Business disruption insurance and COVID-19

  • Opinion

    12 March 2020

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Businesses that suffer losses because of disruption caused by COVID-19 will be considering whether they may be able to make claims under their insurance policies.

Business losses may be suffered in a number of ways, including:

  • inability to source supplies from affected areas or because freight is unavailable
  • inability to operate because of staff illness or unwillingness to come to work
  • customers’ inability or unwillingness to complete existing arrangements or enter into new ones
  • liability arising from breaches of contractual obligations (where they are not protected by force majeure clauses in contracts)
Business interruption insurance policies

Businesses typically insure their profits against losses caused by interruptions to their business under “business interruption” policies. The cover provided by these policies is, however, more limited than their name suggests.

Ordinarily, business interruption policies are linked to physical property or ‘material damage’ insurance and they provide cover only for business interruption losses that are caused by physical damage to insured property.  A global pandemic that affects people’s life and health but does not affect buildings and other property will not qualify.

Most business interruption policies do provide some limited cover for lost profit that is caused by events other than damage to insured property, but the categories are limited and the amount of cover provided is normally significantly lower.  Many events which are typically covered will not be helpful to deal with COVID-19 losses, for example:

  • damage to other people’s property such as the property of suppliers or customers
  • damage to electricity, gas or other utility supplies
  • damage to transport installations

However, some insured events may be relevant:

  • threat to human life which prevents or hinders use of the insured’s premises, whether the premises are damaged or not – this may apply where a person in the insured’s premises has been taken ill with COVID-19 and the premises have had to be evacuated for a stand-down period, or where an area is quarantined
  • actions of public authorities which deny access to an area because of a fear of any insured event – this may apply if a quarantine is declared or workers are ordered by a government agency to stay at home because of a risk to life and health

Where this cover is available, it is likely to be limited to shorter periods of time and lower amounts than the cover that is provided for business interruptions caused by property damage.

Some business interruption policies also specifically exclude claims arising from infectious or contagious diseases.

How much cover may be provided?

Where business interruption policies do provide cover, they normally insure the ‘reduction in turnover’ and any ‘increased costs of working’ caused by an insured event. In short, this involves a calculation of the difference between the profit that the business has earned and the amount it would have earned if it had not been for the insured event, with an allowance for any additional costs it has been obliged to incur.

Government assistance?

The UK Government has announced, among other measures, a temporary “business interruption loan scheme” under which banks may offer loans of up to £1.2 million to support small and medium-sized businesses.  This plan is presumably intended to recognise and partly address the deficiencies of the cover that is typically available under traditional business interruption insurance policies for losses that are not caused by property damage.

To date the New Zealand Government has not announced any similar measures.

Key worker policies

Some businesses may have “key worker” insurance policies that provide limited cover, normally in the form of payment of an agreed sum of money, for expected loss that is suffered as a result of key workers or named individuals becoming ill and unable to work or becoming deceased.

These policies are uncommon, however, and will not assist most businesses. They are normally limited to one or a small number of key individuals so they will not assist if a large number of workers become ill or are otherwise unable or unwilling to work.

What to do?

Organisations should consider their business interruption policies and whether any circumstances are likely to arise that would afford them any cover. They should consider how they might structure their response to COVID-19 to ensure that they have the best opportunity to make a claim.

For instance, it may be best to keep a place of work open, where and to the extent it is safe to do so, if a Government response that quarantines the area is expected, if the only relevant policy extension is one that applies where access to the premises is prevented.  Another possibility is that a business might collect evidence to satisfy an insurer that it was obliged to close because of a threat to human life.

Business should consult with their insurance brokers and other advisers to ensure that they understand the consequences of their decisions in the face of the challenges posed by COVID-19.