Business Insurance and Covid 19

18th May 2020 Commercial Litigation

The potential fall out and legal issues arising from whether insurance policies will pay out to businesses who have been affected by Covid 19 gathers momentum.

The business, insurance and legal pages have seen considerable reporting and speculation as to what the eventual outcome will be. Suffice it to say the legal sirens are blurring loudly as law firms race to get ahead of the pack.

At JMW we have seen a significant uptick in clients and contacts asking advice as to their insurance position.

The issue arises as most insurance policies offer what is known as business interruption insurance (BI). As the name suggests, it applies when a business sustains losses when it is interrupted due to a specific identified reason. The most obvious example is where the business premises are damaged e.g. fire and the business loses income during the period when it is getting itself back on its feet. There may be limitations as to the size of the cover and the period but it is easy to see how the policy will respond to that damage.

Policies will also respond if premises are closed for reasons which do not involve the physical damage of the property. This can occur, for example, when the surrounding area is damaged in some way and access is restricted or prohibited.

It is this non-physical damage BI clause which often lies at the heart of whether there is any prospect of the impact of Covid 19 being insured.

Whilst these are standard areas of cover, the terms and conditions vary widely from insurer to insurer and sector to sector.

There is considerable press coverage that certain Hiscox policies are caught by Covid 19. Also, there are several polices which indicate that BI applies where the closure or interruption to premises is due to a Notifiable Disease. Whilst Covid 19 would not have been specified for the obvious reason it was unknown until earlier this year, it did become a Notifiable Disease on 5th March 2020.  

Indeed, press reports indicate that insurance policies provided by Hiscox, Allianz, QBE and RSA are all under attack.  

In an attempt to bring some early order and urgent clarity to the situation the FCA have taken the unusual step of inviting a “small number of insurance companies” to clarify whether they are declining or intending to decline claims. They have asked for responses by 15th May and then intend to issue court proceedings against firms who they believe should pay out to victims with appropriate insurance.

Provided there is visibility and transparency in this process this step by the FCA is to be commended. It will be interesting to see who is on their “naughty list”.

In the meantime anyone with BI insurance should be entering into a dialogue with it insurers or brokers to at least ensure it is complying with the policy in terms of notification.

Even if the policy does respond to Covid 19, there will be huge argument as to what losses are properly recoverable which again is likely be fact sensitive and fertile argument for lawyers and forensic accountants.

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Graham Small is a Partner/Head of Department located in Manchester in our Commercial Litigation/Corporate Recovery and Insolvency department

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