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.
