Business Interrupted – The Insurance Implications of COVID-19
20 April 2020
There is understandable concern about the significant financial impact that COVID-19 is having on the global and national economies. Many businesses will be looking to their insurance policies to cover the financial losses incurred as a result of the disruption. We discuss the application of business interruption insurance in the current COVID-19 crisis.
Business interruption cover
In general, business interruption insurance covers losses incurred by a business as a result of a disruption caused by an “insured peril”. This type of cover generally requires an element of damage to property, for example fire or flooding. Whether or not an “insured peril” extends to a virus very much depends on the policy wording. Some more specific policies may include an extension which expressly covers losses caused by communicable or infectious diseases, without a requirement for physical damage to the property. In these circumstances, it would be common for the policy to limit the cover to the outbreak being present at the premises, for example Legionnaires' disease in a hotel.
Some policies even go so far as specifically excluding business interruption cover for a virus on a global or national scale. The difficulty for insurers in including cover for diseases linked to pandemics or epidemics such as Ebola, SARS, Avian flu or COVID-19 is that there is a significant difficulty quantifying the potential risk and in turn, the potential cost of cover.
Principles of insurance and guidance from the Central Bank
In basic terms, insurance policies are contracts. They are defined in scope and breadth and are designed to cover losses arising in a specified set of circumstances. They are not fluid or reactive documents designed to provide a financial safety net to cover losses which are not specified under the policy. The majority of policies will be clear in terms of what is or is not covered for the purpose of business interruption.
The Central Bank issued a letter to all Irish insurers on 27 March 2020 confirming that where cover exists for a business closure as a result of a government direction, “the recent government advice to close in the context of COVID-19 should be treated as such a direction”. The Central Bank further stated that “the CEO of each insurance firm shall take responsibility for the oversight of how their firm is managing determinations of whether claims are covered or not in the context COVID-19”.
The Central Bank letter also advised insurance companies that the interpretation of any ambiguous clauses surrounding policy cover for COVID-19 related claims should be read in favour of the consumer. This has been interpreted in some commentary as a new concept, however it simply reaffirms the long standing rule of contra proferentem. This simply means that insurers have always been obliged to interpret ambiguous terms in favour of the insured.
The Central Bank has also requested insurers to submit detailed breakdowns of their business interruption policies including details of how policies with ambigious language are being dealt with.
SARS case law
Whilst no known case law has arisen to date as a result of COVID-19, case law arising from the SARS outbreak may be regarded as comparable.
As a result of the outbreak in or around 2003, Hong Kong based hotel group, Mandarin Oriental International Limited, received a pay-out from insurers in the sum of approximately $16million. Their policy responded to the significant business interruption caused by cancellations and reduced local food and beverage sales. This prompted insurers to include specific schedules of diseases which would be covered. As COVID-19 was unknown until recently, there will inevitably be very few, if any, policies which will include it as a specified disease.
In a further SARS related case, which went to the Court of Final Appeal in Hong Kong, it was determined that the insurance policy did not have to respond to cover losses which had occurred prior to the date on which the disease was designated as a notifiable disease. This would only be applicable to policies where a trigger event is incorporated into the wording of the terms.
This is an extraordinarily challenging time for insurance companies and policyholders alike. While most business interruption policies will be clear about what they cover and more importantly what they do not cover, some policies may require more in-depth analysis to ascertain whether they respond to losses incurred as a result of the current COVID-19 crisis.
The Government and Central Bank are taking an active interest in how insurers are treating claims during this current crisis, with Minister for Finance Paschal O’Donoghue recently holding a virtual meeting with Insurance Ireland.
It is certainly an area which will continue to develop over the coming weeks and months and we will bring you further updates as they occur.
For expert guidance in navigating the complex coverage issues the pandemic continues to present, contact a member of our Insurance & Risk team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
 New World Harbourview Hotel Co. Ltd & Ors v ACE Insurance Ltd & Ors  HKEC