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Commercial property owners are finding that their insurance doesn't cover business interruptions caused by the pandemic.CHANSOM PANTIP/iStockPhoto / Getty Images

Insurance exists to cover some of the risk for commercial property owners, managers and tenants, yet most policy holders are finding that the insurance they do have does not cover them from damage caused by the COVID-19 pandemic.

Class-action lawsuits have been launched against insurers in Canada and abroad, mainly to seek business interruption payouts because of forced closings, which insurers maintain is not covered in most plans.

While observers wait for those cases to be resolved, those in the industry say that the sector has been operating in an increasingly difficult environment in the past several years. Those factors, more than COVID-19, are likely to affect insurance products and pricing available to commercial real estate companies, they say.

No coverage for COVID-19

“There’s really no coverage for COVID. Viruses, anything that’s non-property related, is very difficult to insure and is [generally] not covered by insurance,” says Neil Lacheur, principal and executive vice-president, real estate management services, Canada, for Toronto-based commercial real estate services firm Avison Young.

Even if insurers were to come up with pandemic products, pricing them would be difficult.

“Insurance works on the principle of looking back in time and determining what the frequency and severity of losses are and then projecting what they may be over the next 12 months when setting up what an insurance policy would be priced at. So, with respect to pandemics, specifically, there is no historical track record,” says Peter Kennedy, national director, real estate practice, for Aon Canada, a leading insurance broker.

The insurance industry started with fire coverage, Mr. Kennedy says, and physical damage is still the backbone of coverage.

“Back in the 1800s people would buy fire insurance. And then they added business interruption years later, and other things, like flood and hailstorm, windstorm and things like that.”

But for businesses closed by broad government mandates, interruption clauses generally do not apply. “So, the challenge you have with COVID-19 in many cases is when the government says to close down a city or region, there’s no physical damage suffered by premises, so the policy is not triggered,” he says.

What’s driving higher rates

While those in the commercial real estate industry agree that the pandemic is not a major driver of insurance concerns, the insurance market has been undergoing rapid change in the past couple of years, including rethinking products and boosting premiums.

A rise in catastrophic and other events has raised costs for the insurance industry, while a low interest-rate environment has reduced investment returns, says Jeffrey Charles, a managing director at Arthur J. Gallagher Canada Ltd., a risk management and insurance brokerage company.

“The accumulation of attritional losses is as bad as single cat events today,” he says, referring to events such as the recent Texas ice storm, which are not considered cat, or catastrophic, events, but add up to massive losses.

“It’s not a major windstorm, it’s not a flood, it’s not a forest fire, all of which would be categorized as a catastrophic event. … But it’s actually an accumulation of attritional losses. The Texas circumstance is going to be comprised of several hundreds, if not thousands, of individual losses that all accumulate up to a total number that is staggering.” The figures are about $20-billion in total loss, he adds. “And that’s something that is going to have an impact on property insurers and underwriters.”

This is happening globally, which also affects the Canadian insurance market. And the reinsurers, which are insurance companies that insure the risks of other insurance companies, are also affected, driving rates higher, Mr. Charles adds.

Along with low interest rates that affect returns on the investments insurers make with the premiums they collect, insurers are managing costs and returns “by changing their price or by changing the amount of insurance they’re willing to put on the street for any one risk,” Mr. Charles says. “And those two things are creating challenges for the real estate operator.”

In this climate, it is importance for real estate companies to re-evaluate not only their insurance policies, but also their relationships with their insurers, and the information about their assets available to their insurers, he adds.

Property risks

“The things that we worry about are fire, flood, water – water coming from the bottom, water coming from the top. Those are the fundamentals that we manage against [through capital improvement and ongoing maintenance] and fundamentally insure against,” Mr. Lacheur says.

The risk varies across building type and depends on where assets are located.

“Industrial buildings are pretty simple,” Mr. Lacheur says. “They have a roof and walls and some basic systems. The risk is if you have a 50-storey office building and you have a water event on the 50th floor, it’s potentially catastrophic in that it could impact easily 20 floors or more of tenant space. And each of those become insurable events.”

Each part of the country has got its own set of risks, Mr. Kennedy says. “Earthquake risk on the West Coast, a good chunk of British Columbia, is a much higher concern for people who have assets in that area, as is the Ottawa Valley and Quebec City corridor, which is a secondary earthquake zone. Flood risk is a challenge for people who have assets near major rivers, like Calgary and … the Saguenay River area. … Then you have hailstorm [and tornado] risks that are more prominent on the prairies, and wildfire risks are more prevalent where you are surrounded by forest. On the East Coast you have hurricane risks.”

Lessons from the pandemic

“The lesson to be learned [from COVID-19] is that everyone needs to be focused on all kinds of outcomes and probabilities of anything that can happen, and … determine what can we do to mitigate that risk. Either in a practical sense or on a risk-transfer basis, which is what essentially insurance is,” Mr. Kennedy says.

But, because it would be prohibitive to act on and insure every risk, it is important for companies to have a broader enterprise risk management plan, he adds.

“Risk is only increasing in importance and will continue [to do so] over the foreseeable future,” Mr. Kennedy says. “The world is just a riskier place, as we have seen, and that manifests itself in many cases to your insurance costs. And real estate is just as much if not more susceptible to all that because it’s broad-based across the country.”