Businesses which have been paying out premiums for business interruption (BI) insurance may expect to recover the revenue they have lost as a result of restrictions imposed to combat COVID-19 under their policies. After all, their business has been interrupted due to events entirely outside of their control. Some businesses, particularly in the hospitality and leisure sector, expect to be unable to survive without this insurance lifeline, even with the support measures put in place by the Government.
However, whether an insurer will extend cover under a BI policy for COVID-19-related claims is not clear cut and will depend on the detailed policy terms. In its capacity as a UK financial regulator, the Financial Conduct Authority (FCA) has been clear that under most BI policies it would not expect COVID-19-related losses to be an insured risk. Its press release states that “in the majority of cases, business interruption insurance was not purchased to, and is unlikely to, cover the current emergency.” However, the FCA has also acknowledged that in a small number of cases, COVID-19 claims would be covered and that in this instance it expects insurers to assess and pay out on claims swiftly.
Even those businesses with policies which, on a plain English interpretation, would appear to cover COVID-19 related claims, may face an uphill struggle with their insurers, despite the FCA’s stance. Hiscox, for example, will not pay out for COVID-19 related claims despite the wording of its policy indicating such claims could be covered. It says that “like terrorism and flood risks, which have Government-backed schemes, these types of events are simply too large and too systemic for private insurers to underwrite.”
So, where should you look for BI cover and what types of clauses are likely to affect the outcome of a claim for COVID-19-related losses?
What is BI insurance?
BI insurance provides cover against the risk of loss to a business as a result of an inability to trade (or to trade in the usual way) due to an insured event. It is often connected with property insurance or sold as part of a commercial combined policy, that is, one which provides cover for multiple liabilities such as public liability, employer’s liability and personal accident.
BI insurance is designed to cover a business’ loss of profit when it suffers an event (such as a fire at its premises). Some policies go further by including, for example, lost business due to a contagious or “notifiable” disease. However, the terms of each policy will differ.
There has been plenty of contention and confusion in recent weeks over whether the lockdown and social distancing measures count as an interruption to business and whether COVID-19 counts as a “notifiable” disease. Policyholders, perhaps reasonably, expect their insurers to meet claims for lost revenue due to restriction-related interruptions; many insurers, however, have taken a different view.
Industry response
Some businesses believe their insurers have been less than transparent or proactive in addressing how COVID-19-related claims will be dealt with under their BI policies. Anecdotally, it also appears that some brokers are playing gatekeeper to the insurer with claims being rejected at the broker stage rather than being passed through to the insurer.
Insurers, on the other hand, face claims estimated at in excess of £1.2bn and say they are dealing with claims quickly amid huge disruption to their own industry. However, the approach of some has been the subject of significant scrutiny and criticism, leading to action groups being formed not just against Hiscox but a number of other big-name insurers.
What to look out for
Standard BI policy wording is unlikely to cover instances where losses are caused by an infectious disease or by actions taken to combat it. However, many policies include “extensions” that widen the scope of the events that trigger BI cover. Three key extension clauses to look out for in relation to possible COVID-19 related claims on the policy are:
- “Specified” or “notifiable disease”;
- “Non-damage denial of access”; and
- “Loss of attraction”
1. Notifiable disease
A notifiable disease is one that medical professionals are required by law to report to the Government because its occurrence is potentially dangerous to human or animal health. On 5 March 2020, COVID-19 was added to the list of notifiable diseases while SARS-CoV-2 was added to the list of notifiable causative agents.
Some BI policies provide cover for business interruption caused as a result of a contagious diseases occurring, often by way of a specific extension for which an additional premium is charged. In some policies, whether cover is extended will depend on the disease being designated a certain level of seriousness (such as designation as a national event: in this instance, COVID-19 could therefore trigger such cover); in other policies, cover depends on the occurrence of a named disease (these types of policies are unlikely to cover COVID-19 given the disease itself did not exist before November 2019, although a different approach could be taken for those policies which include cover for mutant variations of existing diseases, such as SARS); and, in others, cover may extend to a notifiable disease occurring within a certain radius of the business’ premises.
In this last instance, in deciding whether or not it is required to extend cover, the insurer is likely to consider the following issues:
- Is there anything in the wording which restricts cover to circumstances where there is a single instance of a notifiable disease within the specified radius of the insured premises?
- Is it required to extend cover available when the loss of profits is caused by multiple occurrences of a notifiable disease within the specified radius of the premises?
- Is cover only available where the occurrence of a notifiable disease is limited only to areas within the specified radius of the premises?
- Is it required to extend cover if there are occurrences of notifiable diseases not only within the specified radius, but also similar occurrences outside of that radius?
- Is it required to extend cover for all losses incurred as a result of a combination of cases within and outside of the specified radius and, in the current circumstances, how would such losses be distinguished?
Answers will be provided by reviewing the construction of the wording of the policy. In many instances, insurers’ primary argument will be that cover was not intended to insure for losses caused by a pandemic.
2. Non-damage denial of access
Some policies provide cover when access to business premises is hindered or prevented by something other than physical damage to those premises. The policy will typically set out which events causing the prevention of access will trigger cover. For example, the policy will include a term that cover is provided where access to premises is prevented on the order or advice of the Government or other statutory body. Such policies, minus any additional exclusions, would be expected to provide cover for lost revenue caused as a direct result of the COVID-19 restrictions imposed by the Government.
3. Loss of attraction
A loss of attraction clause is intended to provide cover when specified events have a negative impact on revenue, typically where the event causes a fall in the number of customers or potential customers visiting the business.
The FCA has recognised that the types of clauses outlined above could lead to disputes between insurers and businesses as to whether COVID-19-related claims are covered under their BI policies. It will shortly be issuing High Court proceedings for a declaration on the interpretation of certain commonly occurring terms which are likely to be the most frequent areas of dispute. The proceedings will be dealt with on an urgent basis to ensure court guidance is available swiftly to insurers and businesses as to the application of common policy clauses to the current crisis.
Calculation of loss
Even when a BI policy does extend cover for losses caused as a result of COVID-19, another challenge for businesses is how the insurer approaches its calculation to what the business has lost. It is anticipated that insurers will take a much more restrictive view of losses which have been caused by the pandemic than that taken by the insured.
Policies will usually contain detailed provisions for calculating the quantum of losses caused by business interruptions. It remains to be seen how insurers will operate these provisions in the current context and the weight they ascribe to, for example, decisions which were taken by the insured as a result of the crisis which had an impact on the losses that business sustained. Insurers will also no doubt look at the decisions which a business did not take in response to COVID-19 which could have limited its losses.
As with any instance which requires the interpretation of contractual provisions, the approach taken is likely to be fact-specific and dependent on the nature and type of the business the BI policy covers.
Commentary
Initial indications are that, even where BI policies are in place, in most cases it is expected that the specific policy wording will exclude what could have been a lifeline of cover helping a business to survive. However, there is by no means a blanket rule which applies here and each policy will include its own specific wording which will need to be closely reviewed to determine if payout should be made under it for a COVID-19-related claim.
Given the stance already taken by some insurers, we may be seeing COVID-19-related disputes under BI policies for a number of years to come. The FCA’s court proceedings are being issued in the public interest to ensure swift guidance is available on the interpretation of common policy provisions to the current crisis. However, it still seems inevitable that further disputes will arise.
In the short-term, any business considering making a claim under its BI policy should take the following steps:
- Check your policy’s requirements for how to notify your insurer of a potential claim
- Act swiftly to provide the insurer with notice of the claim
- Keep detailed and up-to-date records of the losses which you have incurred
If you have already notified your insurer (or broker) of a claim under your BI policy but this has been declined (particularly at broker stage), it is important to take urgent advice on your specific policy terms and whether there are areas to challenge your insurers’ initial decision to refuse cover.
Please note: Nothing in this article constitutes legal advice and we are not liable for any reliance on the information provided. This is a rapidly changing subject, and whilst correct at the time of writing, circumstances may have changed since publication.
To find out more about anything covered in the article, or to discuss the potential impact of the coronavirus pandemic on your business, please contact Caroline Watson or another member of Thrings’ Dispute Resolution team.
* Additional information provided by Chloe Williams (trainee)
