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Covid-19: Insurance and 'Business interruption'

24th June 2020

Covid-19: Insurance and 'Business interruption'

THE BATTLE BETWEEN BUSINESSES AND INSURERS REGARDING COVID-19 RELATED LOSSES

Why businesses need to check the wording of their Business Interruption policies carefully

Following the 2008 financial crisis, the Courts were inundated with disputes that emerged in the banking sector as a result of the sustained volatility in financial markets.  The immediate disruption caused by the Covid-19 pandemic has been more widespread.  It has materially affected manufacturers, retailers, the hospitality industry and a range of service providers; unlike 2008, those in the real economy have been immediately affected.

Businesses counting the cost of the pandemic’s impact might look to their insurers to provide some compensation for the unforeseen financial effects of being forced to temporarily halt their operations.

The first question those business owners should ask themselves is whether they have the benefit of a Business Interruption Policy.  Those who purchased such a policy would be justified in assuming that it would respond in the circumstances of a global pandemic.  However, insurers are fiercely resisting such claims and have stated that they anticipate that the vast majority of Business Interruption Policies will not provide cover for businesses suffering the financial effects wrought by the pandemic.

In recognition of the concerns of businesses nationwide at this seemingly unjust position, the Financial Conduct Authority has taken the unusual step of bringing a test case asking the Courts to consider a sample of the wording used by a range of insurers in Business Interruption policies to offer guidance as to whether those policies should respond to the present circumstances.

 

As details of that test case emerge, it is now becoming apparent where the battlegrounds are likely to lie in the forthcoming tussle between the insurance industry and policy-holders.  As such, business owners with the benefit of Business Interruption Insurance should consider the wording of their policies carefully when assessing the likelihood of obtaining a payout from their insurance company.

The following points are likely to be key in assessing the merits of any such insurance claim:

Could it be argued that your premises suffered ‘physical damage’ as a result of the pandemic?

The vast majority of Business Interruption Insurance policies will have been purchased as an add-on to the company’s property damage policy.  Accordingly, those policyholders need to demonstrate that their business premises have suffered physical damage in order for any claim to be entertained by the insurers.

It seems counter-intuitive to imagine that the pandemic could possibly have caused physical damage to business premises, but this possibility should not be ruled out.

Microbiological changes to the premises are capable of constituting property damage. As such, if the business owner has evidence that there was an infected individual on-site, it may be possible to assert that the Covid-19 virus was present on surfaces in the premises, thereby constituting property damage.

The question of how the business might evidence the assertion that the virus was present on the surfaces in the premises and how long the virus could have survived on those surfaces is likely to present a challenge to advancing such claims.  Nevertheless, this is a point worth considering when assessing whether a claim is viable.

Could it be said that the business has been denied access to its premises?

Some policies provide cover if there has been a “denial of access” to premises. Such a provision would respond, for example, if there had been a fire in the building adjacent to the business’s premises which led to the evacuation of those premises while remedial works were carried out.

There is scope for debate as to whether the UK Government’s policies in response to the pandemic led to businesses actually being denied from accessing their premises.  Insurers argue that even if a shop or restaurant was ordered to close its doors, this does not amount to preventing the business owner from accessing the premises themselves.  Business understandably challenge the logic of such a restrictive interpretation.  The Court’s approach to such provisions is keenly anticipated.

To what extent does Covid-19 amount to a “notifiable disease”?

Many clauses in Business Interruption policies specify that an “infectious” or “notifiable disease” is a trigger for cover.  Such clauses often relate to the policyholder’s premises (for example, a novovirus outbreak in a restaurant) or locality (such as an outbreak of an infectious disease within a 50 mile radius of the premises).  Insurers suggest that those clauses were not intended to respond to a global pandemic such a Covid-19.

Covid-19 only became a “notifiable disease” on 5 March when the government added it to the list of notifiable diseases under the relevant regulations.  Accordingly, cover would not be available for any losses that arose prior to that date.

Insurers also argue that policies would only cover Covid-19 if it had been added to the list of notifiable diseases at the date that the policy was written.  Again, this approach seems to contradict the purpose of taking out an insurance policy to mitigate against uncertainties, so again, the Court’s view of this argument will be closely watched.

CONCLUSION

As will be apparent, in assessing whether any insurance claim is viable, much turns on the wording of each individual policy.

The prospects of any such claim being accepted by the insurance company will become clearer once the Court hands down its judgment in the test case brought by the Financial Conduct Authority.

For present purposes, businesses are advised to scrutinise the terms of any Business Interruption policy (with the assistance of their legal advisors if necessary) to determine whether a potential claim can be made and, if so, the evidence that they should collate in support of that claim.

If you would like to discuss any of the issues outlined in this article in more detail please contact Adam Johnson on 01384 327 284 or email adam.johnson@higgsandsons.co.uk

If you have any other general queries or concerns that you feel we can assist with, please email supportingyou@higgsandsons.co.uk and somebody will get back to you as a matter of urgency.

 

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