What is Business Interruption Insurance?
Many businesses do not take out Business Interruption Insurance as they mistakenly believe that losses can be adequately covered by other insurances such as buildings and contents policies. Whilst these policies can assist in remedying any damage caused by, for instance, a fire or a flood, they do not deal with consequential losses that flow from such events.
Unfortunately, this is being highlighted now more than ever. With this unforeseen external event causing consequential losses to the vast majority of businesses, many are finding that they are not adequately covered for those losses by their other policies.
However, if you or your business has had the foresight to take out Business Interruption insurance, you may still find some difficulty in successfully claiming against it. As always, the wording of the policy is key.
Will my claim be covered?
It will be crucial for anybody claiming from a business interruption policy that they can show what the cause of their loss was. This perhaps sounds easier than it is.
It will be crucial to check the wording of the policy to ensure that it covers ‘losses caused by government (or other public authority) restrictions resulting from an occurrence of a notifiable human disease’. Most policies will have wording that is similar or to that effect.
Even if your policy does have that wording though, there are still pitfalls when it comes to causation. Businesses that chose to close as a result of government guidance are likely to be met with the argument that they were not legally forced to do so. If your business is non-retail, insurers may refuse to pay out on this basis. Moreover, businesses should check the period for which their insurance claim relates. Any claim that includes losses prior to 5 March 2020 are likely to be rejected as this was the date that COVID-19 became a notifiable disease.
Businesses that have suffered losses because their premises have been contaminated should also be wary about claiming this as the cause of their losses. Insurers are likely to argue that some of the losses would have occurred anyway due to the disease’s general impact.
How will mitigation of loss effect my claim?
Mitigation is likely to be a point of contention in most business interruption claims. Businesses will always have a duty to do what they can to minimise their losses, whether or not their business interruption policy expressly says they should.
However, it is worth noting that most policies do mention mitigation as a ‘condition precedent’. This effectively means that a business will lose its right to claim altogether if it fails to take ‘reasonable’ or ‘all practicable’ steps (depending on the wording in the policy) to minimise its losses.
For those businesses that could stay open, insurers may, in some cases, claim that a failure to adapt resulted in higher losses. Perhaps the biggest point of contention though will be surrounding the Coronavirus Job Retention Scheme (aka the furlough scheme). Insurers may be able to argue that a business claiming under its interruption policy did not approach the scheme sensibly, either by not using it enough or by topping up their employee’s salaries (thereby failing to limit losses), or by using it too much thus inhibiting their ability to recover.
What other circumstances could effect my policy?
It is usual for Business Interruption policies to include a clause that allows insurers to reduce the amount paid out if there is a market trend that would have affected the business irrespective of the occurrence of the insured event i.e. COVID-19.
Whilst most businesses will be able to point to COVID-19 as the result of any downturn in their sector, it is worth noting arguments that other factors may also be to blame. For example, the drop in oil prices in the first few months of 2020 had nothing to do with COVID-19 and its knock-on effect will have impacted the market trend in many sectors.
How much could I be awarded?
Once a business has overcome the hurdles noted above, they will still face some argument with insurers as to how much they are due from their policy. The policy itself will usually go into some detail as to how awards are calculated. Typical pitfalls here are:
- A failure to provide enough evidence of the losses suffered (usually a result of poor record-keeping)
- A limit on the indemnity period (most policies will only indemnify businesses for up to 24 months after the event whereas the impact of COVID-19 will surely be felt for much longer), and
- A liability limit, i.e. a limit on the amount that the insurer will pay out.