Does your captive have a COVID-19-related claim?

The US has taken a substantial economic hit from the COVID-19 pandemic. Some, if not all, businesses have been affected in some way, whether it be loss of income, suspension of operations due to regulatory actions, or losses of key employees. Many captive owners suffering a loss will be quick to access capital from their captive—but should they?

Most captives have policies for work stoppage, business interruption, regulatory and legislative changes, and loss of key individuals. At first glance, a pandemic might appear to be a golden ticket for an owner to file claims under these coverages, but the devil is in the details of the policies.

Work stoppage
A work stoppage policy is intended to cover the economic loss to an insured because of a work stoppage in the insured’s business through no fault of the insured. Great! The insured did not cause the pandemic, so we are in the clear—except many businesses have not come to a full stop but have merely slowed down.

Restaurants are still providing takeout; retail stores are still providing online orders. Some sporting events are still taking place with no-one in the stands to watch. This is a typical exclusion on work stoppage policies and should be kept in mind before filing a claim.

Business interruption
A business interruption policy covers the loss from the reduction in net profits sustained because of the inability to use the insured’s premises. This must be the golden ticket that our policyholders need! There are often restrictions on these policies which specify the reason you are unable to use the premises including: weather, damage caused by impact, loss of utilities, or strike.

If you are lucky, there is an additional inclusion for government regulation or action. If you are fortunate to have this inclusion, you may be covered.

Regulatory and legislative changes
A regulatory and legislative change policy typically covers any change by a governmental body in any law, regulation or administrative rule related to operation of the insured that causes an economic loss. This could be the one!

I believe most policyholders will have an insured event if they have this policy. If businesses are now required to hire additional employees, buy masks, rent barriers to enforce social distancing, shut down, etc, a claim should be justifiable for this policy.

Loss of key individuals
Loss of key individuals policies cover bodily injury to key individuals resulting in their inability to perform the same type of work, voluntary termination and, obviously, death.

The SARS-CoV-2 virus is taking the world by storm and we probably all know someone affected by the virus. These policies may be accessible in the event a key individual is affected by the virus or voluntarily terminates because of their inability to continue coming to work.

Companies will have other situations not listed above. Reputational risk and lawsuit interruption are also at stake, which may come into play. I have read many articles criticising companies for their lacklustre response to the pandemic, thus damaging their reputation.

How many lawsuits can we expect as a result of a business violating administrative actions? I have observed countless businesses not implementing social distancing or requiring masks when there is a state-mandated order.

Captives owners should treat claims arising out of COVID-19 as they would any other claim and accept their customary adjudication processes. The next 12 months will be interesting as we observe how the captive insurance industry responds to the pandemic.

TJ Strickland is managing partner at Strickland Hardee. He can be contacted at:  tj@sh-pllc.com