Business Interruption Insurance and COVID-19

With COVID-19 causing continuing financial turmoil for many UK companies, businesses are looking to their insurance policies to help them respond to the unprecedented circumstances they find themselves in. Business interruption (“BI”) insurance, which is often included in business or property insurance policies, is one class of cover to which they are looking.

In assessing whether a business is covered by BI insurance, an insured needs to establish that a claim falls within the terms and conditions of the policy. Typically, BI insurance covers the loss of income that results from an interruption to a business due to property damage caused, for example, by a fire or flood. As a result, many businesses will find that they are not covered for the loss of income caused by the ongoing pandemic. However, some BI insurance provides cover for loss of income due to closures that result from other reasons, such as infectious diseases, non-damage related prevention of access and public authority closures/restrictions. It is these types of policies that businesses should pay particular attention to when considering whether they can make a claim under their BI insurance for losses resulting from COVID-19.

The Association of British Insurers has estimated that 75% of the £1.2 billion its members are anticipated to pay out for claims relating to COVID-19 will be for BI. If a business does find itself in a position whereby it is covered by BI insurance, it must notify its insurer, either directly or through its broker, according to the notification clauses in its policy. The failure to do so could result in a denial of its claim. If a policyholder is in doubt about cover, it should nonetheless notify. On 15 April 2020, the FCA set out its expectation that insurers must seek to agree, process and pay successful claims as swiftly as possible, using interim payments if appropriate.

Unfortunately, many SMEs have found, and more inevitably will find, themselves in a position in which their BI insurance does not cover them for loss of income due to closures and interruptions resulting from COVID-19, or in which insurers decline cover and reject their claim.

Redress in such circumstances is by litigation through the courts or, if the policy provides, arbitration. However, in certain circumstances an eligible business can make a complaint to the Financial Ombudsman Service if its insurer denies its claim. If successful, the decision is binding on insurers (but not the insured). To be eligible, a business must: have an annual turnover of less than £6.5 million; have a balance sheet total of less than £5 million, or employ less than 50 employees. The business must contact the Financial Ombudsman Service within six months of the insurer’s final response. The limit of compensation that can be awarded is £350,000. Unlike litigation or arbitration there are no adverse costs risks. If the insured accepts an award it cannot subsequently pursue litigation.

The FCA has acknowledged that there is, in fact, widespread concern about the lack of certainty and clarity in BI policy wordings, and therefore the basis on which insurers have rejected BI insurance claims. It announced on 1 May 2020 that it would be seeking to obtain a judicial declaration to resolve contractual uncertainty regarding the meaning and effect of BI insurance, and has written to a number of insurers asking them to clarify their position on their BI insurance wordings.

If the FCA does obtain a declaratory judgment, the Financial Ombudsman will be able to take it into account in considering complaints.