The rapid and dramatic spread of the coronavirus (COVID-19) across the UK, Europe and beyond is affecting the movement of people, trade and business operations on both micro and macro levels. The advice and policies of national and local governments are changing on a daily basis.
More recently, the UK government issued guidance to employers and businesses encouraging businesses to allow their employees to work at home, wherever possible. But what if working from home doesn’t work for your business? Or what if working from home could work but it would cause significant challenges that your business might not have the strength, resilience, or resources to overcome?
Many businesses are going into lockdown to contain the spread of the virus and to protect their staff, but what does your insurance actually cover you for? Can your insurance cover you where your business is interrupted due to a ‘pandemic’?
The full impact on global commercial operations will not be known for some time – but it will be far-reaching and long-term. However, there are some important steps that you can take now to protect the financial position of your business.
We advise businesses to look closely at their insurance policies and consider upcoming renewal dates. Policy wording and terms are different depending on the level of cover negotiated and paid for. In this article, we focus on business interruption cover. We will issue further articles in the coming weeks regarding other types of cover that could be used to assist businesses dealing with COVID-19-related issues. Our next alert will focus on event cancellation insurance – every day, we hear of more events being cancelled (such as music or sporting events, including Glastonbury Festival or the Formula 1 Grand Prix de Monaco 2020) or postponed (such as Premier League fixtures and the London Marathon). Stay tuned for further know-how alerts from the Reed Smith Insurance Recovery team.
Business interruption insurance
Business interruption cover is designed to protect a business from the financial impact of not being able to operate as a result of an insured risk. Typically, this would be an indemnity for loss of revenue arising from damage to property. The policy may also extend to provide cover for related additional expenses that a business has had to incur as a result of the business interruption and for other triggers such as events. Business interruption cover may be covered in a stand-alone policy, or issued as part of a wider business insurance package or within a property policy. For more information on how business interruption policies operate, please see our previous client alerts from 6 February 2020 and 2 March 2020.
If your organisation has already been impacted by COVID-19, whether by a slowdown in operations or a necessary closure, it should be considering its insurance position now.
As every business is unique, no one business interruption policy is the same. This is particularly the case where a broker has arranged your policy after assessing the needs of your business.
Cover for financial loss arising from damage to property is the key benefit of a business interruption policy. One of the potential issues in pursuing a COVID-19 claim under such a policy, however, relates to how the virus can be seen as leading to ‘damage to property’. If COVID-19 claims are not seen as causing damage to property, the standard business interruption insuring provisions will not be triggered.
A ‘damage to property’ argument based, for instance, on the relevant property being uninhabitable as a result of COVID-19 has not yet been tested in court. Nonetheless, we are already seeing and exploring attempts to argue that COVID-19 has caused damage to property, thus triggering cover under a business interruption policy.
Coverage of claims for non-damage losses arising from COVID-19 will likely need to be made under the Notifiable Diseases section of a business interruption policy. However, Notifiable Diseases is not automatically included; it is normally an extension to standard business interruption cover.
Notifiable Diseases can be defined in three different ways (a policy may include one or more):
- a specified list of diseases
- notifiable diseases under the Health Protection Regulations (2010) (HPR); and/or
- enforced closure of an insured location or building by a government or local authority for health reasons or concerns.
COVID-19 is a new disease and therefore unlikely to have been specified as a covered disease.
COVID-19 was, however, formally added to the HPR as a notifiable disease in England and Wales on 5 March 2020, so there could be cover for any losses sustained after this date.
Claims for financial losses arising from any closure of a business will likely only be covered where such closure has been ordered by a public authority. Any business which elects to close, whether in whole or in part, out of precaution for the welfare of its employees and customers, should therefore be aware of the potential impact that this may have on its insurance position.
Cover for Notifiable Diseases may be restricted insofar as the locality of discovery of the disease (that is, where the disease was discovered). Check the policy carefully for any such restrictions. Some policies provide cover where the Notifiable Disease occurs within the ‘vicinity’ of an insured location. ‘Vicinity’ will likely be a defined term in the policy wording. We envisage that most insured locations in the UK would now be able to rely on such wording, given the broad and rapid spread of COVID-19.
Finally, an insured might also have an extension of cover for ‘Infectious Diseases’ in their policy. This extension is likely to have a low sub-limit (that is, a financial limit), and there would probably be a higher limit under the Notifiable Diseases cover.
Notifying your insurers
The vast majority of insurance policies will require a formal notification to be made in order to trigger coverage. Indeed, some may require notification within a specified period as a condition precedent to cover. This obligation to notify exists notwithstanding the fact that insurers will be aware of COVID-19 and its impact worldwide.
Accordingly, now is the time to review your policy terms relating to notification of a claim and circumstance wording in your business interruption policy. There may be a specific format that needs to be complied with. Getting your notification right is important to facilitate insurers’ consideration of the claim, acceptance, and prompt payment.
Proving a loss – cause of interruption
At an early stage, it will be necessary for an insured to demonstrate that the downturn or cessation of business is a consequence of a covered cause or event. It is therefore important to consider what the precise cause is: whether it is a supply chain issue, self-isolating employees, a drop in footfall and customers, cancellation of bookings, or government-mandated closure (or a combination of these and other reasons) and whether these incidences are a direct consequence of COVID-19.
Determination of the cause of the interruption may also be important for the purposes of any aggregation. ‘Aggregation’ is where a number of claims are considered to be one claim for the purposes of an insurance policy excess or an insured’s limit of indemnity. Depending on policy wording, insureds may want to avoid all of their COVID-19 losses being aggregated as a ‘single’ claim. Instead, an insured may want to be able to make more than one COVID-19 claim. An insured needs to be careful to protect its aggregation position and to have this in mind when notifying its claim(s).
Proving a loss – quantum
Although a business will seek cover for the immediate and direct loss to its turnover, it may also seek an indemnity for other losses arising from other insured risks, such as cancellation of events, higher operation costs, loss of attraction, liability to employees and the public, and so forth.
When it comes to presenting a claim for financial loss suffered, insurers will require the insured to provide evidence of the amounts sought. While it may not be desirable to deal with demanding, and often extensive, requests for information from insurers, it is worth understanding the potential scope of the more common requests at an early stage to manage the expectations of internal stakeholders.
- Business income
Typical information sought by insurers includes previous management accounts and profit and loss accounts showing the turnover of the business. Insurers will also seek information on budgets and forecasts for 2020 and subsequent years. If the business was in decline or in a period of growth prior to the impact of COVID-19, insurers may factor that into any calculation of loss.
Similarly, if the business relies on any seasonality, for example, the winter ski season which would generate significant annual income, then historic evidence should be provided to support this.
- Other expenses
Your business interruption policy may also cover additional costs incurred that are associated with dealing with the business interruption and consequential losses. This may include bringing in additional temporary workers or third-party contractors, if permanent staff have been diagnosed with COVID-19 or forced to self-isolate. Full records of correspondence with staff relating to issues with COVID-19 and any additional expenses incurred during this period should be maintained.
A business should also check the policy wording for any specific additional costs and expenses that the insurer might pay in connection with a business interruption loss, such as claims preparation costs, contractual penalties, or public relations costs. If the policy wording is not clear, the insured may need insurer consent prior to incurring any or all of these costs. An insured should also bear in mind that they will not be covered under their insurance for ex gratia payments (that is, payments not contractually obliged to be made).
Businesses should note that they are under an ongoing duty to mitigate their losses (that is, to make reasonable efforts to limit any resulting harm).
It is also important to be mindful of specific exclusions in your business interruption cover. Insurers will be suffering heavy losses as a result of COVID-19 and will be anticipating further losses as further claims are made and the full extent of the damage emerges. In a hardening insurance market of this nature, insurers will scrutinise claims closely.
Typical exclusions to be aware of include:
- Closure of premise due to infectious diseases; and
- Losses due to supply chain issues (such as closure of a supplier’s premises).
We recommend that you review your exclusions and consider the wording carefully on renewal.
Timing and the benefits of acting promptly
The effects of COVID-19 on business operations are being felt immediately and severely. Government announcements of closures of restaurants and theatres are often made at short notice, leaving businesses struggling to prepare or adjust.
One of the key priorities for many businesses at this stage will be managing cash flow and contingency planning. Maintaining a regular dialogue with brokers and insurers and making prompt notification of a loss under a business interruption policy will assist businesses in managing those key priorities.
Where a business interruption policy does respond to the claim, a business may want to ask insurers to make payments on an interim basis, for example, on account of the increased cost of working. Further, the insured should take note of any applicable excess and the appropriate limit of indemnity (including any relevant sub-limits).
The nature of viral diseases means that there can be ‘waves’ or ‘surges’ in their impact on a business. As mentioned above, depending on the wording of any aggregation clauses, this could affect the way in which an insured notifies a claim and the level of indemnity available to a business under a policy.
It is safe to say that insurers are busy dealing with numerous requests for cover in these uncertain times. Review your insurance documentation and speak to your broker in the first instance. If you want further advice on policy review and potential coverage or assistance with making a notification, please do not hesitate to contact the Insurance Recovery team at Reed Smith.
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.