BUSINESS INTERRUPTION INSURANCE IN TIMES OF EMERGENCY
ARE YOU COVERED AND IF SO HOW DO YOU CLAIM?
Will my standard business policy or business interruption policy cover me for interruptions due to COVID-19?
How does business insurance work?
What is business interruption (BI) coverage?
Case Law from The United States and from England
Why would insurers increase rates during a crisis?
How long does it take to get rates approved?
What can consumers do to lower their premiums?
These are uncertain and challenging times. With COVID-19 causing global concern, we understand many clients will have questions related to commercial insurance. We have produced a brief Q&A document outlining how coverage is triggered and how business interruption policies work.
The primary English law legal principle of contractual obligations, which applies in most of the South East Asian countries and Taiwan, is as follows:
Under English law, contractual obligations are absolute, and the contracting parties are bound to fulfill these obligations (Paradine v Jane (1646) Alleyn 26). Therefore, a party that is unwilling or unable to perform its contractual obligations resulting from a business interruption event will be in breach of contract, which would entitle the other party to terminate the contract and/or claim damages. Under common law, the only way to avoid termination of the contract or the payment of damages in these circumstances is for the non-performing party to demonstrate that a "frustrating event" has occurred, such that the common law principle of frustration applies or there is an event of “ Force Majeure “.
A frustrating event is an event that occurs after the contract has been formed, is so fundamental as to be regarded by law both as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered the contract, is not due to the fault of either party and renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract. If a contract is frustrated, the parties will not have to perform any further obligation under it, provided neither party can be blamed for the frustrating event. Accordingly, neither party will be in breach of the contract and, consequently, liable for damages.
An additional difficulty for a business to take into account is what happens if it becomes unable to perform its existing contractual duties to third parties as a result of a business interruption. This could result in claims against the business for failing to comply with deadlines and fulfil orders, with an additional impact on future business from the same source. It is crucial, therefore, that SMEs take some time to analyze the strength of their supply chain in the event of a business interruption. This is particularly the case in the current climate where interruptions in business and the delivery of goods are anticipated consequences following Brexit.
Even if a business does have BI cover in place, it essential that this is regularly assessed to make sure that it is fit for purpose and covers risks as they continue to emerge and develop. An excellent example of this is the case of HHJ Davis in Contact (Print and Packaging) Ltd v Travelers Insurance Co Ltd  EWHC 83 (TCC); . The claimant printing company had proved its case on liability against the defendant insurance company, following the breakdown of a printer at the claimant's premises, which caused loss and damage. The Technology and Construction Court held that the most obvious explanation for the damage to the press was a subsidence event, which was not excluded by the insurance policy between the parties. The claimant was entitled to damages for property damage as claimed, coming to £824,683.07, and consequential losses in the sum of £18,900. However, its claim for business interruption failed, as the evidence supporting it was inadequate. The case highlights the importance that Insureds preserve documentary evidence relating to the interruption of the business.
Every UK company faces significant liability risks and exposure not covered, due to limitations on the policies it has in place. Insurers need to carefully analyze the risk and educate policyholders as many still do not fully understand the risks that could be financially crippling to them. People must be aware of the threat that business interruption poses. The insurer should ensure that the Insured’s needs are fully understood and translated into the right products, with appropriate cover. Insureds need to be proactive and ensure that they have adequate security, business continuity and disaster recovery procedures in place to cope with the risk of major operational disruptions. They must preserve all relevant documentation, and any evidence relating to their business interruption claims to ensure that they are covered, as illustrated in the HHJ Davis case above.
In addition, businesses should consider a supplier’s extension to their BI policy, which would cover losses arising from a supplier’s difficulties, whether caused by terrorism or otherwise.
It is vital that policy wording is regularly checked and kept up-to-date, so that businesses can cope with interruptions to their business, without this causing additional financial pressure at a time when a business least needs it.
One of the conventional methods of mitigating contractual risks is by insurance, and many clients will have policies of insurance which they believe cover them for business interruption due to the current pandemic.
Commercial insurance is complex and specialized, which makes it essential that you speak to your insurance representative or us if you have any questions or need clarification about your coverage.
Will my standard business policy or business interruption policy cover me for interruptions due to COVID-19?
Generally, commercial insurance policies and traditional business interruption policies do not offer coverage for business interruption or supply chain disruption due to a pandemic such as COVID-19.
Some organizations may have purchased specialized contingent business interruption coverage, stand-alone business interruption coverage and supply chain disruption coverage which may be triggered as a result of the World Health Organization’s declaration of a pandemic.
Commercial insurance is complex and specialized and specific to your business which makes it essential that you speak to us if you have any questions or need clarification about your coverage.
How does business insurance work?
Property insurance for businesses is designed to protect the physical assets of a business against loss and/or damage from a broad range of causes. There are two basic policy types:
Named perils – covers only loss and/or damage caused by perils specifically listed in the policy, subject to exclusions. Loss and/or damage caused by any other peril is not covered.
Comprehensive – covers loss and/or damage caused by any peril, unless expressly excluded.
What is business interruption (BI) coverage?
BI coverage is an add-on to an existing business insurance policy. In the event of business temporarily needing to shut down, BI covers continuing expenses or replaces lost profits. There are three types of BI policies:
Gross earnings policy, which pays only until property or damage is replaced or repaired, or stock is replace
Profits form policy, which continues to pay until business resumes its average, pre-interruption level (subject to policy limits)
Extra expense policy, which is designed for businesses that can remain operational during periods affected by loss and/or damage.
How does BI insurance work?
BI policies are not standardized and include many variants, but most contain language indicating that the insurer will pay for the actual loss of “business income” due to the “necessary suspension” of operations during “the period of restoration.” Some concepts and nuances come into play, including:
Physical damage requirement: Most policies require proof that the insured premises sustained physical damage (for example, from fire, heat, flooding or firefighting efforts) that was covered under their property policy, which caused an interruption that resulted in a loss of business income. A business that is interrupted due to the loss of data or a loss of utilities may not have sustained a physical loss (There is separate utility loss coverage).
Period of restoration: If BI coverage is triggered, a significant issue is defining the period of indemnity or, as some policies refer to it, the period of restoration. Most policies will pay business income loss through to the point that the business is restored or when the coverage expires (usually 12 months from the beginning of the interruption).
Although many such clauses are in use today, a typical business income insurance clause reads as follows:
“We will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” The suspension must be caused by the direct physical loss, damage, or destruction to property. The loss or damage must be caused by or result from a covered cause of loss.
To better understand business income insurance, let’s explore the three terms highlighted above:
Actual loss sustained: Business income coverage covers the actual loss sustained by the insured as a result of direct physical loss or damage to the Insured’s property by a peril not otherwise excluded from the policy. The insurer is only obligated to pay if the insured sustained interruption of business, leading to a business income loss. If the insured does sustain a business income loss, the extent of the insurer’s obligation is limited to the dollar amount of loss sustained, but not to exceed the applicable policy limit.
Business income: Usually, the carrier is liable for the reduction in net income that results from the suspension of operations—whether wholly or partially—due to a physical loss at the insured’s premises. This following commonly used definition of business income is intended to clarify what sums can be included when calculating the amount of loss.
“Business income includes the net income (net profit or loss before income taxes) that would have been earned or incurred by the insured and the continuing normal operating expenses incurred, including payroll.”
Period of restoration: Insurers are liable for the loss of business income only during the period of restoration, which is often defined as the length of time required to rebuild, repair, or replace the damaged or destroyed property. The period of restoration begins when the physical loss or damage occurs; it ends when the property should, with reasonable speed, be repaired or replaced. Expiration of the policy does not end the period of restoration. As long as the physical loss occurs during the policy period, the business income coverage will provide coverage for the duration of the period of restoration, even if the policy expires before the period of restoration ends. The business income endorsement most commonly found—as well as some insurer forms—includes a 30-day extended period of restoration beyond the standard period of restoration (the period from the time of loss until the time of repair or replacement). However, the insured may require more than this 30-day limit. To address this issue, an insured may elect to increase this limit from 30 days to any multiple of 30 days up to 720 days. This is accomplished by purchasing the extended period of optional indemnity endorsement offered through ISO.
In addition to coverage for business income, the business income endorsement of the property policy can provide other coverages, know as “additional coverages.” An example of an “additional coverage” is an extra expense, which is detailed below.
Extra expense is defined as the necessary expense incurred by the insured during the period of restoration that it would not have been subjected to if there had been no physical loss to real or personal property caused by a covered peril.
Note that when a business income loss occurs, the insured is obligated to take reasonable steps to try to avert or minimize such loss: Any expenses incurred to reduce the loss are covered as part of the business income loss. The insurer will typically limit such expenses to the point that such expenses reduce the business income claim. In other words, the insurer will not pay any part of the expense that is more than the claim itself.
For example, the insurer will reimburse the insured $100 to reduce the claim by $200; but the insurer will not reimburse the insured $100 if the claim is only reduced by $50. Any additional expenses above this that are incurred to continue the business may be recoverable under an extra expense provision in the insurance policy.
Additionally, the business income endorsement section of property policies can include “extensions of coverage,” wherein the insured’s policy will insure against business income losses resulting from a variety of causes, including the following. (Note a sublimit typically applies for these optional, additional coverages.)
Service interruption provides coverage for an insured for direct physical loss, damage, or destruction to electrical, steam, gas, water, sewer, telephone, or any other utility or service including transmission lines and related plants, substations, and equipment of suppliers of such services.
The owners, managers, or operators of such utilities or services cannot be a named insured under the policy. The loss, damage, or destruction at the location of the utility or service must be the result of a peril(s) similar to the peril(s) covered under the insured’s policy. Note that the policy may impose some limitations, such as:
Limitations regarding distances (such as where the actual loss occurs to the utility’s property in relation to the Insured’s premises where the business income loss occurs).
Exclusion for certain perils such as an earthquake.
Exclusions for overhead transmission and distribution lines.
Contingent business interruption (CBI) coverage is designed to cover an insured’s business income loss resulting from loss, damage, or destruction of property owned by others, including direct “suppliers” of goods or services to the insured and/or direct “receivers” of goods or services manufactured or provided by the insured. The property damage to these suppliers or receivers must be of a type that would be covered by the insured’s policy had the damage happened to the insured’s property.
As noted, most commonly coverage provides coverage for the “direct” relationship between the Insured’s “suppliers” or “receivers” of its goods or services. This can create a gap in coverage for insureds involved in multi-tiered supply chains. For example, consider that a supplier or customer of one of the Insured’s direct suppliers experiences a loss resulting in an interruption to its operations, which in turn causes a disruption to the insured’s direct supplier/customer. Ultimately, this also causes a business income loss to the insured. Its policy will likely exclude coverage for this business income loss as the Insured’s direct supplier did not experience direct physical damage/loss. This coverage is typically added to a property policy by endorsement if requested by the insured. Commonly, the suppliers of the direct supplier—known as the “indirect” suppliers or “receivers”—must be identified.
Leader property is an endorsement that provides coverage to the insured for direct physical loss, damage, or destruction of the type insured by the Insured’s property policy to property not owned or operated by the insured, located within the stated distance to insured’s property or business, and which attracts business to the insured. Examples would include a nearby amusement park, casino, mall, or destination retail store.
Interruption by civil or military authority coverage is provided to the insured for the actual loss sustained by the insured during the length of time when access to such described premises is prohibited explicitly by order of civil authority as a direct result of damage as insured against in the insured’s policy, to covered property on the described premises or property adjacent to the premises described in the insured’s policy.
The coverage time most commonly stated in this endorsement is either 14 or 30 consecutive days. The carrier may also impose a waiting period that must be reached for coverage to attach: Common waiting periods are 24 hours, 48 hours, or 72 hours.
As illustrated by the various coverage options discussed, there are many considerations that businesses must weigh when purchasing business interruption coverage. The above are basic coverages; additional coverage options exist and can be customized based on an individual company’s needs. To learn more about business interruption, or to discuss the coverages that would be most appropriate for your organization, please contact your local Marsh representative.
Case Law from The United States
Since COVID-19 swept through the world, numerous articles have commented on the lack of business interruption insurance in commercial property policies based on two critical standard policy provisions –
(i) the loss of net income caused by “direct physical loss of
insured property” and
(ii) the Virus Exclusion.
As a general rule of interpretation, most courts will interpret coverage provisions in a policy broadly and, most often, in a way that favours coverage. Furthermore, courts invariably strictly interpret exclusions and will enforce a written exclusion to support a carrier’s decision to deny coverage. Some lawsuits have now been filed across the country involving policies that allegedly do not contain the Virus Exclusion. These lawsuits challenge the interpretation of the provision requiring direct physical loss to insured property to obtain the coverage afforded under the respective policies.
These cases will become pivotal as their outcomes may establish important precedent that could either strengthen or impede the ability of other businesses to challenge their policies in court. Below is a review of several cases, making strong arguments for coverage.
Ocean Grill v Lloyds in Louisiana. A restaurant owner in Louisiana filed suit against Lloyd’s of London seeking a declaratory judgment that he was entitled to insurance compensation for lost net income and extra expenses under the business interruption section of his property policy due to the impact of the Coronavirus on his business and the recent shutdown of restaurants by executive order. In that action, the restaurant, the Oceana Grill, alleges that Lloyd’s policy under review does not contain the virus exclusion. Lawyers for the restaurant allege that “to avoid payments for a civil authority shut down the insurance industry is pushing out deceptive propaganda that the virus does not cause a dangerous condition to property.” That attorney also is representing the owner of two restaurants in Napa Valley California insured under a Hartford policy that does not have an exclusion for the viral pandemic. It is alleged that in that case the Hartford’s “Policy Deluxe Form” actually extends coverage for a loss or damage due to virus.
Chickasaw v Lexington Insurance and Choctaw v Lexington Insurance in Oklahoma. Two separate lawsuits were filed on behalf of Native American tribes for losses incurred from an order shutting down their Oklahoma casinos. Complaints filed by the Choctaw and Chickasaw Nations Departments of Commerce against multiple insurance companies, including various underwriters of Lloyd’s, Lexington, Homeland, Arch, Endurance Worldwide, Allied World, Liberty Mutual, Hallmark, Endurance, Evanston and XL Insurance Company. In those complaints, the plaintiffs outline losses incurred by the executive orders shutting down their casino operations due to the pandemic. Although the complaints filed in the Oklahoma State District Court do not specifically allege the lack of a virus exclusion in the various policies involved, it appears the Llyods’ policy form may be similar to the policy form under review in the Louisiana case.
Big Onion Tavern v. Society Insurance in Illinois. Most recently, a group of Chicago restaurant and movie theatre owners filed suit in federal court against Society Insurance, Inc., a Wisconsin based insurance company alleging that it denied coverage for their business losses without undertaking the necessary investigation and inspection mandated under the relevant policies (Big Onion Tavern Group, LLC et al. v. Society Insurance Company, Case no. 1;20-cv-02005). The Governor of Illinois ordered the closure of all restaurants, bars and movie theatres in response to the Coronavirus. The complaint, in that case, alleges that the Society policy form does not contain a virus or pandemic exclusion. The groups’ attorneys commented, “[I]f Society Insurance had wanted to exclude pandemic related losses under the plaintiffs’ policies-as many insurers have done in other policies- it easily could have attempted to do so on the front-end with an exclusion.” Here again, the focus of the case will be the provision that requires the loss to be caused by direct physical damage to property. There is some case law that may support the argument that a virus or some other similar event that does not cause visible physical damage to insured property, may nevertheless fall within the policy.
The above lawsuits reveal that even the insurance industry is not infallible and that there may be some policies or policy forms that do not contain the virus exclusion that may be subject to challenge. Accordingly, we urge all of our clients to review their policies and if they do not contain a virus exclusion consult with counsel regarding your rights to coverage.
Legislative Efforts. On March 27, New York Legislatures introduced a bill to override the Virus Exclusion actively. The bill, A10226, states, “Notwithstanding any provisions of law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes loss of use and occupancy and business interruption, shall be construed to include among the covered perils under that policy, coverage for business interruption during a period of a declared state of emergency due to the coronavirus disease 2019 (COVID-19) pandemic. The bill would only apply to insurance policies in force by March 7, 2020, and issued to businesses with fewer than 100 full-time employees.
Similar to the New Jersey bill (A3844), the New York bill would allow carriers that payout on these policies to seek reimbursement from the State Superintendent of Insurance under a fund. A special-purpose apportionment would create the fund that the Superintendent would be authorized to collect from all insurers doing business in the state. Carriers will most likely pass the costs on to customers in the form of higher premiums for virtually all insurance products. The insurance industry is pushing back against the New York bill as well as the efforts in New Jersey and other states, such as Massachusetts and Ohio.
English Case Law
Insurers are set to pay out a record to cover losses from the COVID 19 claims, bringing into focus the issue of policy response for BI claims involving wide area damage.
Standard UK policy wordings provide BI cover for interference to revenues caused by loss or damage to the Insured’s property (the “Incident”). The link to physical damage is maintained for purposes of the “Other Circumstances” clause, which provides that adjustments shall be made as appropriate to reflect trends in turnover affecting the business at the appropriate time, so the level of indemnity represents so far as reasonably practicable the loss of profits that would have been achieved but for the Incident. This does not encompass interruption consequent upon damage within the surrounding area and is not synonymous with the operation of the insured peril itself, which can give rise to anomalous results and severely limit policyholders’ recoveries.
In the aftermath of a catastrophic event causing wide area damage, not all businesses will be affected in the same way. Despite a severe downturn in the local economy, some businesses will experience increased demand (provided they can continue trading), for example, supermarkets and pharmacists.Still, in principle, the “Other Circumstances” clause works both ways and policyholders should be able to invoke an upward trend in appropriate cases, subject to adequacy of the overall sum insured.
UK Legal Position
The issue of whether the Other Circumstances clause can or should be used to adjust the standard turnover to reflect trends resulting from an event causing damage not only to the Insured’s property but also to the wider geographical area, was considered by the English courts in Orient-Express Hotels v Generali . Before this case, some disputes over holiday resorts in the Far East, subject to UK policy wordings, had gone to arbitration and been variously decided both in favour of and against the respective insureds.
The Orient-Express case considered the impact of Hurricane Katrina on a luxury hotel in New Orleans, and the owner’s appeal on points of law the following arbitration. In summary, the hotel suffered significant physical damage from wind and water resulting in its closure throughout September and October 2005 and partially reopened in November, albeit with limited amenities and ongoing repairs. A state of emergency had been declared, and a mandatory evacuation of the city ordered on August 28 and lifted at the end of September. Insurers rejected the owner’s claim for BI losses during the closure of the hotel by applying the trends clause, arguing that New Orleans was effectively closed throughout this period and the adjusted standard turnover should be zero.
The owner argued that: it was entitled to indemnity for losses caused by insured damage even if concurrently caused by damage in the vicinity (The MV Miss Jay Jay ); a reasonable interpretation should not permit adjustment of the consequences of the same insured peril which caused the insured damage; the trends clause was effectively being treated as an exclusion, which it was not; the precise reasons for cancellations and reduced revenue were likely to be a combination of factors, which could not sensibly be separated from each other evidentially; and insurers’ position had the remarkable result that the more widespread the impact of a natural peril, the less cover is afforded by the BI policy for the consequences of damage to the insured property.
The Commercial Court disagreed with these submissions, upholding the tribunal’s conclusion that a “but for” causation test was appropriate in accordance with the policy wording so that the BI loss was to be assessed on the hypothesis that the hotel was undamaged, but the city was devastated, as in fact it was. Permission to appeal was granted, however, and it was subsequently rumoured in academic circles the Court of Appeal might have taken a different view, had the case not settled by then.
BI forms in the US generally refer to “Direct physical loss of or damage to property, including personal property in the open or within 100 feet, at premises described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss”. The link to physical damage for claims involving wide-area loss is not as strong as the standard UK wording.
Many US policies include a loss determination provision, specifically excluding windfall profits caused by the impact of the insured peril. Nevertheless, it is interesting to note the decision in Berkshire-Cohen LLC v Landmark Aon Insurance (2009), in which the claimant realty agents were successful in recovering windfall profits due to increased demand for rental properties following Hurricane Katrina, despite the exclusion clause. The reasoning was that both storm and flood damage had occurred with only the former being a covered cause of loss, and in the US (as in most of mainland Europe) flood is a contingency addressed by the government rather than by insurance. The US District Court, therefore, held that while the exclusion applied to storm damage under which th