Business interruption insurance is often a critical component of a company's continuity plan. As the government introduces more stringent measures to delay and flatten the peak of COVID-19, businesses are facing significant financial losses due to interference with their revenue streams.
We are an experienced policyholder disputes practice and we are being asked by a number of clients to review their business interruption policies (BI) to advise on whether there is cover for COVID-19. The position is not straightforward because physical damage to insured property is a prerequisite for most standard BI cover.
Lawsuits have already been filed in the US seeking declaratory judgements as to whether BI policies cover loss of income arising from COVID-19. It remains to be seen whether policyholders in England will follow suit.
We have set out below some of the factors which will be relevant to whether your policy covers your business interruption losses from an English law perspective. Businesses should also be looking at their supply chains and the terms of their contractual arrangements with third parties. If your BI policy is not going to respond to revenue losses, do your contracts compel third parties to continue to perform? Who bears the risk? Are third parties contractually able to cancel or delay placing orders? If your BI policy does cover interruption caused by COVID-19, will this be available where you have agreed to or acquiesced in a counterparties' non-performance where they were not strictly entitled to do so under the contract terms? All of these points highlight why businesses should be looking at their insurance and contractual arrangements in the round. In a separate article, AG has considered whether COVID-19 can amount to a force majeure event under the umbrella term "act of God".
Is it property damage?
Many businesses will have BI cover which provides an indemnity against first party losses consequential upon property damage, such as a flood or a fire.
Contagious viruses / diseases are unlikely to constitute property damage. However, there will be some policies (usually by way of extensions of cover) which specifically cover losses flowing from the loss of use of business premises. There is no market standard for these extensions, although they often appear under 'restriction on use' or 'denial of access', so the wording of the policy must be checked carefully to see what is covered.
Claiming under such extensions in this context is likely to require that the loss of uses arises as a result of a restriction imposed by the government, as opposed to a voluntary closure to protect employees or third parties or as a result of supply chain disruption.
Does it fall into an exclusion?
Many insurers have specific exclusions in their policies for bacterial or viral infections and some may even argue that their standard pollution exclusions apply to bar coverage (whether viruses or bacteria constitute 'pollutants' is uncertain, but it may be an argument which insurers try to run).
In the context of COVID-19, even where cover would otherwise be available via for example notifiable disease language or specific pandemic cover, there have been suggestions from insurers that a commonly found exclusion for SARS may be raised.
What losses are recoverable?
The aim of BI is to put the business in the same financial position it would have been in had the loss caused by the business interruption event not taken place. Typically, BI covers loss of profits, fixed costs and increased costs of working.
It is important to note that the time at which a government declares a virus as 'notifiable' could affect whether a business is covered by a policy or not. COVID-19 was added to the list of notifiable diseases in England on 5 March, which may help businesses seek compensation, particularly if they have an extension to a BI policy which covers notifiable diseases. In the case of New World Harbourview Hotel Co. Ltd v ACE Insurance & Ors  HKEC 264, the Hong Kong Courts considered issues in interpreting BI policies and 'notifiable diseases' with regards to SARS. It was confirmed that insurance cover is often not retrospective and losses that occurred prior to the SARS virus becoming 'notifiable' were not covered by the insured's policy.
We are also anticipating "wide area damage" arguments being raised by insurers, on the basis that restrictions to the wider area mean that even if the business had been able to continue operating, it would have had no custom anyway.
The recent social distancing measures introduced by the UK government may present further concern for businesses in this respect. With the inevitable decline in customers, but no firm instruction from the government to close certain businesses outside of primarily the 'leisure sector', many businesses will be in a challenging position with potentially limited scope to recover through insurance.
The Association of British Insurers have said: "irrespective of whether or not the government order closure of a business, the vast majority of firms won't have purchased cover that will enable them to claim on their insurance to compensate for their business being closed by the coronavirus." A number of insurers have participated in a survey regarding how they would respond to business interruption caused by COVID-19. Some insurers, including Axa and NIG, confirmed they would only cover diseases specified in insurance policies and not a general class of notifiable disease. Whereas others such as RSA and Ageas said they would deal with COVID-19 cases on a claim-by-claim basis due to the wide range of insurance policies in place.
As there is no default position, a business will want to: (i) reserve its position with its contracting parties (including on whether COVID-19 is a force majeure event); (ii) carefully check the terms and conditions in its contracts against the full terms of its insurance policy; and (iii) make appropriate policy notifications.
Insurers are encouraging policyholders to get in touch if they have questions about their cover or if they require advice as a range of different scenarios may apply. Your lawyers or brokers will be the first point of call if you have concerns over whether your insurance will cover you for losses arising out of COVID-19.