Businesses across Europe are discovering an expensive gap in their insurance coverage: extreme heat can devastate revenue without damaging a single piece of property.

Last summer’s European heatwaves caused an estimated €43 billion, or roughly $50 billion, in lost economic output, according to Moody’s. Yet insured payouts totaled only about €500 million — meaning barely more than 1% of the estimated economic losses were covered.

The reason lies in how traditional business-interruption insurance works.

Most policies are built around physical damage. A fire destroys a restaurant kitchen, a storm damages a roof or flooding forces a factory to close. The property damage triggers the business-interruption coverage that can reimburse lost income while the company recovers.

Extreme heat can hurt a business very differently.

Customers stay home. Outdoor tables sit empty. Construction crews work fewer hours. Factory workers become less productive. Cooling expenses rise. Trains slow down. Agricultural output falls.

The business may lose substantial money while its building remains completely intact.

And that can leave the owner with no traditional insurance claim at all.

The problem is becoming particularly visible in Italy.

In Padua, a northern Italian city known for its early-evening aperitivo culture, extreme temperatures have pushed customers indoors or caused them to arrive much later.

A survey of roughly 600 restaurants, bars and other hospitality businesses in Padua and the surrounding province found that more than 80% experienced sales declines of about 20% during the recent heatwave.

For a restaurant operating on thin margins, losing one-fifth of revenue can turn a profitable month into a losing one even though nothing inside the restaurant was physically damaged.

That distinction is becoming a much larger issue for insurers and businesses.

Only 28% of small and midsize European companies surveyed for the region’s insurance regulator had business-interruption protection attached to their property coverage. Just 17% carried non-damage business-interruption coverage, which can respond to disruptions even when property remains intact.

And even specialized policies may not automatically cover extreme temperatures.

Insurers traditionally find heat difficult to underwrite because there is no single obvious event comparable with a hurricane making landfall or a building catching fire. Heat can instead trigger several problems simultaneously — drought, wildfire, water shortages, lower worker productivity and reduced consumer activity.

Companies are already reporting the consequences.

Manufacturers can face higher cooling costs and slower production. Restaurants lose outdoor customers. Construction companies may need to shorten working hours. Farmers can lose crop yields. Transportation companies can encounter infrastructure restrictions.

The potential solution receiving more attention is parametric insurance.

Unlike a conventional policy that reimburses a company after investigators establish physical damage, parametric insurance can be structured around a predetermined trigger.

For example, a business could purchase coverage that automatically pays if temperatures remain above an agreed level for a specified number of days.

The thermometer effectively becomes the claims adjuster.

That could be particularly useful for hotels, restaurants, construction companies, farms and other businesses where revenue or productivity is closely tied to weather but physical property may remain undamaged.

The lesson for business owners extends well beyond Europe.

A company that carries business-interruption insurance should not automatically assume it is protected whenever weather interrupts business.

Owners need to understand what actually triggers the policy.

If coverage requires physical property damage, a week of extreme temperatures that empties a restaurant, slows a warehouse or forces employees to stop working could produce a major financial loss without producing an insurance payment.

That makes a previously obscure insurance question increasingly important:

What happens when the weather damages the business — but not the building?

For a growing number of companies, the answer today may be that the owner absorbs the loss.

JBizNews Desk | London

© JBizNews.com All Rights Reserved. Reproduction or distribution without written permission is prohibited.