COVID-19: Impact on Business Interruption InsuranceTuesday, 24 March 2020
In light of widespread business closures, particularly in the hospitality sector in the last week, we examine the impact of COVID-19 on business interruption insurance.
Many businesses are surprised to discover that their commercial property insurance policies are refusing to respond to claims for loss of income, continuing operating expenses, rent, payroll and stock.
Generally, business interruption insurance becomes operative as a result of a direct physical loss, damage or destruction to property by a covered peril, such as a fire or escape of water, leading to business closure for the period of reinstatement works required to trade again.
It appears that insurers are taking a firm line globally, on the extent to which businesses can expect to be indemnified for their losses from COVID-19. With the prospect of widespread closures extending to the retail sector, this is causing increasing frustration for the business community.
Typically, when a claim is made, it is assessed by the insurer and if business interruption cover applies, indemnity is confirmed. Some commercial policies, particularly in the hospitality sector might be expected to meet claims where the loss arises from an outbreak of a “notifiable” infectious disease on the property, or where the property is restricted from trading by a public authority. This is usually an endorsement on the policy, which extends the standard scope of cover. A notifiable disease is usually understood as one that medical practitioners must by law, notify to health authorities. COVID-19 has been designated as such since 28 February 2020. Some insurers, however, are refusing indemnity on the basis that:
- COVID-19 is not present on the particular premises;
- the policy contains an exclusion for “virus”;
- the list of notifiable diseases are only those specifically listed in the policy; or
- where COVID-19 was not anticipated, business interruption simply does not apply.
Whether a particular commercial policy includes wording which might favour a valid claim must be examined on a policy by policy basis.
Another concern for insurers is the indefinite duration of the business closure period. Even where business interruption insurance cover is in order, the policy extension might be limited in duration, typically for the duration of the restoration period. To avail of any further cover, the policyholder must have secured an extended period of indemnity endorsement. The interpretation of such clauses may well give rise to dispute between insurers and policyholders.
It seems clear that if the loss claimed does not meet the policy conditions for business interruption, cover will not be provided. Insurers are exercising significant caution and relying strictly on policy conditions to that effect. It has also been reported that cover is being refused because business closures were not mandated by law and because the pandemic itself is a “force majeure” event, the consequence of which depends on the policy. Insurers may seek to restrict payments on valid claims on the basis that, if a business had been able to trade during this crisis, diminished economic activity would have significantly affected its income. The government has been asked to engage with insurers and to provide clarity by retrospectively legislating the closure order affecting much of the hospitality sector. Unfortunately, this might not assist businesses with tightly worded policies which either expressly exclude new illnesses such as COVID-19 or clearly list the notifiable diseases for which cover is available.
In the U.S. business owners have reportedly begun legal challenges against insurers on various counts; namely that the policy does not specifically contain an exclusion for losses arising from a virus or global pandemic. Claimants also allege that the virus causes infectious contamination to surfaces for up to 28 days, directly attributing losses to physical damage or contamination. By likening the risk to a gas leak or public health risk which requires closure for a period of remediation, they are seeking to invoke the business interruption clause of their insurance. The duration of the contamination risk is arguable, depending on which medical authority is consulted. The outcomes of such cases have yet to be determined.
The cost of commercial insurance is one of the biggest overheads facing businesses in Ireland and reportedly, some insurers are considering a reimbursement of a portion of premiums in respect of employers and public liability insurance for the duration of the disruption on an "ex gratia" basis where a business has let staff go and shut its doors. However, this will not compensate businesses to the extent they might have expected under the business interruption extension under their insurance policy.
Businesses should carefully consult their insurance policies and engage with their insurers or brokers to establish whether their business interruption cover applies in the present circumstances of the outbreak of COVID-19. Coverage needs to be assessed on a policy by policy basis. In the event of a dispute on the conditions required to secure indemnity, legal action may be required to compel performance of the contract of insurance or compensate businesses, once the cost of the COVID-19 disruption is ultimately measured.
Please note that the content of this summary does not amount to professional advice. Legal and tax advice should be sought in respect of specific queries. The COVID-19 situation is evolving rapidly and this update is provided on the basis of information available as at 24 March 2020.