If you purchased business interruption cover (BI), you might have insurance to pay losses while you cannot trade. You will need to have one or two of the most common BI extension clauses and cover will depend very much on the wording of that clause. Insurers will not be expecting to cover losses due to a pandemic but, if the wording is not drafted carefully enough, they may find they are liable to indemnify. There are also questions being asked by government which might encourage insurers in a certain direction. We explain below.
Standard BI covers a business for loss of income during periods when they cannot carry out business as usual due to physical damage: typically damage to the premises caused by a storm, fire or flooding. The insurance might compensate the business for any increased running costs and/or shortfall in profits for a set period and financial limit.
Some policies have extensions that might apply to Coronavirus losses, for which additional premium will have been paid. There are two main clauses likely to respond.
BI as a result of specific illnesses
Most extensions cover specific diseases, listed in the cover. These are diseases that are well known and understood. Covid-19 will not be named though and this is likely to lead insurers to deny claims. Insureds will feel aggrieved by that when they specifically bought cover for this type of circumstance. The argument will be that the clause was intended to cover disease closure and the clause could not have named a disease that did not exist.
Some disease extensions are more general and do not specify certain diseases. In these cases, business interruption cover for Covid-19 is more likely to apply. Usually Covid-19 must have been present at the premises or within a short radius. This is because business interruption is supposed to cover the short period while premises are shut down for a deep clean. Insurers will not have been expecting to pay for a long term shut down due to a global pandemic, but each clause is different and you should check your wording.
Given the limitations on these clauses, due to Covid-19 being new and the need for illness on the premises, the government is asking questions of insurers (see below).
BI for non-damage denial of access
Another relevant extension is cover for losses as a result of people not being able to access the business due to a specific circumstance such as the police cordoning off an area because of terrorism, fire, or the risk of a collapsing building. The clause might cover inability to trade due to a government restriction – this is exactly what has happened now with schools, bars, restaurants and similar venues being directed by the government to close. These clauses might cover loss, again depending on the wording.
Unoccupied premises; do you need to notify your insurer?
Another issue arising out of businesses being temporarily closed is the need to let your insurer know if the insured premises are unoccupied.
There may be a clause in your property insurance that requires the premises to be occupied. The Association of British Insurers (ABI) has suggested that insurers will be more flexible over the requirements around these types of clause under current circumstances, but you should consult your broker/insurer if you are in any doubt. The premises will still need to be insured against risks such as fire, theft and vandalism and all sensible risk management precautions need to be taken and policy conditions complied with.
The FCA’s view
The FCA has reacted to Coronavirus by focusing on the operational resilience of financial services providers, making sure they continue to function, service customers and treat them fairly.
They have also provided some guidance to insurance companies on policies and on 1 May announced they will be bringing claims against certain insurers to determine whether the policy should pay out. They have warned of the particular need to treat customers fairly when renewing and making mid-term adjustments, notably to exclude Covid-19 from travel policies or medical insurance. One area that they will need to monitor is the solvency of insurance companies amid some concern that travel claims and cancellation losses could test even the largest insurers at a time when their invested assets have fallen in value so sharply.
Government response on BI
The government has asked the insurance industry certain questions. Mel Stride, the Chair of the Treasury Select Committee, wrote to the ABI on 25 March asking for data and information on the industry’s response to Coronavirus.
Alongside requests relating to cancellations and amendments to insurance coverage, and of particular interest to BI cover, he asked:
- Can you provide an estimate of the amount of money, in aggregate, your firms expect to pay out for business disruption in the face of the coronavirus?
- Can you provide details of the approach that your members are taking regarding the provision of cover for the costs to business relating to Covid-19 and where there may be some flexibility shown in respect of this element of potential cover?
The Select Committee received the following reply from the ABI: “It is important to note that no insurance market in the world provides widespread insurance coverage for pandemics and the UK is no exception. For such cover to be available at affordable prices for businesses would require a very significant subsidy from the State given the scale of business disruption we have seen with the COVID-19 pandemic. Only a very small minority of businesses will have chosen to buy any form of cover that includes local closure due to an infectious disease. An even smaller number will have cover enabling them to potentially claim on their insurance for the presence or impact of the Coronavirus pandemic.”
Where are we?
If you purchased business interruption cover (BI), you might have insurance to pay losses while you cannot trade. You will need to have one or two of the most common BI extension clauses covering closure due to infectious disease or denial of access to business premises. Cover will depend very much on the wording of the clause. Insurers will say they do not cover pandemics and do not charge premiums commensurate with that exposure. They might also say that it is for government to bail out businesses, for example, by the furlough scheme because this pandemic is so widespread and unexpected that it falls outside what private insurance ought, as a matter of policy, to cover. Insureds will say that they were paying extra premium to extend cover to deal with precisely this sort of risk. Just because this infectious disease was not known, that should not exclude them from cover. Government, via the financial regulator the FCA, has taken a close interest in insurers’ position. There is also the Financial Ombudsman Service for small businesses which can order insurers to pay. Both routes are alternatives to Court or arbitration.
We are monitoring developments with interest.