Business Interruption clauses / Cover for COVID?

At the time of writing, the COVID-19 outbreak is a live insurance event for the World Wide insurance market with a potential to surpass the other top Global catastrophe events in the last 30 years, including Hurricane Katrina, 9/11, Tohoku EQ, Hurricane Andrew, Hurricane Marie, and Hurricane Irma.

In fact, Lloyd’s, the world’s leading (re)insurance market, by a press release of yesterday revealed “that it will pay out in the range of $3bn to $4.3bn to its global customers” as a result of the far-reaching impacts of COVID-19. These losses could rise further if the current lockdown continues into another quarter.

Lloyd’s believes that once the scale and complexity of the social and economic impact of COVID-19 is fully understood, the overall cost to the global insurance non-life industry is likely to be far in excess of other historical events.

To understand the impact of the pandemic on the global non-life insurance industry, Lloyd’s undertook an economic study of the potential losses. This looked at both underwriting losses through the Profit and Loss Account, as well as the reduction in the value of investments which insurance companies hold to fund future claims payments. The economic study took account of the current pay out estimates assuming continued social distancing and lockdown measures through 2020, as well as the forecast drop in GDP globally.

Closer to home, Irish Insurers are experiencing a significant increase in notifications and possible claims for lost earnings from businesses forced to close by the COVID-19 lockdown. Whether voluntarily closed or on foot of the lockdown ordered by the Government, many businesses are looking to the business interruption clauses within their Insurance policies as a safety net.  Insurance Ireland confirmed on April 10, 2020, that most business policies provide no cover for COVID-19 closures, but the devil is in the detail of individual policies, and some policy wordings or policies with no time or spatial limits may favour policyholders.

To balance this argument, a leading Economist, Moore McDowell last week adopted the view of Insurers when responding to the call by Fianna Fáil TD Robert Troy for “insurance companies to be arm-twisted into paying up on “business disruption” claims will be welcomed by many who have had claims disallowed by reference to “small print” terms.”

Mr McDowell countered – “Popularity, however, does not mean that the demand is correct.” Mr Troy, and others, miss the point that insurance companies in effect are “risk-poolers” and then went on to add “In that respect, Covid-19 is indeed comparable to a war. The problem with Covid-19 (regardless of interpretations of the small print in policies) is that it would bankrupt insurers, who had sold policies based on a one in a hundred or even smaller risk, if they had to cover the costs when the disruption hits 30 per cent or more of the insured” and then goes further by saying “Regardless of the fine print, business disruption on the scale of that flowing from COVID-19 is simply not an insurable risk, and anyone who really believes that insurers should cover such an event is seriously deluded.”

While most business interruption policies will be clear about what they cover and more importantly, what they do not cover, a more forensic review may contain exclusions which mean compensation will be limited to certain circumstances. As with all policies the wording will have to be considered in tandem with the schedules attached to the policy itself. Some policies may require more in-depth analysis to ascertain whether they extend to losses incurred as a result of the current COVID-19 crisis.

Claims under such policies are inevitable and proceedings have already been issued against FBD by the company, backed by several former and current rugby players, which owns the Dublin pub, Lemon & Duke. It is understood that the case relates to a claim under a business interruption policy in respect of the pandemic.

To claim successfully for business interruption, policyholders usually have to prove that they have lost earnings because of physical damage to their premises, such as a fire, flood or storm. Insurers are arguing, that losses arising from the COVID-19 lockdown do not fit this criteria, because the virus does not inflict physical damage to the premises. Instead, businesses must have add on cover that insures them for infectious diseases in order to claim.

This extra layer of protection was intended for unforeseen losses, such as a restaurant hit with temporary closure, for example, by an outbreak of salmonella or food poisoning. Yet the add–ons might have wider applications in the current environment as business owners are discovering when they seek advice on their insurance policies. Some policies cover outbreaks of infectious diseases that occur within a stated radius of a policy holder’s premises. This could encompass most COVID-19 closures because the virus is now so prevalent, having reached every county in Ireland. Into the future, Insurers are starting to impose a COVID-19 exclusion, particularly on property and perhaps on some Liability Lines, particularly Healthcare. However, in general Underwriters are underwriting their way through this crisis and looking at companies and risks on a case by case basis as policies fall due for renewal.

Policy Wording 

Insurance policies are contracts, nearly always defined clearly and are designed and written by underwriters who have considered and calculated the risk to cover losses arising in a specified set of circumstances. These contracts insure against unforeseen peril and are not fluid documents designed to provide a financial safety net to cover losses which are not specified under the policy. The majority of policies will be clear in terms of what is or is not covered for the purpose of business interruption.

The Central Bank issued a letter to all Insurers on 27 March 2020 and advised insurance companies that the interpretation of any ambiguous clauses surrounding policy cover for COVID-19 related claims should be read in favour of the consumer, simply reaffirming the long standing legal principle of contra proferentem.  Ultimately, arguments relating to cover and binding decisions on cover will be a matter for the Ombudsman’s office and the Courts and not the Central bank. The Financial Conduct Authority (FCA) in the UK have announced that they will seek court rulings to speed up the resolution of contentious claims being resisted by Insurers. The regulator said it would select cases with business interruption policies containing the most frequently used policy wordings that have caused uncertainty for businesses trying to claim. We will monitor these cases and advise our clients on the outcomes.

Coverage advices will rest on the finely balanced interplay between what is specifically included, such as a list of infections that are covered and what is specifically excluded such as an epidemic or pandemic. Some policies provide cover for “notifiable diseases” which may be a little more helpful to policyholders since the Irish Government declared COVID-19 as such on May 5 2020, but this an example of how each insurance policy must be read forensically and is word specific.

In conclusion, the general consensus is that policies will have to be reviewed on a case by case basis.

Our Insurance cover experts are available to assist with any queries arising on interpretation of policies or any other matters arising from business interruption.

For further information please contact Liam Collins and Geraldine Stack – Geraldine.stack@goregrimes.ie