German insurers say BI losses from gas shortages not covered

The German insurance association (GDV) has announced government-ordered emergency gas rationing because of shortages caused by the war in Ukraine would not be covered by business interruption (BI) policy wordings. The GDV advised German companies to start taking precautions now to mitigate this very real risk as supplies from Russia begin to run out. It said companies need to start saving energy and seek alternative sources in preparation for potential restrictions. As with Covid-19, German companies’ BI policies would not respond should the government ration gas use because no physical event sparked the interruption and government actions are excluded, according to the GDV and its panel of experts. “Europe faces the difficult task of possibly having to ration gas. This could lead to business interruptions in the industry. However, there is no insurance cover in this case,” the association warned. “This interpretation is confirmed by a current report commissioned by the GDV. The experts came to the conclusion that calling out the emergency level is a ‘scheduled shutdown’ and the corresponding risk exclusion in the model clauses applies. Even if the existence of property damage is not specifically agreed in a clause – which can be the case with older policies – the risk exclusion ‘scheduled shutdown’ ultimately applies, according to the assessment of the experts,” the association said. “If push comes to shove, Europe faces a gas distribution battle in winter. In connection with the war in Ukraine and the subsequent sanctions imposed by the West, Russian President Vladimir Putin is using gas supplies to build up counter-pressure. The EU is preparing for a possible delivery stop and has presented an emergency plan: It calls on the member countries to save energy – if necessary with coercive measures,” explained the association. “The EU countries are also preparing for an emergency – including Germany. The Federal Ministry of Economics had already announced the first stage of the gas emergency plan at the end of March, followed by stage two in June. It comes into effect when there is a gas supply disruption or exceptionally high demand for gas, leading to a ‘significant deterioration in the gas supply situation’,” the GDV said. The third and final level is the emergency level. At this point the state intervenes and additionally prescribes “non-market-based measures” to ensure gas supply is maintained in Germany as far as possible. “This means that gas is being rationed and everyone is affected by this: local authorities, private households, housing associations and companies. It is still unclear whether certain groups will be prioritised. The head of the Federal Network Agency, which has to enforce the measures, has already indicated that there could also be shutdowns in industry,” explained the GDV. The insurance association urged German industry to act now to mitigate this risk. “Companies need to adjust to this scenario – and take precautions. Save energy and – if possible – switch to alternative energy sources. Otherwise, there is a risk of losses in production: assembly lines could come to a standstill, melting furnaces could cool down, chemical plants go silent, machines could neither punch nor roll. Even companies that do not need gas could be indirectly affected by production losses at suppliers,” stated the GDV. And German companies should not assume this BI loss will be covered. “Such production losses are not insured. Business interruptions can be insured separately. Compensation always presupposes material damage. This means: if production comes to a standstill due to a fire in a factory, the resulting damage is covered by business interruption insurance. However, there are no production losses due to state-ordered and planned rationing of raw materials,” it explained. The association added that credit ratings agency Fitch came to the same conclusion in a recent analysis. “The insurance sector would… not be affected by business interruption losses resulting from a stop in Russian gas deliveries to Europe. The so-called business interruption policies only covered losses resulting from physical damage to business premises or production facilities. The companies’ chances of claims from political risk insurance are also low,” Fitch said. The GDV also took the opportunity to defend the concept of exclusions, which has come under fire recently as customers largely failed in efforts to call on their BI policies to cover Covid-19 related losses. The European insurance sector is currently trying to persuade the European Insurance and Occupational Pensions Authority (EIOPA) of the validity of exclusions as part of the supervisory body’s recently launched review. “Such exclusion clauses are important for insurers to protect themselves against many simultaneous claims that would overwhelm them. This is always the case with so-called accumulation risks. This refers to dangers that can cause a great deal of damage in a relatively short time, such as a war, a pandemic or an interruption in the electricity or gas supply that was planned months in advance. Because if many companies claim damages at the same time, the principle of risk diversification no longer works. Insurance is designed to cover unforeseen random events,” it said.

German insurers say BI losses from gas shortages not covered

GDV defends concept of exclusions

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