Melissa Worth, Dispute Resolution Partner at Knights plc
Business interruption insurance is a type of insurance which, in certain circumstances, will indemnify a business for losses caused by interruption to its operations, such as burglaries, floods, disease, contamination or fires.
Business Interruption policies have, understandably, been the subject of much commentary in the press in recent weeks.
On 15 April 2020, the FT Adviser reported that the Financial Conduct Authority (FCA) had issued a warning to small and medium sized businesses that the losses they have suffered from the Covid-19 pandemic would not be covered by their insurance because most policies only have basic cover and will not cover a pandemic. However, on 12 April 2020, The Guardian newspaper reported that a number of insureds are bringing action against their insurer because the insurer has refused to respond to their Covid-19 related claims. I do not know what grounds the insureds are relying on to bring their claim but, if and when the claim is issued, the legal proceedings will be scrutinised.
The FCA originally said that it would not intervene in the fallout between businesses and their insurers, but it has now decided to bring its own test case to the High Court to try to resolve some of the uncertainty.
So, will Business Interruption insurance provide cover for the Covid-19 pandemic? The short answer is that it will depend upon the specific terms of the policy and, if an insured is unsure about the terms of their policy, they should speak to their broker in the first instance.
Will all businesses have appropriate cover?
On 17 March, the Chancellor of the Exchequer, Rishi Sunak, announced further support in respect of the UK government’s economic response to Covid-19. The key parts of the announcement relating to insurance were as follows:
“Following the changed medical advice, there are concerns about the impact on pubs, clubs, theatres and other hospitality, leisure and retail venues. Let me confirm that, for those businesses which do have a policy that covers pandemics, the government’s action is sufficient and will allow businesses to make an insurance claim against their policy.But many of those businesses don’t have insurance – so we will go further.”
I am aware from speaking to a number of insureds that the UK Government’s action has not yet been of benefit to them when making a claim on their existing policies even if their policies do, on the face of it, cover pandemics.
Most standard Business Interruption policies respond to scenarios such as floods, storms, vandalism or other damage such as theft, fire or other serious incidents. Some insurers offer insureds the option to “top up” that cover to include business interruption relating to infectious diseases. However, as recently suggested by the Association of British Insurers (ABI), which represents the interests of insurance companies (amongst other things), most insureds do not take up such cover and, even if they do, the diseases that apply are often specifically named in the policy. As Covid-19 is a new virus, it is unlikely that it will be named in such policies.
As seems to have been anticipated by the UK Government, some policy provisions for infectious diseases are wider in scope, in that they simply stipulate that the disease must be a notifiable disease. As referenced by Rishi Sunak, on 5 March 2020, Covid-19 was listed as a notifiable disease. However, it is not unusual for the policies to specifically state that there must be an outbreak of the disease on business’ premises or within very close proximity. In the current circumstances, where testing for Covid-19 has been limited, demonstrating that there has been an instance of Covid-19 on or within close proximity may, arguably, be tricky (though far from impossible).
The ABI suggests that when such policies were drafted, the underwriters had in mind that insurers may be required to pay out if an insured needed to claim the cost of, say, thoroughly cleaning the premises before reopening. The ABI also suggests that the underwriters will not have envisaged a nationwide lockdown or a government instruction for its citizens to stay at home. Insurers might argue that it would be difficult to show that all of the loss suffered by the insured’s business resulted from an outbreak of Covid-19 at the business premises and not some other reason, such as social distancing measures.
Given the members of the ABI consists of insurers companies, some might say that it is not surprising that it has published commentary that suggests that the position for insureds is bleak. Clearly, the insureds referred to in the Guardian article (see above) feel bullish about the position. Without seeing the specific terms of their policy, it is impossible to provide meaningful comment.
My personal view is that, based on the policies I have seen, there is scope to argue that a policy ought to respond to the Covid-19 pandemic and, if I were an insured, subject to the specific wording of the policy, I would be looking to challenge the insurer’s initial decision. It is fair to say that lawyers working in the insurance sector are expecting a significant increase in disputes relating to policy interpretation.
There are two further points I would like to highlight; further issues relevant for insureds and, issues relevant the insurance sector generally.
First, in addition to notifiable disease consideration, referred to above, insureds should consider whether the terms of their policy provide cover for “non-damage, denial of access”. This provision is commonly seen in policies relating to venue and events hire and would kick into play if the venues were closed for a reason outside of an insured’s control. Insureds should also review their property damages policies, to check for provisions which require a minimum number personnel to be on site at the property, and should speak to their broker if complying with the provision is not possible because of social distancing measures. If an insured cannot comply with the terms of its insurance policy, there is a risk that an insurer will refuse to pay out if a claim is subsequently made.
For the insurance sector generally, it is worth noting that insurance professionals in the UK, such as Mactavish, are calling for the government to step in to support the insurance market as a whole, noting that the impact of Covid-19 will be far wider than whether a policy responds to a Covid-19 related claim. This is because there has been a significant drop of investment return for insurers and the knock of effect of this for insureds could be more expensive premiums and fewer available products on the market.
The information and commentary on the impact of Covid-19 on the insurance sector is updated every day. Insurers may have been quick to refuse cover for Covid-19 related losses but, as demonstrated by the FCA test case and the insureds threatening legal action against their insurer, the decision to decline cover will not be the end of the story. It will be interesting to see how ‘much further’ the UK Government is prepared to go to do ‘whatever it takes’ to support those insureds that do not have the benefit of business protection insurance or have been declined cover by their insurers. During these times, any government assistance given to the insurance sector would most likely be welcomed by insurers and insureds alike.
This article is for information purposes only and should not be relied upon in place of legal advice.
If you would like to speak to Melissa or another member of Knights’ Dispute Resolution Team, please contact firstname.lastname@example.org
Knights plc is a commercially focussed national legal and professional services business providing a wide range of advice and assistance to businesses across the UK.
11 June 2020
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