Business Interruption Insurance – check your policy
Updated as of 15 June 2020
COVID-19 has resulted in the UK economy going into such a state of shock that most businesses have been enduring significant losses with almost no warning and without knowing when a level of normality will return. It’s not surprising, therefore, that many business leaders are looking at different ways to mitigate their losses. Whilst the government measures will certainly help to support many businesses for a while, it is also important to review the full plethora of contracts covering every aspect of the business. One of the first set of contracts that many business leaders reached for on hearing the news of the pandemic was their insurance policies and their business interruption cover in particular.
Many have been surprised to find that their policies won’t cover business interruption losses caused by having to close the workplace as a result of COVID-19 lockdown measures. Whilst many businesses may have procured business interruption policies, this is usually linked to closure being forced as a result of physical damage. Non-damage business interruption cover (which might cover the impact of a pandemic like COVID-19) has been available in the insurance market, but is either not commonly bought or is defined by reference to named viruses and diseases none of which (of course) include COVID-19 because it hadn’t been heard of at the time of underwriting.
Nevertheless, every business leader should check their policies. COVID-19 losses might be covered inadvertently. Some policies adopt the term “notifiable disease” (defined under the Health Protection (Notification) Regulations 2010) as a formal classification that triggers cover. When the UK government confirmed COVID-19 as a “notifiable disease”, those policies will be deemed to have covered COVID-19 related losses from that moment.
That may not be enough to get past the insurer. Some policies may feature a geographical exclusion clause: e.g. the notifiable disease must have manifested itself within a set radius of the insured premises. The scale of the infection is now so high as to make it likely that any premises will be close enough to a recorded case to qualify.
Perhaps unsurprisingly there has been considerable dispute over the appropriate interpretation of the policy wording in some cases which has led to many customers having what they believed to be valid claims rejected by their insurer. To help resolve the uncertainty the FCA have taken a test case to the High Court. The purpose is for the Court to provide its interpretation of a representative sample of policy wordings. The outcome of the test case will be binding on the insurers who are a party to the case. The FCA also state that the decision will “provide persuasive guidance for the interpretation of similar policy wordings and claims, that can be taken into account in other court cases including in Scotland and Northern Ireland, by the Financial Ombudsman Service and by the FCA in looking at whether insurers are handling claims fairly.”
More information on the FCA’s action can be found here https://www.fca.org.uk/firms/business-interruption-insurance.
The test case is due to be heard in the second half of July and we will see how this develops. In the meantime, we urge all clients to review their insurance policies and give serious consideration to notifying their insurers of a claim in order avoid a claim being denied at a later date. We are here help you in the event that you consider that your policy might provide cover. We will provide our existing clients with a free health-check of your policy to see if it provides the necessary cover.
Related to insurance cover, we would also recommend that business tenants check their leases to see if their rent suspension clauses have been triggered. This may require sight of the landlord’s insurance policy which the tenant may be paying for under the terms of the lease. More information can be found in our real estate section of our coronavirus hub.