02 April 2020
14 April 2020
Even if a business has extended Business Interruption cover how will their loss be valued - implications of widespread reduced demand.
COVID-19 is not only a major threat to human life, but has serious financial implications for businesses around the world.
Business Interruption (BI) cover is widely available and many corporate entities have BI policies in force. A look at the wording, however, will reveal that BI cover is usually triggered by damage to the insured’s property.
An outbreak of a disease such as COVID-19 will not involve damage to property. Separate cover or extensions are available, such as Contingent BI, Suppliers/Customers Clauses, Denial of Access, and Loss of Attraction. Still, cover arising from infectious diseases is rarely given under such clauses. Only large corporates/multi-nationals are likely to have this protection.
The small number of organisations with cover against infectious diseases was highlighted in a 17th March statement from the Association of British Insurers:
"Irrespective of whether or not the Government orders closure of a business, the vast majority of firms won’t have purchased cover that will enable them to claim on their insurance to compensate for their business being closed by the Coronavirus.
Standard BI cover - the type the majority of businesses purchase – does not include forced closure by authorities as it is intended to respond to physical damage at the property which results in the business being unable to continue to trade.
A small minority of typically large firms might have purchased an extension to their cover for closure due to any infectious disease. In this instance, an enforced closure could help them make the claim, but this will depend on the precise nature of the cover they have purchased so they should check with their insurer or broker to see if they are covered."
During a press conference with the UK’s Prime Minister on the same day, the UK’s Chancellor of the Exchequer referred to the possibility of insurance claims being pursued in response to Government advice to avoid unnecessary contact through going out. He said that, having spoken with insurers, the Government’s advice (to avoid unnecessary contact) “will allow businesses to make an insurance claim against their policy". Later, the ABI confirmed their earlier statement (quoted in full above), saying “as the Chancellor acknowledged, the vast majority won’t have purchased extended cover and this remains unchanged”.
Even if a policyholder has cover against loss of attraction arising from the outbreak of an infectious disease, there is still a significant challenge to overcome: Wide Area Damage (WAD).
The issue of WAD came to the forefront after Hurricane Katrina wreaked havoc in New Orleans in 2005.
A hotel suffered damage and was closed in September and October 2005, but re-opened partially in November despite continuing repair work. The severe damage in New Orleans resulted in a state of emergency being declared and an evacuation of the city was ordered at the end of August 2005.
The hotel owners’ position was that their claim for losses caused by insured damage was admissible. Insurers, on the other hand, argued that by applying the “trends clause” in the policy, the adjusted standard turnover was zero and thus the hotel had no loss.
The “trends clause” (also known as the “Other Circumstances Clause” or “New Business Clause”) applies to the Rate of Gross Profit, Annual Turnover, and Standard Turnover,
“to which such adjustment shall be made as may be necessary to provide for the trend of the business and the variations in or special circumstances affecting the business either before or after the damage or which would have affected the business had the damage not occurred, so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the damage would have been obtained during the relative period after the damage.”
The application of the “trends clause” to the standard turnover became a matter for the English courts after arbitration had failed to settle the issue.
The Commercial Court held that the “but for the damage” wording was key and that the loss should be calculated on the basis that the hotel was undamaged, but that the city was catastrophically affected – which, indeed, was the case. The hotel owners were given permission to appeal, but the Court of Appeal was spared from hearing the case as the parties reached a negotiated settlement.
(Orient Express Hotels Ltd v Assicurazioni Generali SPA - 2010)
With the “lockdown” restrictions now in force as a consequence of coronavirus, it is not beyond the realms of possibility that WAD will re-appear as a talking point in response to BI claims. To a large extent, the market ignored the Orient decision when considering subsequent claims involving large areas of damage, for example, in the case of the devastating floods in Thailand in 2011.
Those with BI policies covering losses arising from infectious diseases must be hoping that insurers will take a similar view this time. Consider, for example, a vendor at London Heathrow in a situation where footfall in the airport has been decimated by flight cancellations, or a city-centre hotel in one of Europe’s major capitals – now in lockdown. The specific business entity may have an employee diagnosed with COVID-19 but, in any event, there are few, if any, customers due to the widespread loss of attraction.
Despite pressure from the major brokers, there are no real signs of the basic policy wording being amended to read “but for the event”, or to include an additional clause to the effect that if there is widespread damage in the vicinity in addition to damage at the Insured’s premises, the damage consequent on which the BI loss is measured includes the damage generally and not just that at the premises.
The issue of WAD will remain contentious, and the insurance industry, anyway, may well suffer (further) reputational damage as businesses look to their BI policies, only to find no cover.
Graham Purdon (ACII) is Group Technical Director and Managing Director at Concordia Consultancy Ltd. For further enquiries please email to: email@example.com
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.