Considering widespread business closures, Michael Murphy takes an in-depth look at the impact of COVID-19 on business interruption insurance with a focus upon the following specific issues:
- Why this is such a key issue for insurers and policyholders?
- Are you entitled to claim for your business interruption losses?
- How do insurers reach their determinations on such claims?
- What do you do if you disagree with the insurer’s determination?
- Can insurers be forced to pay out for these business interruption losses?
- What is going to happen on these issues going forward?
1. Why this is such a key issue for insurers and policyholders
It is necessary to put this emotive, divisive and critical issue in some degree of context given the unprecedented times we are going through right now.
a. Context for Businesses
The COVID-19 crisis has had a crippling, ongoing effect upon Irish society in every aspect of our day-to-day lives, including health, financial, social, family and our economy. The ESRI has estimated that the Irish economy could shrink by 7% this year and EY Ireland has suggested that this could extend to 13% if the shutdown extends to August. This has already had a crippling effect on companies globally – for instance, half of UK SMEs will run out of cash in 12 weeks’ time according to the Financial Times yesterday.
It is, in short, an unprecedented crisis that, despite Governmental fiscal supports, has already had a catastrophic effect upon Irish businesses and it is in this context that Irish business owners have looked to their insurance policies to see if a claim for business interruption can be sustained on the basis of a type of peril that they probably never envisaged requiring when seeking or renewing their insurance – and yet the survival of that business may now potentially be at stake depending on the outcome of that claim.
b. Context for Insurers
Lloyd’s of London CEO John Neal has warned that the COVID-19 pandemic is likely to be the most expensive event in history for the insurance sector, running into tens, if not hundreds, of billions overall. Insurers will be paying out on a wide range of policies as well as dealing with the likelihood of a refund of a portion of the premia for certain policies – however, it is business interruption that has been the most contentious issue for the sector and where battle lines have increasingly started to be drawn for certain insurers.
The Association of British Insurers has estimated that its members’ COVID-19 losses will amount to £900 million for undisputed business interruption claims. The scope of the disputed claims could be astronomical: the American Property Casualty Insurance Association estimates that covering claims for businesses with 100 or fewer employees would be in the range of $255 billion to $431 billion per month, or up to $5.2 trillion per year – sums which would eliminate the entire capital position of the industry very quickly indeed.
2. Are you entitled to claim for business interruption losses?
In short, if you have a policy that includes a business interruption component then you may be entitled to pursue a claim for any losses being suffered such as loss of gross profit or revenue or additional expenses such as loss of rent, cost of alternative premises or increased cost of working. The Irish Times has suggested that approximately 75,000 business in Ireland have an insurance policy that includes some form of business interruption cover. The key question, however, for all policyholders is whether your claim will be accepted by insurers or not – and how and why that determination has been reached.
3. How will insurers determine whether your claim falls to cover or not?
a. Insurers will have to follow Central Bank guidance
In its role as regulator of the sector, the Central Bank of Ireland has provided some key guidance as to how insurers should deal with such claims. The Central Bank’s expectation is that they will handle claims effectively and properly and, where appropriate, offer assistance to customers that may extend, where relevant, to alerting their policyholders to any particular policy terms and conditions that may be to the policyholder’s benefit. The Central Bank expects the insurance sector to engage positively with policyholder claims and to do so in a timely fashion in view of the crisis – however, whilst the Central Bank is the regulator of the sector, this does not mean that it can simply substitute its own verdict.
The Central Bank has nonetheless emphasised that claim settlement offers must be fair, taking into account all relevant factors and reflecting the best estimate of what level the claim should be paid out at. In the UK, interim payments have been encouraged. Where there is any doubt about the meaning of a term in an insurance policy, it should be construed in accordance with the meaning most favourable to the policyholder. It is understood that the Central Bank is reviewing these issues through the prism of the Central Bank Consumer Protection Code and the EU Unfair Terms in Consumer Contracts Regulations 1995
b. They will review what perils your business interruption cover extends to
There is no singular wording for business interruption claims so the wording of each policy will have to be assessed in each case to see if the claim will be accepted by insurers. Those clauses are typically framed in the context of losses arising from a property damage claim on account of a defined peril such as a fire or a flood. That cover can sometimes be broadened by extensions covering interruptions caused by food or drink poisoning, murder and suicide or, most pertinently for this crisis, denial of access or notifiable disease – which we will consider in further detail below given the nuances of language in those policy wordings.
Unfortunately, if your policy does not have either cover for losses arising from a notifiable disease or non-damage denial of access – or indeed if the policy lists a notifiable disease as an exclusion to liability – then the likelihood is that your insurer will not cover your losses. The only way that such a declinature could be successfully challenged (subject to the particular policy wording) would be where the adjudicator of such a dispute between insurer and policyholder would accept that the virus had caused physical damage to properties – typically defined in such policies as ‘loss, destruction or damage’.
This may well be a difficult argument to succeed upon as the loss, destruction or damage must relate to the physical premises, most of which were ordered to be closed by the Government. The Association of British Insurers has estimated that notifiable disease would only be covered as an add-on to a standard policy and that less than 10% of UK businesses are likely to have this extension in place. The Financial Conduct Authority in the UK similarly concluded that: ‘Most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the COVID-19 pandemic’.
c. They will assess what the policy/schedule say about notifiable disease
The Irish Times has further estimated that approximately 37,500 Irish businesses have policies that mention notifiable diseases. A notifiable disease is one which medical practitioners must, by law, notify to health authorities and COVID-19 has been designated as such since February 2020 in accordance with the Infection Disease (Amendment) Regulations 2020 (S.I. No. 53 of 2020). However, the references to notifiable disease extensions can vary significantly between those policies in terms of significance and effect.
As outlined above, the wording of the section in relation to notifiable diseases needs to be carefully scrutinised in the context of the policy as a whole. This is where the issue becomes increasingly contentious – media outlets haves decried what they have referred to as, variously, ‘impenetrable legalese and technical jargon’ or ‘fine print’. However, the policy remains a contract and so it is appropriate that the principles of contractual interpretation should be called to bear when reviewing the effect of the policy wording in this regard.
d. How can the references to notifiable disease change from policy to policy?
Some policies will require that an outbreak or occurrence of COVID-19 must take place on the premises itself and, absent a number of staff members and/or customers contracting the virus on site and this directly necessitating the closure of the business, it is likely to be difficult for policyholders to meet this criteria. The logic of this approach is that they are intended to respond to incidents such as the occurrence of salmonella on a premises where a restaurant may be forced to close for a month. The Government-ordered shutdown has effectively meant that this requirement can never be met for most businesses
There are other policy wordings where the interruption must arise from an outbreak of a notifiable disease on site or within a specified geographic radius (i.e. 24 / 40 miles) and, given the nationwide spread of the virus, this is where most of the controversy on this issue is centred. This is particularly so in view of apparently conflicting approaches being adopted by different insurers such as, according to national media reports, AXA – who have agreed to cover such claims for up to 4,000 policyholders – and FBD (amongst others such as Aviva and Hiscox) who have not agreed to do so on the basis of their interpretation of the clause.
Specifically, the Irish Times has cited three grounds for FBD’s declinature of such claims:
- they maintain that the closure was not caused by outbreaks of disease or within 25 miles of the premises but by national considerations arising from the general pandemic such as social distancing;
- that COVID-19 does not fall within the scope of the infectious disease clause in terms of what they say was within the parties’ reasonable contemplation when the policy was entered into; and
- the business interruption is as a result of social distancing practices and the Government restrictions.
This would seem to raise a fundamental question about whether these clauses should cover a global pandemic and this is a dispute that is not likely to be easily resolved in the near future. This is evidenced by the fact that one of the UK’s largest law firms, Mischon de Reya, has agreed to represent the Hiscox Action Group (‘HAG’) in a challenge against Hiscox’s declinature of their business interruption claims. The HAG collection of more than 200 aggrieved Hiscox policyholders which is seeking litigation funding to bring the challenge. A similar type class action is also being pursued in Canada at this time.
4. What happens if my losses arose from the Government telling me to close?
Policyholders are also carefully checking the policy wording for what is known as ‘non damage denial of access’ clauses. These cover financial losses arising from situations where the policyholder cannot access their premises for reasons other than physical damage. Clarification has also been provided that, where a business closed on Government advice regarding COVID-19, that should be treated as a direction.
However, many policies are restricted to only covering ‘damage-based denial of a-ccess’ situations (rather than non-damage denial of access). Similarly to the analysis above, it is more difficult to envisage a government ordered lockdown being construed as having caused physical damage to either the policyholder’s premises or to another premises upon which the policyholder depends for access to its own premises.
5. What happens next where I disagree with my insurer’s determination?
If you disagree with an insurer’s declinature of a business interruption claim then, subject to any compulsory dispute resolution provision contained in the policy wording, you may be entitled to pursue that dispute against the insurer from up to the following three options:
a. the courts,
b. arbitrators or
c. the Financial Services and Pensions Ombudsman.
Professional advice should always be sought by policyholders in respect of such situations to include the policyholder’s discretion between those options, their respective benefits and disadvantage and, in particular, the time scales associates with each option.
6. Can Insurers be forced to pay out for business interruption losses?
In short, unless there is a successful challenge of the type outlined above – then no, insurers cannot be forced (by either the regulator or the government) to pay out carte blanche for all of their policyholder’s business interruption losses at this time. Whilst policyholders may regard this as being the ‘right thing to do’ (particularly where many insurers are returning to profitability), such a position cannot be reconciled with, firstly, how the sector operates and, secondly, the contractual sanctity of policy wordings that are clear and unequivocal that there is simply no cover in place for such losses.
Furthermore, if the insurance sector was to be compelled to process all COVID-19 business interruption claims without regard for the policy wording (as has been suggested in certain US States), it would set a dangerous precedent and could only serve to exacerbate matters. Indeed, the European Insurance and Occupational Pension Authority has warned that the unilateral imposition of retroactive coverage of claims not envisaged within contracts could create material solvency risks and ultimately threaten policyholder protection and market stability, aggravating the financial and economic impacts of the present crisis.
Whilst the Solvency II framework means that the sector is well capitalised, this is premised upon insurers’ ability to withstand severe but plausible shocks to the system. Having to extend blanket cover to all COVID-19 business interruption claims would go well beyond the bounds of a plausible shock for insurers.
7. What is going to happen on these issues going forward?
A further pressing and looming issue for Irish businesses is that, when their current policies expire, on renewal, more and more insurers are only prepared to do so on the basis of explicitly excluding COVID-19 from the scope of cover. Depending on how long this crisis lasts and bearing in mind risks of second waves or further evolutions of the Coronavirus, this presents a long term risk for businesses. Lloyd’s of London has always prided itself on insuring any risk at the right price but, at this point, there is still enormous uncertainty over how to quantify and price a risk such as COVID-19 and this, in turn, is leading to insurers’ reticence to provide any cover whatsoever. Much of this is driven by the position adopted by reinsurance -companies which take on much of the risk for the primary insurer. Whatever scope there is for disputes on current policies, on renewal, there may be no option but to accept insurers’ COVID-19 exclusions if the market has shifted decisively to that position.
This may well serve to prompt the fundamental question as to where all of this is ultimately going to end, particularly with threats of a potentially even more deadly second wave to hit later in the year. Will there simply be a significant number of companies left to collapse in the absence of any operable insurance policies? Some market commentators have advocated the introduction of a public-private partnership given the seismic nature of the current crisis. It has been asserted that this is the only way in which to bring about a lasting solution and to ensure that those firms who require effective notifiable disease cover will be able to access the most affordable and extensive pandemic insurance cover that can be made available. This suggestion is not without historical precedent – for instance, the War Damage Insurance Corporation was a US government financial protection arm created during World War 2 to provide coverage for war risks not covered by existing policies.
The ostensible purpose of a business interruption policy is to place the policyholder back in the position they were in before the peril occurred – however, even where insurers accept that the policy operates, there are typically reduced limits of indemnity or period of losses in respect of what will actually be covered. In a wider sense, unfortunately, the likelihood is that many companies will simply have no entitlement to cover due to the policy wording. In order for you to consider your precise position and options, professional advice should be sought in a timely fashion so that the policyholder will be aware of the prospects of their claim and their options generally. Given the innovative fiscal measures that governments and regulators have advanced in response to this crisis to date, this may be a further area where all stakeholders will have to come together to ‘think outside of the box’ so as to avoid the crippling business consequences that may otherwise ensue for companies most exposed to this crisis – after all, necessity is the mother of al invention…
This paper should not be relied upon as the provision of legal advice for specific situations for policyholder and, secondly, the nature of the crisis is fast-moving so any further developments must be carefully scrutinised.