The Indian Shopping Centre Industry is reeling under immense pressure as revenue streams have dried up and retail tenants are proposing various waiver/ rental models around license fees and CAM charges amid the coronavirus pandemic. This is expected to have a cascading effect on shopping centres as they will not be to able repay loans to banks, EMIs, interest on these EMIs, minimum electricity bills, property tax, municipal tax, water tax, salaries, and maintenance cost of the mall.
To add to their woes, the lockdown – resulting in zero footfalls and revenue – has unfavourably impacted the employment status and livelihoods of several people (direct and indirect – approximately 3,500-5,000 per shopping centre). The overall working capital cycle has been adversely impacted and business losses of shopping centres are mounting.
And to top it all, now shopping centres are being plagued by insurance woes. In India, under traditional business interruption insurance policies, physical damage to property is the only criteria to trigger business interruption loss, while pandemics and epidemics are specifically excluded. Insurance companies, therefore, are refusing to accept any claims arising out of shutdown.
Explaining this, Sudhir Gudal, Promoter and Chief Distribution Officer, Xperitus Insurance Brokers Pvt Ltd, says, “Mall and retail store owners generally take the Standard Fire and Special Perils Policy, also called as Fire Policy or Package Policy to insure their properties including; Building, Plant and Machineries, Furniture, Fixture and Fittings, Electrical Equipment- HVACs, Escalators, Elevators, Office Equipment and stocks. They also opt for Add on, Loss of Profit (L.O.P) or Loss of Rent (L.O.R) cover to protect revenue income losses.”
“The Fire Policy provides owners indemnity against any material damage loss (physical damage) to their insured property due to any of the 12 insured perils. The L.O.P or L.O.R policy, protects the insured’s consequential loss of revenue, after a material damage loss,” he adds.
Unfortunately for shopping centres, the loss of business opportunity and profits is not covered under various insurance / risk policies which they have bought in the past.
According to Sachin Dhanawade, Chief Operating Officer – Retail & Real Estate, Grauer & Weil (India) Limited, the business interruption insurance covers lost revenues and also the recurring costs of the business while its shut or out of commission in cases of a disaster. “In India, under traditional business interruption insurance policies, physical damage to property is the only criteria to trigger business interruption loss, while pandemics and epidemics are specifically excluded. Insurance companies, therefore, are refusing to accept any claims arising out of shutdown stating that exclusion of pandemics and closure due to this direction does not constitute physical loss or damage.”
Force Majeure Clause
The Government declared the pandemic as a Force Majeure event and therefore the mall and retail store licensees invoked the Force Majeure Clause under the lease agreements to avoid payment of rents. Thus, due to this extended lockdown, although there was no physical damage to their insured properties, the mall owners lost on rental collections and other revenues. The mall and retail store owners sought opinions from insurance and legal experts whether such losses could be covered by the fire policy. However, all the insurance companies opined that the loss was due to Government order compliance, which was an exclusion under the Fire Policy and the L.O.P cover did not pay out these claims because there was no material damage.
What is the Force Majeure Clause
Force majeure refers to a clause that is included in contracts to remove liability for natural and unavoidable catastrophes. There are dozens of circumstances or events that we class as examples of force majeure. War, riots, earthquakes, hurricanes, lightning, and explosions, for example, are force majeure events. The term also includes energy blackouts, unexpected legislation, lockouts, slowdowns, and strikes.
“There have been cases reported where stocks within the retail stores have been damaged by fungal development and dust settlement because the malls have been shut for such a long duration. The damage is due to increased humidity within the premises because the air conditioning was switched off and storekeepers failed to protect their stock by covering them appropriately. Again, these losses are not covered under the Fire Policy because in the said situation no insured peril has operated. Thus, shopping centres and retail industry’s revenue and other losses, as a result of COVID-19 lock down are not claimable under the Fire & L.O.P Policies,” states Gudal.
Contradicting this train of thought, Bipin Gurnani, Bipin Gurnani, CEO Prozone Intu Properties states, “If we look at it from the perspective of any government order, it was Force Majeure as we were forced to lockdown. The insurance companies must come up with some package for compensating people loss of profit or business disruption insurance.”
Types of Insurance Policies
Corporations usually take two types of insurance policies – Material Damage Policy and Business Interruption Policy.
– Material Damage Policy is triggered if there is loss of property due to fire or flood or machine breakdown.
– Business Interruption, on the other hand, only comes into force if loss of profit has happened due to the clauses mentioned under the material damages policy.
Insurers said these claims are not admissible, as loss of profit has not taken place due to any of the above reasons.
3X Increase in Premium Rates for Shopping Centres
Recently, mall owners have also requested a roll back of the recent hike in the insurance premium rates by the General Insurance Corporation of India NSE 4.01 percent (GIC) along with The Fire, Lightning, Explosion and Aircraft (FLEXA) insurance premium rates for shopping malls with multiplex theatres which were raised over 3 times for FY 2020-21.
“We believe such a humongous increase in the insurance premium rates, and the effects of this pandemic is going to have an adverse effect on the industry. Given the likely dual adverse impact of changed business environment and higher costs, we are seeking IRDAI and government’s intervention to help the industry tide through this,” states Dhanawade.
According to Gurnani, the biggest challenge that shopping centre developers and owners are facing in terms of insurance is that the coverage has to be continued without any conditions.
“At the end of the day, this lockdown has been brought upon us by the government. The insurance companies have excluded pandemic/ epidemic part in the policy and they are not recognising this as an act of god or a false bearing which means from insurance point of view if something happens in our premises like burglary, fire or any damage, they can reject the claim. Apart from this, the insurance companies and IRDA must look at having some provision because a lot of businesses have lost money during this phase,” he adds.
Resonating the same thoughts, Shibu Philips, Business Head, Lulu Malls, says, “Shopping Centres are capital intensive projects and there is a huge cost involved to run these centres – whether operating fully or partially. Thanks to the pandemic, the cost of operating has further increased while ensuring a safe and secure environment while the income remains close to zero. Unfortunately, our incomes are not covered by any insurance because of the fact that insurance policies do not cover any pandemic related loss.”
Shopping Centres Association of India (SCAI) has represented its member shopping centres to various governing bodies seeking clemency for Shopping Centre industry due to pandemic COVID-19 as declared by the Government of India. These bodies include:
– Minister of Finance and Ministry of Corporate Affairs
– General Insurance Council of India (GIC), Mumbai Regional Office
– Insurance Regulatory & Development Authority of India (IRDAI)
Letter from SCAI
In a letter to both finance ministry and IRDA, the Shopping Centers Association of India (SCAI), has sought insurance companies to reimburse actual recurring expenses incurred by mall owners one quarter after the normalcy under the said insurance cover.
“The negative impact on cash flows in these times of global economic slowdown, coupled with the rippling effect of this pandemic, without acceptance of the insurance claims and compensation from the insurance companies or government support on the losses, it will push us back on the growth achieved in the last 5 years,” said Amitabh Taneja, Chairman, SCAI.
“Considering the gravity of the present situation, IRDAI has vide their notification number IRDAI/HLT/REG/CIR/054/03/2020 dated March 04, 2020 rolled out guidelines on handling of claims reported for Coronavirus disease treatment. It has been clarified that admissible medical expenses during the treatment for COVID-19 including the treatment during quarantine period, shall be settled in accordance to the applicable terms and conditions of the policy contract and the extant regulatory framework,” Dhanawade explains.
“In view of the above, in order to sustain the Shopping Centres and the employment of individuals during these unprecedented and testing times, it is been requested to include/ allow COVID-19 pandemic as a ground for invoking Business Interruption Cover and thereby helping shopping centres to sail through this challenging phase. Implementation of this measure can immensely support the Shopping Centres, which are already stressed due to the prevailing financial conditions, in mitigating the effects of this unforeseen and presently untreatable pandemic,” he adds.
Speaking on the same lines, Abhishek Bansal, Executive Director, Pacific India, says, “Insurance companies will also have to come out with such policies that cover these situations. Enough events happening across the world which have been treated like act of God. Government should cover malls, transport and hotels in one category. Government should also come with a solution or a policy which is covers the loss which these industries are bearing on day to day basis and in future till the vaccination is done in the country. Getting a vaccine is not the solution until it gets to everyone. Till then a special cover should be created.”
“We would urge the government and the insurance companies to create a pandemic pool, so that in future, if it does not cover our entire business loss during the period of closure, at least it can cover the basic cost and save the shopping centres from incurring huge losses,” adds Philips.
“As far as government is concerned government should return some off the taxes we pay. That would be a very progressive way to go ahead and help the shopping centres and insurance companies should come up with a policy which covers pandemic,” concludes Sanjeev Mehra, Vice President, Quest Properties India Ltd.