Coronavirus – considerations for business interruption insurance
Insurers are fielding large volumes of queries from concerned business owners regarding cover under business interruption.
As a result of the ongoing Coronavirus (COVID-19) pandemic, the entire population is experiencing unprecedented disruption to their daily lives and people are adapting to life under restrictions not seen in peacetime. The government’s efforts to restrict the spread of the pandemic have, of course, resulted in the compulsory closure of all but essential businesses.
We are aware that insurers are fielding large volumes of queries from concerned business owners regarding cover under business interruption (“BI”) policies. We set out below some of the concerns that insurers will need to bear in mind when assessing these queries.
The meaning of “Damage”
BI policies require a triggering event in order for cover to attach. Typically, that triggering event is “damage”. English jurisprudence has established that damage does not necessarily require a physical change to the property insured - at its broadest, merely undergoing an injury that impairs the property’s value and/or usefulness could be sufficient. For example, acid spilled onto a ship’s deck has been held to constitute “damage” (The Orjula (1985)), as has a sub-molecular change in a painting after it was exposed to extreme heat and humidity in a fire (Quorum v Schramm (2002)), and, albeit outside the insurance context, the accidental pouring of concrete into a sewer has been held to cause damage (Northumbrian Water Limited v Sir Robert McAlpine Limited (2013)).
Following such lines of authority, the confirmed presence of Coronavirus on surfaces in insured premises could constitute “damage” and trigger cover for any BI loss incurred whilst the premises are being decontaminated (although the proper assessment of the indemnity period depends on the factual nexus and the policy wording). In practice, however, this may be of limited assistance to policyholders as BI policies will typically also include a waiting period or other form of excess that can operate as a limit, or complete bar, to recovery. Each separate incident of contamination may also constitute a separate incident of “damage”. In this regard it is important to carefully check the policy wording, including any aggregation provisions.
Policyholders are more likely to make a recovery under BI extensions which do not require a damage trigger. One possible candidate is denial of access cover which is a common feature of BI policies (albeit one which would normally require the payment of additional premium). However, denial of access usually has as its triggering event an incident occurring within the vicinity of the insured premises (for example a gas leak necessitating the evacuation of all premises within a particular radius). It is doubtful that a worldwide pandemic leading to government-ordered closures would trigger cover in these circumstances but wordings that are drafted more loosely may do so.
More specific notifiable disease and pandemic extensions also exist but these are less common and are not routinely included in policies. As with all coverage considerations, the devil is in the detail and it is necessary to carefully analyse the wording and the factual background to ascertain whether cover is triggered and, if so, when.
Limitations to cover – things to consider
Whilst the general purpose of BI cover is to replace gross profit lost due to an interruption to an insured’s business, and cover any increased running costs whilst giving credit for savings, the simplicity of this proposition is deceptive, and the comparison exercise will need to account for various factors. If the business would have suffered reduced income even but for the insured event, that loss will generally not be covered. The case of Orient-Express v Generali (2010) gives the textbook example. The Orient-Express hotel in New Orleans was damaged by Hurricane Katrina. The insurers accepted that damage had occurred and that it had interrupted the business. However, the insurers successfully argued that the loss was not covered - because Orient-Express could not show that, “but for” the damage to the hotel, it would not have suffered the same interruption to its business. Even had the hotel miraculously survived the hurricane unscathed, it would have done no business because of the devastation to the surrounding area.
In assessing BI loss due to the Coronavirus pandemic this “but for” test will be highly relevant in considering what losses can be claimed under BI policies. The specifics of the cover will need to be considered carefully, and an exercise undertaken to assess how the business would have fared, but for, the insured circumstances. Would, say, a drop-off in demand or inability to staff the business or obtain materials have caused all or much of the same loss? If so, it is unlikely to be covered. These factors will also affect the BI calculations for existing claims and any future claims whether or not caused by the Coronavirus pandemic.
Clearly, the exercise will often be difficult, and sometimes contentious, requiring as it does the construction of a notional scenario to compare against, with many factors to be hypothesised and estimated. In assessing a BI loss, the usual approach is to make a ceterius paribus assumption i.e. that all other things will remain equal. However, that approach is no longer sustainable given the extent of disruption to global trade and the BI assessment will now be a far more complex and expensive exercise.
The BI assessment exercise must also account for savings made due to the insured’s circumstances. In the present situation, this might include savings on for example general overheads, the leasing of equipment, and payroll if workers are furloughed.
Mitigation of losses
The policyholder will likely be under a duty to mitigate its loss, if not under a specific policy provision then probably at common law. The scope of this duty in the context of a global pandemic is unclear – is the policyholder required to change its business model (for example does an insured restaurant need to convert to a take-away only business) in circumstances where there is no guarantee that this would in fact mitigate the loss? Are policyholders required to let staff go? This would be highly unpalatable for many business owners whose employees rely on them for their wages. Are policyholders required to take out loans to keep their business afloat? There are reports that many banks are only offering such loans at high interest rates or are asking for personal guarantees from the business owners. Many businesses are being given grants of £10,000 or £25,000. How should these be accounted for?
Proactive measures taken to prevent contamination (for example more stringent cleaning regimes) are unlikely to be covered in the absence of clear wording to that effect. The jurisprudence on loss prevention costs under first party policies is equivocal and in practice it would be very difficult for the insured to prove that its preventative measures actually prevented contamination.
There are no easy answers to any of these questions and, as ever, a thorough and careful analysis of the policy wording is required. Clearly, however, the pandemic will markedly complicate the calculation of new and existing BI claims for the foreseeable future. If you have any questions regarding any of the issues raised in this article we would be more than happy to assist.
If you wish to discuss this further, please liaise with Simon Durkin, Partner on 020 7822 1946 or at email@example.com, Alex Marler, Partner on 0151 242 6858 or at, firstname.lastname@example.org or Will Healy, Associate on 0208 036 6970 or at William.Healy@weightmans.com.