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Firms want insurance companies to pay “loss of profit” due to COVID-19

Quite a few companies are eyeing claims under what is known as the “loss of profit” clause in their insurance contracts. This typically covers losses due to factory shutdowns when unforeseen circumstances such as fire or accidents occur.

, ET Bureau|
Last Updated: Mar 27, 2020, 08.55 PM IST
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MUMBAI: Insurers and top companies are likely in for a tussle regarding claims arising out of the Covid-19 outbreak. Quite a few companies are eyeing claims under what is known as the “loss of profit” clause in their insurance contracts. This typically covers losses due to factory shutdowns when unforeseen circumstances such as fire or accidents occur. They have already reached out to insurers seeking clarity about such claims, people in the know said.

Corporations usually take two types of insurance policies -- material damage policy and business interruption policy.

Material damage policy is triggered if there is loss of property due to fire or flood or machine breakdown.

Business interruption, on the other hand, only comes into force if loss of profit has happened due to the clauses mentioned under the material damages policy.

Insurers said these claims are not admissible, as loss of profit has not taken place due to any of the above reasons.

“The losses incurred are due to Covid-19 (pandemic) and not because of the insured perils mentioned under the insurance contract, as a result no claim is admissible,” said C R Mohan, Senior VP of Bajaj Allianz General Insurance.

Many companies had taken insurance policies to cover loss arising due to certain unforeseen circumstances, and “the question now is whether Coronavirus is covered by such policies,” said Abizer Diwanji, National Leader, Financial Services at EY India. “This is going to be a tricky issue and it would lead to litigation in several cases,” he said.

Most insurers will also fall back on the Force Majeure, or “Act of God” clause, experts said.

“The question, whether loss of profit due to Covid-19 is Force Majeure, will require looking into the fine print of the insurance arrangements,” said Sanjeev Krishan, partner and leader - deals, PwC India.

There could be carve-outs for situations like the Covid-19 pandemic as its impact will always be hard to assess, he added.

Industry trackers said top corporates have already reached out to insurers, looking to make a claim. This could also lead to litigation in the coming months. Most companies are asking insurers to give clarity on this as soon as possible as it will impact their financial statements.

“Most listed companies will need this clarity by June as they need to specify this in their annual results. If they are certain that their losses would be covered by insurance, they will have to account it as receivables,” the audit head of a large audit firm said.

ICICI Lombard, India’s largest private general insurer, confirmed to ET that it had received queries from a few firms on the ‘loss of profit’ claims.

It, however, added that these clients have not paid additional premium to cover epidemics.

“Relationship managers are fronting these explanations to our clients,” Sanjay Dutta, chief - underwriting, claims and reinsurance at ICICI Lombard said.

“Whenever detailed discussions are required, our underwriters are engaging with clients over call to answer their queries. We have not received any intimation of any material damages arising out of the pandemic,” he said.

(Catch all the Business News, Breaking News Events and Latest News Updates on The Economic Times.)

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