Written by Travis Toemoe, Peter Yeldham and Emma White
The present economic climate is challenging for all businesses. Businesses suffering interruption and financial loss as a result of COVID-19 (including due to supply chain interruptions), may have insurance recoveries available.
Industrial Special Risks and similar policies (referred to as "Business Interruption Policies" in this note) provide cover in the event of loss, damage or destruction to property (often referred to as "Section 1 cover") and consequential loss, such as loss of revenue/profit arising from interruption to the business due to the property damage (often referred to as "Section 2 cover"). Whilst COVID-19 may be considered unlikely to cause property damage (and that is not certain), cover may still be available for business interruption losses.
Business Interruption Policies differ across clients, industries, insurers and jurisdictions, and are tailored based on the particular type of business insured. As a result, there is no "one size fits all" approach that can be taken when determining the responsiveness of Business Interruption Policies. Accordingly, if you have a policy in place and have been affected, we recommend that you speak with your broker and/or legal advisers to obtain further advice particularly where insurers have suggested that exclusions apply or cover is not available.
This note sets out some of the matters you might like to consider.
Do Business Interruption Policies afford cover for COVID-19-related interruptions?
Cover may be available for COVID-19-related interruptions, subject to the precise wording of your policy.
Business Interruptions Policies almost always require a "trigger" (such as property damage) in Section 1 to enliven Section 2 business interruption cover. As a result, one threshold issue will be whether or not the business interruption arises from loss, damage or destruction to property related to COVID-19. We consider it is worth exploring claims under Business Interruption Policies for the following reasons:
- Extensions to Section 1 cover: Some policies contain extensions that provide cover in the event of:
- infectious diseases;
- interruption or interference with suppliers' or customers' businesses;
- prevention of access to premises; and/or
- the intervention of government/authorities.
Not every policy includes these extensions, and policies that contain these extensions tend to differ between insurers and jurisdictions as to the precise wording. Each extension in a Business Interruption Policy therefore needs to be examined closely to determine whether it might be applicable.
- Construing the "damage" requirement: Depending on the precise manner by which your business has been affected by COVID-19, arguments may be available that COVID-19 constitutes "damage" to your business's property.
In those circumstances, subject to the precise policy wording, Business Interruption Policies may afford cover to businesses impacted by COVID-19. The types of loss that may be covered as a result includes:
- loss of gross profits;
- payment of wages and other expenses;
- fines and/or penalties for non-completion or partial completion of contracts;
- expenses incurred in mitigating losses (i.e. incurring costs to take steps the business would not otherwise in order to reduce overall expected loss);
- additional or increased costs of operation;
- loss of any royalties receivable; and
- costs associated with preparing the claim (including professional and legal fees).
What to do if you have an existing Business Interruption Policy
If you have been impacted by COVID-19, you should:
- Check your insurance arrangements and, in particular, consider which policies might respond (ask your broker as a first step).
- If you have multiple policies across jurisdictions and/or entities in your corporate group, there may be multiple policies which are potentially responsive (although "double recovery" is not permitted if there is any overlap). To the extent one or more of those policies may respond, you will need to closely consider within which business the interruptions have been experienced and where the loss "sits".
- Keep a detailed record of all costs that have been occurred as a result of the impact.
- Make sure you have mitigation steps in place in order to minimise losses (as failure to do so may impact any insurance claim).
- Seek advice from your broker and/or legal advisers on the scope of cover potentially available.
What to do if you are looking to take out, or renew, a Business Interruption Policy
If you have been impacted by COVID-19, or expect to be impacted, you should speak to your broker and/or legal advisers about negotiating policy wording. Insurers are already developing exclusions to limit or exclude cover for COVID-19. As for all contractual terms, exclusions will need to be carefully drafted to ensure they do not have unintended operation.
