By Sharokh Koussari & Naylah Hamour, Partners at DWFM Beckman.
(Sharokh.Koussari@dwfmbeckman.com & Naylah.Hamour@dwfmbeckman.com)
Businesses are increasingly fearful of the very difficult economic landscape that the Coronavirus has left in its wake. The length and breadth of the country, High Streets are bare, holidays cancelled and restaurants, cafés and pubs lie empty. Despite the UK Government’s promised £330bn of financial assistance, further protections of business rents and employee wages, and support for the self-employed in the pipeline from June, there is little doubt that the next few months will be a time of austerity for most organisations. Weathering this storm is a complex exercise for businesses and individuals to take. However, one means of support that many businesses may hope to rely on is that of Business Interruption Insurance.
The primary goal of Business Interruption Insurance is to offer a payment to mitigate an organisation’s financial losses in the event of an external disruptive event. Policies will differ from insurer to insurer, but typically cover events such as fires, floods, civil unrest, terrorist incidents and natural disasters. The types of cover provided may include claims for loss of stock, employee wages, replacement of equipment, lost profits, a temporary new location, repair works and taxes. It is more comprehensive than, say, buildings insurance, as it looks holistically at the nature and activity of the business in an attempt to restore the funds and outgoings otherwise lost.
Unfortunately, there are a number of hurdles that businesses face before they can successfully make a claim under such an insurance policy. In the first instance, most Business Interruption Policies require there to be actual damage or quantifiable loss sustained by the business as result of direct physical loss or damage to the insured’s property. For a fire or flood this may be easy to establish, but the effects of Coronavirus are far less tangible.
The Association of British Insurers has also reported that many standard insurance policies do not cover losses arising from an outbreak of disease, or indeed forced closure by the authorities. Even if disease or epidemic is specified in the policy, the analysts Defaqto have stated that most policies apply only if a business has had to close because of disease being identified on the premises. There have been reports of individual businesses having to close temporarily due to an infected person being on the premises, for which some business loss should theoretically be recoverable from an insurer. However, the losses suffered by several days without trading are likely to pale in comparison to the losses sustained across the epidemic’s minimum estimated duration of 12 weeks.
To see if any losses your business suffers or is likely to suffer from the Covid-19 outbreak are claimable under your Business Interruption Policy you will need to determine whether the policy covers an outbreak of infectious disease, or otherwise if the government-mandated lockdown falls within any of the other insured events under the policy. In relation to infectious disease, it is common for the policy to rely on a definition of ‘notifiable diseases’, which is a list of certain diseases maintained by the government.
An example of such a clause would be:
“This extension provides cover for any loss resulting from interruption of or interference with the Business carried on by the insured at the Premises in respect of an outbreak of a notifiable disease at the Premises/within twenty-five miles of the Premises, or of the discovery of an organism likely to give rise to such a disease.”
The UK and devolved governments have included Covid-19 in the definition of notifiable diseases, in order to help policyholders. If your policy covers this, then you may be able to make a claim for business interruption. However, future policies are widely expected to specifically exclude Covid-19, as insurers have done previously with SARS and BSE. The insurance industry is in the midst of dramatic upheaval. Price comparison sites have suspended searches for many business insurance quotes until insurers can offer more certainty. Already, policies are being re-drafted across the board to exclude liability for Covid-19. Expect many commercial policies to be re-worded or cancelled altogether, as has already happened with insurance for income and travel protection. Of the insurers, Zurich and Aviva have stated that certain previous Business Interruption policies may involve pay-outs over Covid-19 losses. Many other insurers have gone on record to say that their policies are highly unlikely to pay out for this; these include NFU, AXA and Momentum. Insurance policies differ from broker to broker and you should enquire about claims regardless of what is being said in public. The Financial Conduct Authority (FCA) has instructed insurers that where existing insurance policies are to be renewed this year, they should do so on the same terms as before and not be amended to exclude liability for Covid-19. However, there is no guarantee that insurers will follow this through. Therefore it is recommended to read the fine print of all insurance contract purchases or renewals taking place in future. All of these roadblocks must be overcome for a successful insurance claim to be made for Business Interruption.
The situation at hand, of mass and prolonged business closure throughout the entire country, is unprecedented in peace-time. Business interruption and reduced profits are going to become facts of life for every organisation to grapple with. The FCA has urged insurers to be lenient and to pay out in cases where they would not normally do so. Nevertheless, it appears as though organisations may face a tough battle in securing pay-outs from Business Interruption Insurance policies.
It is likely that the next few years will see expansive litigation carried out over the applicability of insurance policies regarding Covid-19. This is a completely unprecedented development in the insurance sector and already lawyers and underwriters are struggling to form cogent interpretations of policies drafted before the pandemic. Many claims are likely to be defended by insurers on the grounds of force majeure clauses, which exclude liability due to dramatically unforeseen circumstances arising. The insurance industry’s concern is understandable given the potential for colossal sums to be claimed, depending on what consensus emerges regarding the interpretation of pre-outbreak insurance clauses. However, policy-holding businesses will, equally understandably, say that this is exactly why they have insurance, to protect against the unexpected. We envisage disputes where, for example, a policyholder claims under an infectious disease extension, but the insurer rejects the claim as excluded on the basis that Covid-19 was an ‘act of God’.
Do not let your organisation be left behind; enquire with your insurers about your Business Interruption policy quickly and persistently, and do not be put off from lodging claims under your policy within any applicable time limits.
By Sharokh Koussari & Naylah Hamour, Partners at DWFM Beckman
For further advice please contact us directly on Sharokh.Koussari@dwfmbeckman.com or Naylah.Hamour@dwfmbeckman.com