Market need drives development of threat-related business interruption coverage

In today’s volatile world, every business leader knows that an organization need not suffer physical damage to experience a hit to revenue. Merely the threat of violence to a business or its neighbors could cause financial consequences due to a forced shutdown, even for just a few hours. However, many business interruption insurance policies available on the market trigger only when a business sustains physical damage.

Hiscox, the Bermuda-based specialist insurer, saw a growing market need for coverage for malicious threats, according to Jennifer Rubin, Hiscox Global Practice Group Head for War, Terrorism & Political Violence. Increasing broker queries prompted the insurer to develop a “unique” response to a risk previously “thought to be uninsurable,” she explained.

“It doesn’t have to be your own business that is targeted by the threat,” Rubin told Advisen, citing schools or organizations affected by bomb threats, or businesses shuttered after the Paris attacks of Nov. 13, 2015, that held much of the city in a grip of fear.

“We’ll eliminate the physical damage trigger,” she added.

Businesses that rely upon foot traffic for their revenue would be most affected by a call from military or civil authorities to close down, according to Rubin. She highlighted retailers, restaurants, casinos, and hotels as the primary sectors likely to experience business interruption due to political violence, active shooters, or other malicious threats.

Hiscox launched coverage for threats of malicious acts as a companion piece to its standalone terrorism products. Rubin said that while terrorism policies can be more expensive in bigger, high-profile cities, the underwriting process for the coverage for malicious threats places less of an emphasis on geography, given that recent events have shown that, unfortunately, threats of violence that halt schools, businesses, and communities in their tracks can occur anywhere. Just last week, bomb threats caused the evacuation of several Bergen County, N.J., schools, two San Gabriel Valley, Calif., banks, and a Durham, N.C., hotel.

“We do take into consideration where they are to a certain extent,” Rubin said, citing Las Vegas as a highly concentrated business district that could be a threat target. “We look at what’s around the business. If they’re next door to a clinic that’s performing abortions and there are protesters that could block entrance, that’s a consideration.”

Hiscox opted to develop its coverage to respond to incidents where businesses must close or have been directed to “stay inside” for at least two hours up to a maximum of 10 days. The underwriting process begins with benchmarking clients’ weekly, daily, and hourly business revenue estimates. Hiscox will pay out $5 million per occurrence.

“We want to make the agreed hourly revenue figure part of the contract so there’s no back-and-forth following an occurrence,” said Rubin. “The product is designed to make the claims process straightforward.”

Given the “moral hazard” that exists with the product, claimants would be required to submit a police report or verification from authorities that the business shutdown was either directed or the appropriate course of action.

Reputational risk continues to be a less quantifiable risk, as businesses and insurers cannot readily assign a dollar amount to lost business due to public perception about safety of any given location. Rubin noted that organizations can instead learn to “harden” their businesses against threats with the assistance of risk control services and public relations firms.

Market response in North America has been promising, according to Rubin.

“We’re getting a lot of inquiries on it, that’s for sure,” she said.