Blog COVID-19 and Business Interruption Insurance Under English Law

COVID-19 and Business Interruption Insurance Under English Law

Business Interruption Insurance

Some recent media reports have suggested that whether business interruption (BI) insurance is triggered depends on whether the Government ordered the business to be closed. Coverage in any particular case depends on the wording of the relevant insurance policy, but in general BI insurance does not work in the way the media has suggested.

BI cover is usually purchased as an extension to a property insurance policy: the intention is that where there is physical damage which is covered under the policy, the BI extension will provide some coverage for the profits which the business loses as a result of that damage.

If business premises are shut down on a purely precautionary basis, and not because coronavirus is believed to be present, there would not usually be any property damage and so the BI extension would not apply either. Even where premises are closed because they are contaminated with the virus, it is doubtful that the presence of a virus alone (if it can be proved) would amount to “damage.” More complicated questions may arise where a response to the virus leads to physical damage, such where a foundry is closed and the moulds suffer damage.

The calculation of lost profit is typically tested by comparing: (1) the profit actually made when the property was damaged against (2) the hypothetical profits which would have been made if the property had remained undamaged during the period in question. In many instances, if the insured property had remained open, the policyholder would still have lost profits because of the impact of coronavirus on customers generally, and that fact must be reflected in the calculation. This is illustrated by Orient Express Hotels v. Generali, [2010] EWHC 1186 (Comm): in that case, Hurricane Katrina caused damage to an insured hotel in New Orleans, but extensive flooding in the city meant that, even if the hotel had not been damaged, it would have suffered a major downturn in business in any event.

On April 15, 2020 the FCA wrote to insurers of small and medium sized enterprises regarding their approach to coronavirus BI claims. The FCA estimates that most SME’s BI cover does not cover coronavirus losses, and it is not intervening in those cases. However, it notes that there are some policy wordings which clearly do cover the situation: in those cases the FCA expects insurers to assess and pay the claims quickly, including making interim payments where the full amount of insured loss may require time to ascertain. The FCA’s letter also notes that the Financial Ombudsman Service is considering how to deal with coronavirus-related disputes efficiently, including the possibility of having a series of “lead cases.”

On May, 1, 2020 the FCA announced its intention to seek declarations from the English courts about the scope of common BI wordings. It also reminded firms to communicate clearly and sympathetically, to pay claims promptly where they are covered, and to handle complaints promptly. Separately, FCA is requiring insurers to consider whether policies provide value to customers during coronavirus, and to take appropriate action which may include refunds business interruption FCA insurance.