One way a company can alleviate risk is through insurance. For
example, many companies have business interruption insurance (BII),
which is a rider that pays the business owner if an event such as a fire
or natural disaster makes it impossible to continue operations. If this
happens, BII will pay the owner for lost revenue, an opportunity cost.
Even though many businesses carry this rider, pandemics are excluded.
For the insurance company, a fire affects few businesses at a time, and
the losses are geograhically widespread and somewhat predictable for a
large number of insured companies. With a pandemic, business
interruptions are concentrated and much more numerous, as we have
recently seen. Paying the large number of claims in this situation would
bankrupt many insurance companies.
Recently, three major insurers have proposed
that the Federal government create a plan to allow businesses to
purchase BII that covers pandemic shutdowns. The proposed program would
be modeled after the Terrorism Risk Insurance Act, which was enacted
after 9/11. A similar program for individuals, which covers flood
damage, is available to homeowners. On a personal finance side, we
should make sure that you are aware that your homeowners policy will not
cover flood damage. A separate policy, offered by the National Flood Insurance Program, must be purchased to cover this type of damage.
