Businesses dealing with lost revenue and profits due to coronavirus may be able to claim against existing insurance policies, explains Lodders’ Dispute Resolution expert, Tom Ellis.
With the country now in lockdown as a result of the Covid-19 pandemic, many businesses have been forced to close and, sadly, now face financial challenges of unprecedented gravity. As business-owners turn their minds to ways of trying to recoup some of their losses, they may wish to consider whether claims may be made under one or more of their insurance policies. While commercial insurance policies come in many different shapes and sizes and cover many different risks, a top priority for most at present will be determining whether or not lost revenue and lost profits may be covered by any existing insurance policy the business has in place. We look at some of the key considerations below.
Business interruption insurance
Traditional business interruption (BI) insurance, often purchased in conjunction with a property insurance policy, will cover an insured against financial loss resulting from an interruption to its business caused by physical damage to, or loss of, its premises or other property. Such a policy might typically be triggered following a flood or fire affecting business premises.
The circumstances of every case will, of course, be different. However, given the way many BI policies are drafted, it is regrettably likely that many claims for Coronavirus-related revenue/profit losses will not be covered. The reason is that such losses seem unlikely to result from physical damage to, or loss of, property and, as such, may not trigger the BI policy. Note that policies may also explicitly exclude losses resulting from certain causes, including pandemics and similar unforeseeable events.
Extensions to traditional insurance
Some businesses may have extensions to their traditional BI policies. One of the most common is referred to as “contingent” BI cover, which provides the insured with cover for financial losses resulting from interruption to a supplier’s business caused by physical damage to, or loss of, that supplier’s property. Contingent BI will be written on terms very similar to traditional BI, and will provide cover for lost revenue only where that loss is linked to property loss or physical damage. Unfortunately, therefore, insureds seeking to claim for revenue lost as a result of the current lockdown are likely to face many of the same obstacles identified above.
A further common extension to BI provides cover for losses resulting from “notifiable diseases”, which are diseases that a business is obliged to notify the local authority of under the Health Protection (Notification) Regulations 2020 if they occur. Even here, however, there may well be obstacles in the way of a successful claim for lost revenue. For example:
- First, and most obviously, Covid-19 became a “notifiable disease” in England & Wales on 5 March 2020. Losses incurred prior to that date will therefore be irrecoverable in any event.
- Second, some policies limit cover to specific, named diseases listed in the policy documentation. Given the relatively recent emergence of Covid-19 as a serious global threat, many policies purchased prior to the last few months will not make reference to it.
- Third, some policies – particularly those purchased recently – may explicitly exclude losses arising from Covid-19.
- Fourth, insurers are in any case likely to take a highly restrictive view of the cause of an insured’s losses and will scrutinise closely the wording of the insurance policy. By way of example, if a policy covers losses caused by an outbreak of a “notifiable disease” at the insured’s premises, revenue lost by businesses that have not had an outbreak of Covid-19 at their premises, but have had to close as a result of the lockdown, is likely to fall outside the scope of cover.
A third common extension to BI policies covers losses resulting from a “denial of access”. This extension will cover a business against financial losses suffered because of an inability to access its premises. Wordings may be drafted in quite a restrictive way and will typically specify that the denial of access must result from specific circumstances, such as physical damage in the vicinity that prevents or hinders access to business premises. Cover will also be subject to exclusions and may be unlikely where, for example, a business has decided to close voluntarily.
Those points aside, some “denial of access” extensions will be drafted less restrictively and may offer cover for revenue losses caused by the forced closure. Given the apparent unlikelihood that traditional or contingent BI cover will (absent quite unusual circumstances) respond, businesses would be well advised to review their policy wordings, including any extensions, closely.
Event cancellation insurance
A further sad consequence of Covid-19 and the ensuing lockdown has been the cancellation or postponement of many events, large and small, across the country, leaving organisers, hosts and other businesses substantially out-of-pocket. As above, these losses may well fall outside the scope of many BI policies. However, businesses with event cancellation insurance in place may be able to claim under their policy for additional expenditure, lost (net) profits, and certain other financial losses which they suffer as a result of cancellations, postponements, and other effects outside their control.
This type of insurance recently hit the national press after The All England Lawn Tennis Club (AELTC) made known its intention to claim under its policy for losses suffered as a result of the cancellation of the 2020 Wimbledon Championships. According to reports circulating in the press, the AELTC’s claim is rumoured to total at least £100 million. Fortunately, AELTC’s policy is thought to cover cancellations caused by global pandemics, such as Covid-19.
The type and extent of losses a business may suffer may not be as extensive as those of the AELTC in the above example and will, of course, vary according to whether an event is cancelled, postponed, or affected in some other way. Event policies commonly refer to the “cancellation”, “postponement”, “abandonment”, “relocation”, and “curtailment” of events, and are likely to respond differently to each type of insured event.
As always, the devil is in the detail, and the starting point should always be a close review of the policy documentation. Note, in particular, that policies frequently exclude cover for cancellations or postponements etc. resulting from “communicable diseases” that lead to the imposition of quarantine or other movement restrictions. Any such exclusion would almost certainly catch claims arising from Covid-19. Cover for losses arising from communicable diseases may, however, be available as a policy extension.
Note also that policies are likely to contain other potentially relevant exclusions – such as losses caused by inadequate sales or voluntary withdrawals prior to the event. Insurers are therefore likely to scrutinise claims quite closely and, especially where losses are large, will look in detail at the circumstances in which financial losses have been suffered, in order to check that they are not excluded by the policy. The calculation of losses that fall to be covered by an event policy may be a complex and time-consuming exercise, which will be easier to navigate if a business has available careful and detailed records to support its claim.
Other types of insurance
Many businesses will have other potentially relevant types of insurance – including, for example, travel insurance and various forms of liability insurance (such as employer’s liability, directors’ and officers’ liability and public liability insurance). The terms of those policies may provide cover against particular financial losses connected with the lockdown, and so should be reviewed carefully. The policies will, however, also contain potentially onerous exclusions and conditions, some of which may apply, depending on the circumstances of any claim.
Conclusion: insurance – some dos and don’ts
- Carefully review the wording of your insurance policies, including any extensions or “add-ons” to the policies, to ascertain what cover you may have. Insurance policy wordings vary widely and should always be considered individually. If you have queries about what is or is not covered, consider consulting your broker or insurer in the first instance.
- In the event that you wish to make a claim, contact your insurers as soon as possible with the necessary details. Pay close attention to the claims notification/reporting clause in your policy to ensure that you notify insurers within the timescale, and in the manner, prescribed by the policy.
- Given the high volume of claims likely to be made during this period, we would expect insurers to take a particularly critical view of the scope of cover available under any individual policy. In order to minimise the likelihood of insurers declining a claim that might otherwise be covered, pay close attention to the terms and conditions of your policy and ensure that you comply fully with your obligations. By way of example, the policy may well require you to seek insurers’ prior authorisation before incurring expenditure, and/or may oblige you to take reasonable steps to try to mitigate any losses suffered.
- Keep careful written records to support any claim, and be prepared to provide relevant documentation to insurers.
- Always think very carefully before you cancel any insurance policy. You may well still require cover against standard risks – for example, damage to property – even if your business is not able to trade and premises are temporarily unoccupied. You may also be obliged under the terms of any mortgage or other secured loan to maintain certain types of property insurance in place. See further the useful guidance from the Association of British Insurers, and always seek advice from your broker about the insurance that best matches the needs of your business.
- If insurance does not help, consider what else you can do to protect your business and revenues for the future – for example, by negotiating for the deferral of performance under contracts, or considering whether contracts are subject to force majeure clauses or have been frustrated (which may relinquish you from responsibility under them), or by making use of the various government support initiatives, including business interruption loans and furloughing of staff.
- Finally, if still in doubt as to any of your obligations connected with the policy, seek professional advice or (if appropriate) contact your insurers for guidance.
If you require legal advice in connection with your insurance policy or in relation to a dispute with your insurers, or if you would like to discuss any of the issues raised by this article, please contact Tom Ellis, on 01789 206107, or via email, or contact any other member of the Dispute Resolution team.
This article does not constitute legal advice and may not be relied upon as such. Neither the author, nor Lodders Solicitors LLP, assumes any responsibility to any party in respect of this article’s contents. Always seek professional legal advice that is tailored to your individual circumstances.
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