Business Insurance Coverage Issues arising from COVID-19

We are increasingly receiving queries from businesses whose insurers are refusing cover under business interruption policies.

The Government’s closure of non-essential businesses on 23 March 2020 is not covered as standard in many business interruption policies and indeed, in most such policies, the impact of infectious disease will not fall under the standard scope of cover.  Basic business interruption cover is often sold as part of a commercial combined policy, and the cover provided generally only covers revenue losses which flow from physical damage to property belonging to the insured.

Some businesses may have purchased an extension to their business interruption cover which may assist in current circumstances and may include:

  • An “infectious diseases” extension to recover losses caused by infectious diseases provided they fall within the scope of cover (which is often determined by reference to whether a disease is on the list of “notifiable diseases” published by the Government from time to time); or
  • A “denial of access” extension which provides cover for loss caused by access to the business premises being hindered or prevented for certain reasons.

The policy wording should be checked carefully on a case by case basis to determine precisely the extent of any additional cover available.

COVID-19 was added to the list of “notifiable diseases” in England and Wales under the Health Protection (Notification) Regulations 2010 on 5 March 2020.  As such, whilst cover may be available under certain business insurance policies where the “infectious diseases” extension refers to any disease categorised as a “notifiable disease”, other policies may only provide cover in respect of a pre-determined list of diseases, which is unlikely to include COVID-19.  Moreover, many commercial policies apply exclusions that could apply to a viral contamination such as COVID-19.

Further, even if COVID-19 falls within the definition of “infectious disease” in the business interruption policy, some policies may require the loss to have been caused by an outbreak of that disease in or in the vicinity of the relevant premises.  As such, on a strict reading of the policy, there may be businesses who have purchased an “infectious disease” extension who may be unable to claim under their policy of insurance where their business premises closed in response to Government guidance and/or as a result of social distancing rather than as a result of any actual contamination in or around their business premises.  Businesses which decided to suspend operations voluntarily to avoid spreading the virus may not be able to claim on their business interruption policies.

If a business seeks to rely upon a “denial of access” extension it will need to consider carefully whether the policy wording is sufficiently broad to cover the loss of access caused by the lockdown as, for example, certain policies may be limited to loss of access caused by physical damage and/or loss of access caused by an outbreak in the immediate vicinity of the premises i.e. the policy may require a specific event occurring at the business premises.

It follows that the availability of cover will turn upon the detail of the policy wording and businesses may find that the policy wording does not envisage the current exceptional circumstances.

The extent of cover available

Even if it is established that losses do fall within the scope of the relevant insurance policy, determining the extent of coverage available is not always straightforward and often such policies do not provide cover for pure loss of profit.  Further, the business will generally need to prove that the COVID-19 outbreak (or government restrictions) caused the losses claimed.  This may be very difficult when there is a general downturn in business.  For example, even before any mandatory closure of the business, few customers may have been visiting the insured’s premises due to fears concerning the virus.  Policies that only cover the occurrence of a notifiable disease on the insured’s premises will probably provide little assistance as it will be difficult to demonstrate that a business’s revenue losses flow from the occurrence of the disease on their premises, as opposed to the pandemic being in existence throughout the country. There will often be scope for insurers to argue that whether the insured event had occurred or not, the losses would still have been incurred because of the broader crisis. Any recoverable losses may also be subject to “sub-limits”, restricting the recoverable amount.

In summary, careful consideration needs to be given to the express wording of the relevant policy in the context of any given claim.  There is a vast array of wordings used across different policies meaning that differences in coverage can be substantial.  However, what is clear is that in so far as revenue losses are concerned, businesses will generally find it very difficult to recover on their business interruption policies.

This is an area to be monitored closely as the UK Financial Conduct Authority (FCA) is seeking clarity on how such policies should be interpreted in light of COVID-19 and has issued a test case in the High Court through an expedited court process and the case is expected to be heard in late July 2020. The FCA has also clarified that the test case will not prevent parties complaining to the Financial Ombudsman Service if they have had cover declined or from pursuing their own disputes through negotiated settlement, arbitration or court proceedings.

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