Business Interruption Insurance – Does it provide any relief in the current crisis?

April 21, 2020

By Jonathan Lowe

With the country having been in lockdown for over 3 weeks the business community has been as hard hit as any.

If a business can continue to function remotely there is hope that the imposition of restrictions introduced by the government to combat the current crisis may be limited. Realistically, however, most businesses are suffering a significant downturn in trade, and in particular if a business relies on trade from premises that are closed the effect can be catastrophic.

It is in times such as these that businesses will dust off their insurance policies and look for some comfort, but will they find any?

The straight-forward answer is, of course, that it all depends on the contents of the policy.

The first issues is whether or not the policy that the business has taken out provides cover for business interruption. If such cover has been taken out the terms of cover will need to be scrutinised; it may be that whereas there is cover, the circumstances which have caused loss to a business do not fall within the insuring clause of the business interruption cover, or alternatively they may fall within the ambit of an exception to such cover.

By way of example analysis,

  • cover may be provided for business interruption when the business, and in particular the business premises, is affected by a disease,
  • however, disease may be defined in a way which lists a number of specific diseases which list is highly likely not to include Covid-19
  • alternatively, many policies rely instead on a generic definition of notifiable disease. Covid-19 was only added to the government’s list of notifiable diseases on 5th March 2020;
  • if it may be possible to prima facie bring a claim within cover, issues may then arise as to the time at which cover was effective;
  • a claim may prima facie be covered as a result of the policyholder being denied access to premises; however, what exactly is the reason for that denial of access and does it fit within cover or an exception to cover

The Financial Conduct Authority has issued several documents to address the fallout from the current crisis, and it, as the regulator of the financial industry including the insurance sector, is very aware of the importance to business of insurers treating their policyholders fairly in these troubling times.  For the purpose of business interruption cover specifically the FCA’s Interim Chief Executive sent a very clear letter to CEOs of insurers on 15th April 2020 setting out what is expected of insurers in dealing with SMEs and their claims under business interruption insurance.  In part the letter reads

Based on our conversations with the industry to date, our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic. While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances.

In contrast, there are policies where it is clear that the firm has an obligation to pay out on a policy. For these policies, it is important that claims are assessed and settled quickly. A key objective of the FCA is to ensure that financial pressures on policyholders are not exacerbated by slow payment, rather, such claims should be paid as soon as is possible. This is consistent with the wider objective of the authorities to support business and consumers during the current crisis. If there are reasonable grounds to pay part of a claim but not to make the payment of such claims in full, we would like you and your board to adopt an approach of making an interim payment. Many firms are already doing this. If you disagree with doing so, we would like you to send us the grounds for reaching that decision including how you believe it represents a fair outcome for customers. Your firm’s decision is likely to help inform our assessment of its culture.

Those words are realistic, but also provide hope that insurers, under the scrutiny of the regulator, will address business interruption claims properly and fairly.

In short it will be important to consider the terms of cover closely in order to establish whether or not there is in fact cover in the particular circumstances of each case, and for that purpose it may well be sensible to seek early expert advice so that any claim is presented from the earliest opportunity on the right basis and the correct approach taken with an insurer to hopefully secure an early pay-out. Realistically, and unfortunately, there will be many policies where cover is not provided, but there are others where a valid claim can be made which may well prove to be the difference between a business surviving and not.

Exchange Chambers has launched a specialist service for policyholders who have had COVID-19 related business interruption claims unfairly rejected. For further details, please click here.