April 21, 2020

COVID-19 and business interruption insurance

Business insurance policies

What is business interruption insurance?

Many commercial insurance policies provide cover for loss of income where external circumstances mean that a business cannot trade as usual. This is commonly known as 'business interruption' insurance.

What does it cover?

The most common business interruption cover will be for disruption caused by damage to the property in which the business trades – for example, if a fire damages the fabric of the building, alongside cover for physical damage to the building, a commercial policy may also provide cover for the period in which the business is unable to trade (subject usually to a longstop date).

Some business interruption policies may also cover losses caused as a result of external events, such as damage to a neighbouring building preventing access or closure of routes to or nearby the business.

More bespoke policies can also include specific cover tailored to that business – for example, hospitality businesses that depend on a nearby attraction to generate trade may obtain cover if that attraction closes.

What about COVID-19?

Not all losses will be as a result of direct physical loss or damage to property.

Some insurance policies do contain business interruption extensions specifically for infectious diseases. More often than not these include a specified list of diseases (lesson learned following the SARS outbreak in 2003) but, in circumstances where COVID-19 was only added to the Government's list of notifiable diseases on 5 March, it is not likely to be covered on any pre-existing policies of this kind.

However, it has become clear to us through advising our clients that there are some policies out there that (should) provide cover on a wider basis for "an occurrence of any human infectious or human contagion disease", or "any notifiable disease". This type of cover is likely to have been purchased as an extension to standard policies and, on the face of it, should include COVID-19.

The UK Government has not yet compelled insurers to indemnify businesses irrespective of the business interruption cover in their policies. However, the Financial Conduct Authority has said that it expects all insurers to show fairness and flexibility in the treatment of their customers during the pandemic.

Despite this, at the time of writing, it is apparent that some insurance providers with policies which include non-specified wording such as this are seeking to exclude COVID-19 and the consequential general lockdown measures taken by the UK Government from their cover, causing businesses to join forces to launch legal action against the insurers in question.

Future cover

Hindsight is a wonderful thing and it is fair to say that nobody expected an event such as the COVID-19 pandemic and the unprecedented effect it would have on businesses across the globe.

Events such as this are simply too large for private insurers to be in a position to underwrite and should they be forced to do so, it may have a significant and detrimental effect on the global insurance industry. On the other hand, businesses are likely to have paid a premium to ensure they have cover for events such as this – which in reality, is the purpose of insurance – so why should they be prevented from claiming if the cover is there?

As and when business starts to resume some normality, it is likely that policies will be amended to expressly exclude cover for these sorts of occurrences.

Our general advice would always be to check the wording of your policies carefully and to consider the optional extensions that may be available in order to protect you and your business as much as possible.

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