What happens when the interruption is interrupted?

Giving advice?

The coronavirus pandemic is causing thousands of policyholders to raise questions about their insurance cover, especially business interruption; and the entire insurance sector is struggling to provide answers. That is because until the pandemic struck no one had asked these questions. There is no precedent.

Policyholders are not interested in how insurance works they just want answers; and the right answer for them is “Yes, of course you are covered”.

Well, we cannot say that about the COVID-19 pandemic.

So, when asked questions about a subject with which you may not be entirely familiar what happens next?
It is often what is not said that is taken to be “advice”. Never will that be truer than in engaging in discussions with policyholders about losses incurred by COVID-19; because there is so little knowledge or experience, let alone precedent.

Already lawyers are circling in anticipation of taking up the fight on behalf of possibly thousands of disappointed policyholders. Brokers are, sadly, at risk if the insurers will not pay and lawyers know that. Consequently, it is imperative as a trusted broker, not to “wing it” in advising on something you may know very little about.

Case Study: What happens when the interruption is interrupted?

The Red Lion Hotel suffered a fire in March 2019. It was a thriving business through its drinks and restaurant activities as well as a successful B&B offering. After some delay, the material damage claim was agreed and it was estimated it would take 18 months to reinstate the damage to the building and contents.

The policy contained business interruption cover with an indemnity period of 18 months.

On the 12-month anniversary of the fire in March 2020, UK pubs and hotels had to close by order of central government as its response to the COVID-19 crisis. This also meant that the building works were interrupted. There was no reliable estimate as to how long the lockdown would last.

The loss adjuster acting for the insurer agreed to settle the business interruption claim for the first 12-month period of loss but stated that, as from March 2020, the business interruption claim would terminate. The stated reason for this decision was that the fire was no longer the cause of the insured’s loss, and that current losses flowed direct from government action, for which the policy would not respond. The adjuster took the view that government restrictions were likely to last for another six months, by which time the 18-month indemnity period would have been exhausted. The insured was therefore put under pressure to accept an offer to settle for the first 12 months of interruption only, which represented a payment of two-thirds of the total loss.

The adjuster defended his position by issuing a reminder that an insured cannot profit from obtaining an indemnity and that, had the insurer paid for losses over the full 18-month period, this would have represented an advantage over businesses that had had to close but had suffered no insured loss.

Was the adjuster, right?

At first sight, there might seem to be some logic to the adjuster’s opinion. The insurer is only obliged to compensate for losses arising from the insured peril and such losses that occur within the stated indemnity period.

In this case, the business interruption wording defines the indemnity period as being:

“The period during which the business is affected, starting on the date the incident occurred and ending not later than the maximum indemnity period.”

The country’s lockdown has proven to be something of a leveller affecting most businesses. In the case of the Red Lion, not only did trade stop, but so did all efforts to reinstate the property. This had the effect of time standing still until the country was again operating normally. If, as predicted by the adjuster, the period of lockdown did turn out to be for six months, at that time the work of reinstatement would start again. The total time taken for the contractors to complete the work would still be for the 18 months originally anticipated (the period during which the business is affected) and this is still the time during which the Insured should be compensated for the business interruption loss.

In a situation such as this, the only equitable solution is for the insurer to suspend the rate at which the indemnity period is being exhausted, so that any period of lockdown is disregarded. The end result would be that the business would still be compensated for the full 18-months’ business interruption loss even though the business would have been closed for 24 months. This leaves the insured with an uninsured period of six months which only places the insured in the same position as any other business. It is not making a profit from the BI insurance claim. For the (expected) six-month period of lockdown, the business must avail itself of what government assistance is available, just like any other business.

The insurance industry is already receiving criticism for its refusal to deal with business interruption claims that arise as a direct result of the COVID-19 shutdown. We can only hope the industry does not pave the way for further criticism by attempting to curtail ordinary peril business interruption claims as outlined above. There would be no equity in that.

A new initiative

Businesses that rely on human contact for survival have been hung out to dry; they can no longer trade so therefore are unable to generate an income. The government has offered an 80% bailout to cover employees’ wages, but what about all the other costs involved in running a business? Many business owners have turned to their insurance companies, so far, the majority have had little to no success.

In answer to this situation, Flaxmans has issued a COVID-19 Business Interruption Recovery Initiative which has been sent to insurance industry bodies and the government providing a solution to the thousands of businesses affected by the pandemic.

The paper makes a case for a joint initiative between (primarily) the UK Government and the British insurance industry to deliver and manage a co-insured Business Interruption recovery scheme for the mutual benefits of:

• The UK’s business entities (as defined)
• The UK Government and Parliament for and on behalf of the interests of the subjects of the United Kingdom
• The UK insurance industry and the underwriters at risk

Roger Flaxman, Chairman and Principal Consultant at Flaxmans, said:

“The pandemic was not foreseen by the government, the industry or the nation. Had it been the industry would have required the government to agree on a process and subsidy to manage such a risk. There is a feasible solution that would cost the insurance industry very little if it gets government support to implement it.”

The objective is to raise awareness of this proposed solution that seeks to avoid the substantial risks and unintended consequences of mass litigation between the UK’s businesses and the insurance industry.

The insurance industry does not need to make the situation worse by public litigation of its position on coverage. The fact that the legal position in the contract may prove to help protect some insurers bears no comparison with the ethical, moral and humanitarian responsibilities of the industry and government to the nation who are dependent upon short term cash to survive.

Flaxmans are internationally recognised specialists in Claims Mediation and Resolution for Commercial and Business sector clients.

For more information email: brokersupport@flaxmanpartners.co.uk or visit www.flaxmanpartners.co.uk