Insurers are coming under pressure to waive policy terms and conditions in order to deem cover for business interruption insurance claims following government orders to close businesses and enforce social distancing. Although superficially attractive to insureds, as Chancellor of the Exchequer Rishi Sunak told Parliament on 18 March 2020, compelling insurers retrospectively to change policies to cover coronavirus related business interruption in these circumstances would “cause solvency issues most likely for the industry as a whole, as well as for individual insurance companies”.
Despite political and other pressure, in the author’s view, it is only by properly applying the terms and conditions of policies that insurers can hope to preserve their reinsurance protection, solvency, and be fair to all of their policyholders. Societies need solvent insurance companies during and after this crisis in order to pay covered claims.
There are three main reasons why standard property business insurance policies are very unlikely to be triggered by the coronavirus crisis.
Coronavirus does not damage property
Although it is possible to purchase certain ‘standalone’ business interruption (BI) policies, standard property policies nearly always require ‘loss or damage’ to ‘property’ as an essential pre-requisite of cover, and that is a matter for the insured to prove, with evidence.
From the point of view of physical property, coronavirus is completely harmless and totally unremarkable. It is simply one amongst billions of viruses and other pathogens that are distributed around the physical environment by humans and other living things, every second of every day. If coronavirus lands on property, it will survive for a few minutes or hours, during which time it will not corrode or change the physical state of the property in any way whatsoever. Then it will break down and vanish. The property itself will have suffered no loss in value whatsoever. In that regard, it is very different, for example, to mould that damages buildings or perishable goods.
In a handful of cases insureds might temporarily be deprived of the use of their property because of actual or feared contamination, however English case law makes it clear that temporary deprivation of property is not ‘loss’, unless the effect is that the property perishes, which it will not do in the case of coronavirus.
Coronavirus will not be the proximate cause of business interruption
Even if coronavirus could be proven to have caused physical loss or damage, insureds claiming for business interruption would still need to prove that their financial loss was caused by that damage, or in the case of contingent business interruption, by damage to someone else’s property. It seems very unlikely that any business will be able to demonstrate that.
Rather, in most cases, the real or proximate cause of financial loss will not be physical damage to property, but will be human agency. Examples include government orders or recommendations, supply chain collapse, and loss of demand.
Exclusions may apply
Finally, even in the unlikely event that a claim could be shown to fall within the coverage sections of the policy, the exclusions will need to be considered. Exclusions vary greatly from policy to policy but, where they appear, exclusion for losses indirectly caused by contamination and acts of government will also be relevant.
We envisage that few successful business interruption claims can properly be brought under standard property policies. As the Association of British Insurers has said:
“The spread of coronavirus is unprecedented in modern times and we understand this is an incredibly difficult time for families and businesses. No insurance market provides widespread insurance coverage for pandemics and the UK is no exception. For such cover to be available at affordable prices for businesses would require a very significant subsidy from the government, given the scale of business disruption we have seen with the COVID-19 pandemic.
Instead, standard commercial insurance policies – the type the vast majority of businesses purchase – provide cover against a wide range of day to day risks including damage caused by fire, flood, theft and accidents involving employees. Insurers action claims of £22m each day to firms through these policies, supporting millions of businesses across the UK each year."