On 9 June 2020 the Financial Conduct Authority started proceedings in the High Court as a test case to seek clarity of the meaning and effect of business interruption insurance policy wording in the context of COVID-19.
A number of insurance companies have agreed to participate and specific policies have been chosen for which the wording will be tested against insurance companies interpretation of it in deciding whether to grant coverage to businesses who have made a claim for business loss due to the impact of COVID-19.
The key issues to be considered will be:
- Coverage – whether the policy wording provides coverage for COVID-19, such as how diseases are defined within the policy wording and the proximity of an instance of outbreak to the business; and
- Causation – the link between the loss suffered by the business and COVID-19.
This will hopefully provide clarity for many businesses whose claims on their business interruption insurance have been rejected.
The case can be followed here.
Many businesses are now fighting for their survival as a result of the pandemic. As well as applying for financial support from one of the many temporary government schemes, many firms are also trying to find out whether their insurance policies will cover them for Coronavirus-related business interruption.
However, businesses who had the foresight to take out business interruption insurance, are discovering that it’s proving hard to secure a pay-out from their policies. Many businesses have been told by their insurance companies that the current situation is not covered by their policy. Here we look at the factors involved and whether you are likely to be able to make a successful insurance claim.
What is a business interruption policy?
It’s an insurance policy which aims to protect businesses in the event of damage relating to their premises and resulting financial losses. Unlike buildings insurance which is for physical damage, business interruption insurance covers the detrimental impact on businesses income, due to not being able to trade. Typically this might be caused by a fire, storm, flood etc. which causes the building to be so damaged the business must close and be repaired.
Will my business interruption insurance cover me for Coronavirus?
Most usually business interruption insurance policies are linked to damage to the policy holder’s premises, in order to indemnify for loss, but a few policies have special extensions that may cover business interruption caused by Coronavirus. The Association of British Insurers (ABI) has advised that most standard business interruption policies are there to provide cover for “a wide range of day to day risks” such as flood, fire or storm damage, or theft. This implies that they are not intended to cover the unprecedented pandemic businesses are currently facing.
The Financial Conduct Authority (FCA) confirmed this in an open letter to insurance CEOs, in which it stated that “most policies have basic cover” and “do not cover pandemics and insurers have no obligations to pay out in relation to the COVID-19 pandemic”.
What if the government orders my business to close?
Unfortunately, forced closure by the authorities is not usually covered by standard business interruption policies. However, if you have cover for a notifiable or infectious disease, it may be a condition of your policy that your business is first ordered to close by the authorities, before it will pay out.
Can I claim for losses suffered as a result of Coronavirus?
It depends on the following factors:
- the extent of the cover of your policy
- the terms and conditions of your policy
- the actual cause of your loss
- the terms of the loss covered
- that you have acted in a sensible and reasonable way to mitigate your loss
- the inclusion of or interpretation of a Force Majeure clause in your policy.
Some policies will only cover lost revenue, some will cover additional expense and some expected profit lost. Much argument is likely as to whether a loss is recoverable in part or at all.
Where your policy is limited solely to the interruption of the business as a result of physical property damage, you will not be able to make a claim in light of Coronavirus.
Other policies which are more comprehensive, may include coverage for business interruption as a result of a ‘notifiable’ or ‘infectious’ disease. However, some of these will only cover a specified list of diseases and therefore won’t pay out for Coronavirus because it’s a new illness.
Where the notifiable or infectious disease is unspecified on the policy, businesses are much more likely to be able to claim on their insurance. This is because the Government took urgent action to list Coronavirus as a notifiable disease in law on 5th March 2020. So Coronavirus is now a notifiable disease under the Health Protection (Notification) Regulations 2010.
Additionally, some will list the specific diseases they will cover or may exclude cover for certain diseases. Following the SARS outbreak in 2003, many insurers excluded or removed SARS from their coverage. As Coronavirus is a type of SARS disease, cover will not be available on these types of policies and as ever it’s important to scrutinise the policy wording.
Some policies will not deal with a specific list of covered or excluded diseases at all. Some may refer to new and emerging diseases. If they are not specifically set out, and not excluded, your position may be stronger in claiming. This is because any unclear language should be construed in the favour of the customer, rather than the insurer.
Lockdown caused an interruption to my business, rather than Coronavirus directly. Can I claim based on this?
Most business difficulties will be caused by the lockdown rather than a direct link with Coronavirus. Some insurance policies will provide cover for business interruption caused by actions of a competent authority which led to closure. Therefore the Government imposed lockdown may provide the ability to claim on such a policy instead of relying on Coronavirus specifically.
If I am covered, what losses am I likely to get back?
This will depend on your policy. Some polices will provide for a loss of income and other for gross profits loss. There may be a limit to the amount you can claim and the period you can claim for. It will also depend on whether you are claiming losses directly from Coronavirus, or from the lockdown. It’s vital that you can quantify your financial loss with information which shows a decrease in revenue and profit, or an increase in running costs.
I think my insurer is treating me unfairly, what can I do?
Insurance companies are subject to strict regulatory rules. They are required to act honestly, fairly and professionally in accordance with the best interests of their customers. Particular regard should be had for individuals and small business customers (defined as having an annual turnover of less than £6.5 million and employing less than 50 people).
The FCA has stated that there is a need for consistency in approach by insurers, but has warned against collaboration by insurers in breach of anti-competition laws. This is to stop all insurers agreeing, for example, not to pay out claims brought as a result of Coronavirus, in order to make it more difficult for customers to challenge their decisions.
The FCA has identified that many business interruption policies will not cover pandemics and they will not force insurers to intervene where the policy wording is clear. However, if coverage does exist, they do encourage insurers to pay-out accordingly. The FCA has stated that they may seek Court determination on the interpretation of particular policy wording that causes problems.
The Financial Ombudsman has stated that they expect insurers to think beyond the strict interpretation of the policy terms and consider what is fair and reasonable in each case. You may wish to get advice from a dispute resolution solicitor who specialises in insurance disputes.
What help is available if my business insurance policy doesn’t pay out?
It will be worthwhile checking any other insurances policies you may have. It’s possible that policies for cancellation insurance, employer’s liability and public liability may have additional coverage included. These may cover other types of losses arising from Coronavirus or the resulting lockdown, that is, not as a result of the interruption of your business. For example:
- public liability insurance and employer’s liability should cover any claims against you by members of the public or employees who believe they contracted Coronavirus from you or your premises, as a result of inadequate protection being provided.
- cancellation insurance will usually cover irrecoverable expenses incurred and loss of profit for events cancelled for reasons covered by the policy or, not excluded by the policy.
- trade credit insurance may provide coverage for non-payment by a debtor, who has perhaps become insolvent.
Government support measures
The Government has announced a huge package of fiscal measures aimed at supporting struggling businesses through these troubled times, as summarised below:
- The Coronavirus Job Retention Scheme (CJRS) is now live and enables businesses struggling to pay their employees’ salaries to claim back 80% of wage costs up to a cap of £2,500 per month per employee.
- Businesses in the retail, leisure and hospitality sectors, as well as nurseries, are entitled to a business rates holiday during the 2020-21 tax year.
- Small businesses and those in the retail, leisure and hospitality sectors can apply for a range of cash grants to help cover their overheads and essential costs.
- The government-backed Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme can help eligible businesses to access up to £5 million and £25 million of business finance, respectively.
- Commercial tenants will also be protected from eviction by new emergency laws until at least 30 September 2020.