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What COVID-19 Risks Will My Captive Cover?

We at Atlas have received a number of questions from clients about what coverage their captive might provide for the exposure from COVID-19. While standard insurance policies may provide some coverage, clients will probably find that they contain significant limitations and exclusions. A captive program, as a complement to a standard insurance program, may provide coverage for certain COVID-19 related risks, depending on the coverage triggers and coverage definitions and exclusions for each coverage form.

Some of the coverages many clients will find in their captive program include: Work Stoppage, Contingent Business Interruption, Legislative or Regulatory Change, and Loss of Key Customer and Loss of Key Supplier. Following is a brief coverage overview.

Work Stoppage – Intended to provide coverage for an interruption of normal business operations because you and your employees are not able to have access to your work premises or jobsites. It does not cover direct physical damage to insured property (which is normally covered by standard business interruption insurance) but covers interruption from other risks and exposures, such as illness including epidemic or pandemic. Probable situations that could trigger coverage would be shutting down because employees are sick or not being able to access a work premises or jobsite because of actions of civil authority.

Contingent Business Interruption – Intended to provide coverage when there is a disruption to the operations of an entity you are dependent upon for your normal operations. Most often it involves supply chain interruption but could extend to a number of service providers whose services are critical to your continued operations. Coverage could be triggered when circumstances resulting from COVID-19 prevent a supplier or service provider from getting the insured what they need to carry on normal operations.

Legislative or Regulatory Change – Intended to provide coverage for a disruption to business operations caused by a change in federal, state or local laws or regulations. It was anticipated that the change would be intended to be permanent rather than temporary and that the change would cause a limitation or adverse effect to normal operations. Potentially, the federal, state or local government could make a change to laws or regulations based on COVID-19 that affects the insured’s operations that is not just a temporary decree within the authority of a particular office. In that case, coverage under this coverage form could be triggered.

Loss of Key Customer or Loss of Key Supplier – Intended to provide coverage for loss of income from the permanent loss of a key customer or key supplier due to bankruptcy, insolvency, management change, or discontinuation of a product line or service. Unfortunately, the COVID-19 outbreak could force some companies to go out of business. The cause of the bankruptcy or insolvency is not a condition of coverage, so coverage could be provided for a key customer or key supplier going out of business because of COVID-19.

It should be emphasized that whether a loss is covered by insurance or not will depend on the specific circumstances of that loss and on the precise language of the policy under which the claim is made. This is as true of a claim submitted to a captive insurance company as it is of a claim submitted to a commercial insurer.

We at Atlas are here to assist our clients in this crisis and help them determine how their captive might be able to respond to the risks and exposures resulting from COVID-19. We have little doubt that many clients will want to examine how their captive might protect them from the effects of future epidemics and pandemics. As the COVID-19 outbreak teaches us all more about what those effects are likely to be, we at Atlas will be striving to develop solutions to help our clients protect their businesses.

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