Market Update - Business Interruption

The Coronavirus Pandemic (COVID-19) has affected companies of all sizes across every industry. As management teams focus on business-critical decisions to help ensure the survival of their businesses, insurance can be an area that is sometimes overlooked.

In this, article we examine the issues surrounding Business Interruption insurance and the action that the Financial Conduct Authority (FCA) is taking to seek legal clarity on Business Interruption insurance.

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Business Interruption (BI) insurance has attracted considerable media attention as the financial impact of COVID-19 has led to businesses making claims for losses under their BI insurance policies. There has been confusion and concern about the basis on which some insurers are making decisions in relation to these claims with genuine doubts arising regarding the appropriate interpretation of policy wordings.

As a result, the Financial Conduct Authority (FCA) is seeking to obtain court declarations as part of a test case, the result of which will be legally binding on those insurers that are parties to the case. The court will consider a "representative sample" of policy wordings and the objective is to provide what the FCA describes as “persuasive guidance for the interpretation of similar policy wordings and claims that can be taken into account in other court cases including in Scotland and Northern Ireland, by the Financial Ombudsman Service and the FCA in looking at whether insurers are handling claims fairly.”

As of 11th June 2020, the FCA had expanded its original list of 17 wordings to 19 covering 91 policy types.

There will be an eight-day court hearing over 20-23rd July and 27th-30th July before Lord Justice Flaux and Mr Justice Butler.

The expectation of the FCA is that, following final resolution of the case (including any appeals), insurers should apply the judgement in assessing/reassessing all outstanding or rejected claims and complaints that may be affected by the case, with the exception of complaints that have been referred to the Financial Ombudsman Service.

Background

BI insurance usually requires physical damage to occur in order to trigger a claim and many companies have been told that they do not have any insurance for the closure of their business or a particular site due to COVID-19.

Whilst some policies have extensions for infectious or notifiable diseases – the Government made COVID-19 a notifiable disease on 5th March 2020 - these are often based on a prescribed list which excludes COVID-19. In mid-April several insurers moved to introduce total exclusions for COVID-19 although they stressed that whilst this would apply to new policies, renewals or where cover was added to a policy mid-term, current customers would not be affected.

The current dispute with insurers centres upon the interpretation of policies where extended cover has been purchased.

It is important to note that the FCA action is in addition to other parallel actions and does not preclude individual companies or groups of companies from taking their own actions.

Looking forward

Whatever the outcome of the test case, there are some important considerations that businesses will need to take into account when approaching the renewal of their BI insurance.

Chief amongst these is the inherent difficulty of providing estimated revenue/turnover figures, particularly where the policy premium is calculated on a minimum and deposit basis. Given the current crisis it is going to be difficult for businesses to provide an accurate reflection as to where they believe their gross profit could be.

If a business anticipates a significant fall in its turnover and wageroll estimates as a result of the lockdown/closures, then we would not recommend using the potential reduced gross profit but rather last year’s figure (especially where the indemnity period is two years or more) and ask insurers to rate on a declaration linked basis of, say, 75%.

The reason for this is that businesses will have to prove an economic loss, which is ordinarily done in simplistic terms by looking at last year’s profit versus the current year’s, following the shutdown of the premises as a result of an insured peril such as fire.

The scope of cover is another factor. Policy extensions such as, non-damage denial of access, property at third party premises cover and customer and supplier extensions, which were previously available at little or no extra cost, are likely to become more restricted.

The availability of strong Business Continuity Plans (BCP) and risk assessments are also going to be important in the overall renewal process, as insurers seek more detailed information about a risk as part of the underwriting process.

Timing is also important. You should be commencing the process three to four months ahead of renewal as, in addition to underwriters requiring additional information, lead times in the market have increased due to the fact that staff at brokers and insurers are still homeworking.

Review your options

Your forthcoming renewal is an ideal time to review the basis of the BI insurance you are purchasing and to consider questions such as whether more flexible limits for increased cost of working/additional costs of working will be better suited to the business model going forwards.

If you would like further information or to discuss how the team here at Matrix can help you to obtain an independent view of your options in this key area, please get in touch.