Manufacturers: Mostly On Their Own to Face Coronavirus Insurance

March 23, 2020 by

Remote Work Not Much Help for Assembly Lines

Property/casualty insurance professionals are trying to provide advice and empathy to their manufacturing clients coping with the effects of the spread of the coronavirus.

But they are not able to offer much in the way of insurance coverage.

In many areas where manufacturers might be looking to recoup losses, P/C insurance just is not the answer.

In traditional claim scenarios, agents and brokers spend their time advising on how to process the insurance claim and how to mitigate losses. “But in this case, it’s uncharted territory. We’re talking about loss of income that’s not a typically covered insurance peril, so it’s not something you could have insured for previously,” says Luke Foley, a producer at Graham Co. based in Philadelphia.

The U.S. manufacturing sector began 2020 with hope. After five consecutive months of a contracting manufacturing economy, January 2020 showed signs of growth, according to the Institute for Supply Management, which reported a factory index of 50.9 in January, up from 47.8 in December. Readings above 50 indicate expansion, while those below 50 signal contraction.

But that hope faded when in February, the effects of the coronavirus began showing up – ISM’s factory index dropped to 50.1.

Property/casualty insurance professionals are watching closely, trying to determine the effects of the coronavirus on the economy overall and on manufacturing. And trying to help where they can, even though their capabilities to do so are limited.

“I don’t think anyone’s ever experienced anything like this, at least in my lifetime or in the last 50, 60 years,” says Graham’s Foley, who specializes in insurance and risk management programs for large privately-held manufacturing and distribution companies.

Foley says most of his manufacturing and distribution clients have enjoyed strong organic growth in recent years. “That’s a sign of a strong economy.”

But the “elephant in the room” – the coronavirus – has his clients on edge. Some already were affected early in the pandemic because of suppliers that operate in China.

A March survey by ISM on business and supply chain impacts – before widespread quarantines and business pullbacks — revealed that nearly 75% of companies already had supply chain disruptions due to coronavirus-related transportation restrictions, and more than 80% believe that their organization will experience some impact because of COVID-19. Of those, one in six (16%) companies report adjusting revenue targets downward an average of 5.6% due to the financial impact of the coronavirus.

“The story the data tells is that companies are faced with a lengthy recovery to normal operations in the wake of the virus outbreak,” said Thomas W. Derry, CEO of ISM. “For a majority of U.S. businesses, lead times have doubled, and that shortage is compounded by the shortage of air and ocean freight options to move product to the United States — even if they can get orders filled.”

Another survey by the National Association of Manufacturers in early March found that more than 53% of manufacturing firms anticipate a change in their operations in the coming months due to the coronavirus and more than 78% say that uncertainty around the outbreak is likely to have a negative financial impact on their businesses. More than one-third reported supply chain disruptions.

The climate for manufacturing clients has been “crazy,” Foley says. “There’s obviously been a change and some fear in clients on what’s to come.”

While many industries can have employees work from home, that’s not possible in manufacturing. “When you’re making things and producing in a manufacturing plant or in a warehouse, your product needs to get built,” he said. “You have to be there, so there’s been concerns over what’s going to happen in the next few weeks.”

Business Interruption

Foley says he’s been advising clients on best practices and ways to minimize business interruption. But there’s no great solution from an insurance standpoint.

“Really, it’s a gray area,” according to Foley. “It’s not like a tornado, or wildfires, that wipe out plants.”

Coverage could be available in seldom-bought supply chain disruption insurance. “Typically, those [policies] can include coverage for business interruption laws, and they may have, depending on the form, some coverage for a loss resulting from regulatory action or from government,” he said. “But it’s not a commonly purchased coverage.”

While past pandemics have disrupted supply chains for manufacturers, Foley believes the coronavirus is different. “There’s been nothing of this magnitude and most clients, if they had been given the option two years ago to purchase this coverage, it was very expensive and they probably didn’t see the value in it honestly.”

That may change going forward, he says. The insurance underwriting community is reactive. “They’re reactive in that they will develop insurance products post-incident,” he said. “So they’re going to either come out with a more widespread coverage that’s available so people can protect themselves from this risk in the future, or they’re going to, maybe conversely, make certain policies have more explicit exclusions as well.”

Foley says existing coverage will now be tested.

“There’s a realistic scenario that throughout this process there could be people who are trying to trigger coverage and say, ‘Well there’s no real exclusion for an infectious disease. So, I’m going to try to trigger this,'” he noted. “And you never know if there’s one insurance policy, depending on the jurisdiction, that somehow does provide some small limited coverage.”

If that happens, he predicts a market where carriers will try to protect themselves even further by putting additional exclusions going forward.

Coverage Unlikely

Chris Boggs, executive director of the Big “I’s” Virtual University, has been receiving calls and emails regarding the insurance implications of the coronavirus. The most common question he is getting is: “Is there business income coverage if a governmental authority (civil authority) requires businesses to close?”

The short answer is “no,” Boggs says. “Before business income responds, there must be damage to property leading to the cessation of a business.

This requirement applies to business income dependent property losses (supply chain) and civil authority losses covered by business income policies,” according to Boggs.

“Additionally, there is a specific property exclusion applicable to viruses that may (generally will) apply.” This is true for “standard” business income forms, he added. There may be some proprietary forms that respond, but these are rare, he said.

In response to the coronavirus, the Insurance Services Office (ISO) created two business income endorsements, but Boggs noted that neither endorsement is assigned a form number.

“Why? Because ISO did not file these endorsements on behalf of the industry. Rather, ISO made these advisory forms available for use by any member carrier,” Boggs explained. “Any carrier that desires to use either or both endorsements must file them with the relevant regulatory authority.”

Tony Hopkins, vice president of business insurance at The Horton Group based in Orland Park, Ill., added that while the new ISO endorsements could provide a small sublimit in coverage, he hasn’t seen any carriers endorse their policies as of yet or offer similar coverage. If they did, the trigger would mean that the government shut down their location or access to their location. “But we haven’t seen any carriers outwardly offering that kind of coverage.”

Hopkins, who specializes in manufacturing, welding supply and industrial gas distribution, agrees there is “no express coverage to handle the coronavirus,” he said. “From a business interruption standpoint, from a supply chain standpoint, from a dependent property business income standpoint … because it’s not a physical loss per se to the location.”

While there are many unknowns for his manufacturing clients, Hopkins says some have already started to feel the pain from an indirect standpoint and from a supply chain risk.

Hopkins believes there could be coverage in “a very unique aspect of the market” that not many clients purchase today. “And that’s through an enterprise risk captive,” he said. “Enterprise risk captives are essentially designed for risks that the market either won’t handle, can’t handle, or doesn’t handle at a price that makes any sense.”

But again, while coverage might be found through enterprise risk captives, it’s rare.

Workers’ Comp and Health

Workers’ compensation benefits might be available where an employee is found to have contracted the virus while at work, Hopkins said.

However, while workers’ comp coverage is a possibility, it’s not easy to prove, according to Boggs.

What makes an illness an “occupational illness” and thus compensable under workers’ compensation? “More specifically, how does or might workers’ compensation respond to the coronavirus?” Boggs wrote in a blog on Insurance Journal’s Academy of Insurance.

Two tests must be satisfied before any illness or disease, including the coronavirus, qualifies as occupational and thus compensable under workers’ compensation, Boggs explained.

‘First, the illness or disease must be occupational.’

First, the illness or disease must be “occupational,” meaning that it arose out of and was in the course and scope of the employment. And second, the illness or disease must arise out of or be caused by conditions “peculiar” to the work.

“Whether an illness arises out of and in the course and scope of employment is a function of the employee’s activities,” according to Boggs. “The simplest test toward determining whether an injury ‘arises out of and in the course and scope of employment’ is to ask: Was the employee benefiting the employer when exposed to the illness or disease?” Boggs asked. But he cautions that this “test” is also subject to the interpretations of various state laws.

“Qualifying as ‘occupational’ is the low hurdle,” Boggs said. “The higher hurdle is whether the illness or disease is ‘peculiar’ to the work.”

Other Coverage Trends

The coronavirus is not the only challenge facing manufacturers, of course.

The manufacturing sector continues to contend with a shortage of labor, which is having an effect on workers’ compensation.

“Many manufacturers are challenged with being able to find and attract the best talent. Some just need any talent at all,” Hopkins said.

He said the labor shortage is showing up in higher workers’ compensation claims “because they’re getting anyone ‘off the street’ and they lack experience.” Plus, like other industries, the manufacturing sector is also dealing with an aging workforce.

Heath J. Kidd, vice president, Industry Solutions Product and Underwriting, National Insurance, at Liberty Mutual, says manufacturers are facing one of the tightest labor markets ever. “Productivity is flat and supply and demand are a problem when it comes to skilled workers. Attracting the best worker is a competitive advantage,” he said.

Kidd believes attractive pay and benefits along with a good working environment are key. “Not surprisingly, the companies that pay well have workers who are less likely to get injured, and if they do get injured, they are back to work quicker,” he said.

Technology is also changing the manufacturing sector. With that comes new risks, Hopkins says. “With robots and co-bots evolving so quickly, many of the manufacturers and integrators of this equipment aren’t well-versed in safety,” Hopkins added. “We’re seeing our clients put in these machines quickly because they have a demand and just a lack of bodies to be able to produce the goods that are needed to meet on time delivery,” he said.

That process is upping the game for risk management to ensure proper safety controls are in place. “And so, we’re doing a lot of evaluation of this new equipment,” he said.

Property and excess liability insurance can be a difficult area for manufacturers.

While many classes of manufacturing are seeing the same types of rate increases as the general property market, there are certain classes that are experiencing rate increases north of 200% to 300%, according to Christa Nadler, executive vice president at Risk Placement Services’ Chicago office.

“Property rates have been depressed maybe 10-to-15 years, and a lot of the insurance companies that we work with were in a situation where they were paying out more losses than they were collecting and they were struggling to make money,” Nadler said. “That trend has been further exacerbated in manufacturing for some specific industries such as woodworking, food and recycling.”

In today’s market, brokers may have only 10-15 markets that will consider quoting those classes, Nadler explained, while for other manufacturing classes they might have an “arsenal of a hundred different markets” to go to for property.

But in general, for the “traditional manufacturer,” whether it be a metal or plastics maker, the insurance market hasn’t hardened as much as it has in other industry sectors, Hopkins said. “The exceptions are manufacturers that are running their own fleet of vehicles, where auto and umbrella have been significantly disrupted.”

However, Hopkins and others serving the manufacturing sector are waiting to see what the coronavirus pandemic does before it is over.