It is a truth universally acknowledged that at a time of significant economic downturn insureds will check the wording of their insurance policies and underwriters will take legal advice. These might be the Austenesque opening lines of a work titled Hope and Uncertainty dealing with the anticipated global surge in business interruption claims as a result of COVID-19.
In the current crisis battle lines with respect to business interruption insurance coverage have already been drawn up and include the following:
- Can COVID-19 cause direct physical loss or damage to an insured premises?
- Is COVID-19 a mutation or variation of another coronavirus e.g. Sars?
- Can business interruption cover be activated by a government ordered shutdown of a business, key customer or supplier?
- What about the financial effects of ongoing interruption to key suppliers or customers once lockdown is lifted?
- Does the absence of exclusion clauses for loss due to a virus or pandemic mean that loss is covered?
The position is rarely clear and will depend upon policy wording and the jurisdiction a business is operating in – some US states have mooted mandatory retrospective coverage by underwriters for business interruption losses, a move that insurers say would lead to the financial failure of the entire sector and would set an unworkable business precedent.
In contrast some insurers have issued urgent policy wording “clarifications” and the current expectation is that whilst losses from proven physical damage caused by COVID-19 will likely be minimal there will be a surge in business interruption claims that may well have merit rooted in poor policy wording and / or supplier / customer disruption.
What steps should businesses take now?
Businesses should be taking steps now to protect their position in the event of a potential business interruption insurance claim including the following:
- Check what insurance cover you have, the detailed wording and liaise with your broker;
- Adapt your accounting system to separately record and account for all additional expenses incurred – it can be both difficult and time consuming to identify these weeks or months after the event;
- Note details and documentation of cancelled orders from suppliers or customers (losses sustained may represent a breach of contract);
- Also, separately note details of potential sales enquiries that could not be met or potential orders that were cancelled;
- Preserve budgets / forecasts or business plans in place before any adjustment for the impact of COVID-19;
- If in-house legal capabilities are used ensure a detailed record of time spent is maintained;
- Maintain a management diary of what has had to be dealt with on a day to day basis – this can assist in understanding full business impact at a later date;
- Consider and document any potential mitigation of potential losses (even if not followed through) and cost savings made by the business; and
- With your broker, consider notifying your underwriter of a potential claim.
We are in uncharted waters but there is no doubt that globally the insurance industry is going to face an unprecedented level of business interruption claims and scrutiny about how these are dealt with. This area is developing rapidly – please get in touch if we can assist.