Globally, many companies have been affected by significant business declines or closures due to coronavirus measures implemented by state governments and organisations.
This has resulted in great financial losses for many industries and companies. In order to deal with this, some companies have tried to rely upon their Business Interruption (BI) insurance to cover their loss of revenue.
The economic consequences of the COVID-19 pandemic on businesses have been dire, to say the least. With many businesses being forced to close either due to government shutdown orders or simply due to a lack of customer base in light of quarantines, the effects can be long-term and detrimental to businesses that simply cannot afford to shut their doors.
During these difficult times, many business owners are finding that their insurance carriers are not covering claims for these interruptions. Although business interruption insurance typically covers losses resulting from disaster-related damage, i.e., fires, theft, etc., many carriers are denying claims related to COVID-19. Some businesses have filed lawsuits against their carriers, while state legislatures are fighting to mandate certain coverage.
Like most questions during such an uncertain time, the issue of business interruption insurance will unfold as we continue to go through this pandemic.
The lockdown restrictions have affected the way people live and work. With a great deal of uncertainty about how long restrictions can last, many business owners are turning to their insurers to find out if and how they are protected by their business interruption insurance policies. Many businesses have found themselves without sufficient cover or those that have tried to make a claim have been declined by their insurers.
Your business interruption insurance policy should list or describe the types of events it covers. Events that are not listed on, or not described in, the policy are typically not covered. It is important to review the policy exclusions, coverage limits, and applicable deductibles. You should also determine if the policy requires your business interruption to last for a certain time period before you are entitled to any policy benefits.
Business interruption insurance protects a business’ income stream when its operations are shut down by a covered peril. The purpose of business interruption insurance is to return the policyholder to the position it would have occupied if the covered peril had not occurred. Typically, business interruption insurance is purchased as part of an “all risk” property insurance policy. All risk property policies are the broadest form of property insurance available because they cover all losses the policyholder suffers unless the peril causing the loss is specifically excluded.
Business interruption coverage typically can only be triggered if you have property loss that leads to the business interruption. One example could be that a fire in your office has caused you to suspend your business activities. Because coverage varies across policies, you will need to read your particular policy and consult your broker or insurer or its agent for more information.
There are two exclusions in some business interruption policies that may be applicable to COVID-19 claims. The first is the “virus” exclusion, which ISO introduced in 2006 following the SARS outbreak. The second potentially applicable exclusion is the “pollution” exclusion. Pollutants are defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapour, soot, fumes, acids, alkalis, chemicals and waste.
Has the Business Suffered a Loss?
The first question to ask is whether the business has suffered a “loss” which triggers the policy. Of course, the business has suffered a loss – an inability to sell its products or services, the resulting loss of income, perhaps an inability to receive shipments of necessary components or ingredients needed for manufacture or assemblage, possible claims for breach of contract, and so forth.
But the question is whether this kind of “loss” is the kind covered under the policy. All risks of direct physical loss of or damage to the covered property or some variant of that language. The issue in this era of Covid-19 is whether the virus is a “direct physical loss.”
Some Selected Cases
With businesses stopped in their tracks, many have turned to their insurance companies for business interruption coverage, only to get denied. Typically, part of property coverage, business interruption is applicable only when there is physical damage to property. Oftentimes, there are virus exclusions in the policy language. Still, businesses across the world are suing their insurance companies and brokers, in some cases over the coverage denials.
Over the past several months, business owners, lawyers and accountants in US have been questioning if insurance companies would pay on business interruption insurance claims on damages related to Covid-19. The insurance companies are stating that the lack of “direct physical loss or damage” to insured property forms the basis for their denial of these claims. This has led to a surge in insurance claims turning into lawsuits, with more than 1000 cases in the year 2020.
U.S. District Judge Stephen Bough in Kansas City is allowing a group of salon and restaurant owners to sue Cincinnati Insurance Co. over denied business interruption coverage. Attorneys for the businesses allege that Covid-19 led to a “direct physical loss” that damaged property and rendered them unsafe and unusable. It is possible, however, that this gap in coverage and economic loss will soon be addressed at the state level. The New Jersey State Legislature, for example, is currently considering New Jersey Bill A-3844, which would force insurance companies to pay Covid-19 related BI claims, even when “viruses” are specifically excluded from BI policies. If passed by New Jersey, or other states in the US, it is possible insurers may challenge its legality in court due to the unprecedented risk and exposure insurance companies could face from a significant volume of BI claims.
Recently, the UK’s High Court passed its long-awaited judgement on the Financial Conduct Authority’s BI insurance test case, ruling in favour of policyholders on majority of key risk issues. The financial regulator brought the case forward in May 2020 to seek legal clarity on whether insurers were obliged to pay out on BI claims related to Covid-19 pandemic.
Based on the sample of policy wordings presented by the FCA, the court decided that most, but not all, of the disease clauses provide cover for losses connected to Covid-19. It also concluded that certain denial of access clauses provide cover depending on specific wording and how the business was affected by government measures such as mandatory closure orders. The test case clarified that the Covid-19 pandemic and the government and public response were a single cause of the covered loss which is a key requirement for claims to be paid.
A Paris restaurant owner successfully argued that his insurer, AXA, should pay for two months of income loss due to the pandemic. The ruling in late May 2020 continues to draw the attention of restaurant owners and insurers around the world. Some other French insurers have said they will pay out business interruption losses to some customers, depending on specific contracts. Regardless of policy language, some judges or juries may want to protect small businesses and rule in their favour.
Infectious Disease Coverage
Currently, one of the only ways for a business to recover its losses due to COVID-19’s impact may be under infectious disease coverage. We are currently in an unprecedented situation with COVID-19 and it is difficult to predict whether the presence of the virus or the threat of contamination will be sufficient to trigger business income coverage. However, it is expected that many insurance providers will oppose coverage of Coronavirus related BI, Civil Authority, Contingent Property or Dependent Property claims.
What then of the future?
The impact of this crisis will have many implications not only for litigation volumes or new claims types. It will also accelerate and increase home working and the use of technological solutions to dispute resolution generally. Whiles the short and medium effects will be, for many, unpleasant, it is hoped that organisations will emerge more resilient, more agile, and with a more engaged and mentally capable workforce.
One of the most prominent areas for class action litigation related to the COVID-19 pandemic is disputes about whether commercial insurance policies cover business interruption losses. Hundreds of businesses have sued a large number of insurance companies arguing that their insurance policies should cover any losses incurred as a result of state and local closure orders during the pandemic. There have already been over 1,000 of these actions filed worldwide, more than half of which have been filed as class actions. Plaintiff businesses have argued that the terms of their “all-risk” insurance policies, including terms related to Business Income coverage and Civil Authority coverage, cover losses from closures required by state and local pandemic orders.
In response, insurers have disputed these allegations, arguing that the insurance policies at issue only cover losses incurred as a result of direct physical damage to property, such as from an earthquake, fire, flood or hurricane, and not losses resulting from business disruptions due to a health emergency. Insurers have also noted that some policies contain explicit exclusions for losses resulting from a virus, indicating that general commercial property insurance terms were not intended to cover the losses claimed.
In the event of something like the rise of coronavirus, it is important that insurers evolve their BI policies in real-time. Turning uncertainty into risk can only be done through experience. The experience of coronavirus is being documented and analysed faster and more thoroughly than any disease in history.
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