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 government and its regulator have taken a very close interest in coverage concerns. The Treasury Select Committee wrote to the Association of British Insurers in March 2020 and the industry’s regulator, the Financial Conduct Authority, has now taken up the baton. The FCA is bringing a test case to Court in July asking for a determination of liability on a selection of typical business interruption policies. The insurers in Court will be Hiscox, QBE, Royal Sun Alliance, Amlin and others. Insurers will say they do not cover pandemics and do not charge premiums commensurate with that exposure, but the Court will interpret the insurance contracts and decide what was actually underwritten. It seems likely that some of these policies will be required to pay out. Following the Court’s assessment of policy liability there will still be a phase of loss adjustment and insureds will need to show that losses were caused by coronavirus and within policy terms, but it is hoped that some monies will flow into the economy from insurers following the FCA’s very unusual but welcome intervention.
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. If insurers do not agree to indemnify now they might change their view by August when the FCA’s court action should be complete. We can assist with policy liability questions, as well as collating losses in the quantum assessment phase that hopefully will follow.
We are monitoring developments with interest.