandonment coverage.

Curtailment: Curtailment coverage applies to events that are able to move forward, but not at their original size, duration or scope. “If you… [reduced your event from 1,000] down to 500 individuals, or 700 individuals, that would be curtailment,” Linde said. 

Postponement: Like cancellation, postponement coverage is pretty straightforward. It takes place if an event is moved to a later date than the one it was originally scheduled for. 

Relocation: As coronavirus spreads globally, relocations will decrease, but they’re still an important area of coverage in some policies. They apply when an event is relocated to a different venue than the one where it was originally planned to be held.  

Some policies may have exclusions that prevent events from being covered due to communicable disease, but many don’t. Willis Towers Watson, which places event cancellation coverage for major events like the Grammy’s and the Kentucky Derby, does not exclude communicable disease in their standard event cancellation policy form, according to Linde.

“Nearly all of the event cancellation coverage placed by Willis in 2020 did not contain any exclusion for communicable disease,” she said during the webinar. “Event cancellation insurance is usually written on a broad all-risk form, similar to your property policy.”

Policies may also cover the failure of speakers to appear, a fact that Linde said can be critical gaining coverage for a cancelled event.

“This is also critical because… voluntary cancellation is usually not covered under any of these policies,” Linde said. “But if your speakers cancel that would be covered and then it’s no longer considered a voluntary cancellation.” 

While coronavirus will fade, Linde says it has shined a spotlight on some of the holes that large events have in their coverage. 

“The coronavirus will ultimately fade as we all know, just like SARS, the swine flu, Zika virus, etc.,” she said. “But it does generate a great deal of awareness about how large events should manage their financial exposure.” 

How to Get Through a Renewal

If the unexpected risks of COVID-19 weren’t difficult enough to manage on their own, some retail and hospitality companies have the additional challenge of navigating these risks during a renewal.

Linde recommended that those in the retailers and hospitality industry give their carriers notice of circumstances and potential claims that could arise relating to coronavirus. 

“Our recommendation is broad notice of circumstance for this event,” she said. “If you’ve got a notice of circumstance, if you can document anything in lines with the policy and if obviously you still have limits left in that policy, then it’s worth it.”

If you’re coming upon renewal and are realizing that your policies wouldn’t cover something like coronavirus, it’s also worth asking your broker to get a quote for communicable disease coverage. 

“You should check and you should absolutely look to see what the cost would be and consider it as we move forward in this global community,” Linde said. “Certain brokers, certain carriers offer much more robust coverage without exclusions unless there’s been an exact event.” &

Courtney DuChene is a freelance journalist based in Philadelphia. She can be reached at [email protected].

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