The outbreak and impact of COVID-19 is one of the most significant pandemics that the UK and world at large has ever seen.
In March 2020, the UK government enforced a lockdown which caused a number of businesses across the UK to close their doors to the public. Most businesses are likely to have to remain closed for the foreseeable future. This has had a natural effect on finance and it has also created significant uncertainty for their long-term survival. The impact of the pandemic on businesses has been felt not just by small companies, but also large corporations demonstrated by companies such as British Airways and Rolls Royce recently announcing thousands of job cuts.
It is important for all businesses to manage risk as part of their day to day operations. It is common for businesses to insure against unforeseen interruptions, in addition to the usual commercial insurance policies such as employer’s liability, public liability and buildings insurance. Whilst every business in some shape or form manage risk in their own way, it is fair to say that no one expected COVID-19 to impact the UK in the way it has done, leading to the government introducing and implementing enforced lockdown.
Although the UK government has provided various support packages and measures to protect businesses, such as the Furlough Scheme, business support grants and business rates relief, there appears to be little provision to cover loss of revenue by thousands of businesses. These businesses have naturally turned to their insurers to recover their losses, but it is becoming increasingly apparent that some insurers are not paying out on claims relating to Business Interruption Insurance (“BII”) as a result of COVID-19.
BII is a type of insurance that replaces income or revenue in the event that a business operation is ceased for some reason, such as a fire or a natural disaster. This type of insurance can also cover operating expenses and a move to a temporary location, if necessary.
When a business takes out a commercial insurance policy, the insurer will usually provide a Schedule of Cover, which will go into detail about the various terms of insurance and conditions applicable to that policy. The Schedule of Cover should explain what is covered (usually referred to as “Insured Risks”) and what isn’t covered (usually referred to as “Exclusions”). In essence, the insurance policy and documents that form part of the overall policy are a contract between the insured party and the insurer. The contract is an agreement whereby the insurer will demand a premium for providing the specified insurance cover, and the insured party will expect to receive an insurance pay out, in the event of a ”trigger” which activates a pay out on the insurance policy.
Different insurers will have different policy wordings which vary widely and are therefore open to interpretation where BII is concerned. Some policies will provide cover to the insured party in the event of a forced closure by, for example, a public authority and some policies will provide cover for outbreaks of certain types of notifiable disease. It is possible that some insurers may exclude cover from their policies for certain types of disease, whilst the insured party may be under an incorrect assumption that they are covered.
In 2003, following the outbreak of the SARS disease, many insurers took steps to exclude certain diseases, like SARS, from the coverage under their policies. Following the outbreak of COVID-19, some businesses, when seeking to initiate claims under their existing policies, have been informed that despite their perception of what was covered, COVID-19 claims do not classify as a ‘trigger event’ under those policies. Although these insurance policies may provide cover, for example for unplanned closure as a result of public authority intervention, the insurers are relying on the strict interpretation of policy wording when assessing claims.
Policy summaries and wordings are open to interpretation. There is a range of case law which illustrates how Courts have in the past been tasked to interpret the wording of insurance contracts. Contracts are usually based on fairly straightforward wording, however, the Courts are well accustomed to considering these types of contracts in the event of a dispute between the parties. When the Court is asked to interpret the wording of a contract, even if the Court applies a ‘common sense’ approach, this does not always accord with a narrow meaning desired by insurers. When reviewing insurance contracts, Courts can look at the purpose and intention of the insured party in taking out a particular type of insurance policy. This may give some comfort to the insured party as the Court may take a more liberal approach when interpreting any exclusions and other wording which would ordinarily give rise to a claim being rejected.
BII policies usually set out limits on how much an insured party can claim under the policy. Generally, BII claims are assessed on a business’ gross profits. Where an assessment of the likely amount of gross profits in the coming year is made at the outset, a premium for BII is then charged based on the gross profit estimations. It is therefore important for the insured party to ensure that, when arranging such an insurance policy, they should be satisfied that any figures or profit projections which are used as part of the assessment process are wholly accurate and will cover their requirements for the duration of the BII policy. It is common for a BII policy to specify a time limit under which the insured party will be entitled to continue to recover any losses, usually referred to as an “indemnity period”. It is always therefore important for the insured party to check that the indemnity period is sufficient and meets their requirements.
You may have used an insurance broker to arrange your BII policy. It is important for the insured party to work closely with the insurance broker to ensure that the broker is fully aware of the needs and requirements of their business. You must ensure that any information which is required by the broker is provided because, if there is anything which leads to, for example, a BII policy not covering for the correct amount, there may be no recourse against your broker if you have not given the broker what was required. It is also important to remember that a business is under a duty to tell their insurer about anything which may impact on the risk being taken on by the insurer. They are contracts of the utmost good faith and, if important information is omitted, the insurer may be able to avoid liability for any claim.
If you are ever in a situation where you need to initiate a claim under BII, it is advisable for you to speak with your insurer or insurance broker as soon as possible to understand the process. There is no legal framework for how these types of claims should be made and handled. Most insurers will outline some sort of framework or procedure for making a claim, including steps that the insured party must take in order to try to reduce losses, for example. If the insured party fails to comply with any particular framework or procedures, this could jeopardise a claim being paid out, so it is therefore important that the insured party has a full understanding of exactly what is required of them in the process. In the event of a dispute, a Court may be minded to look favourably on the insurer, if the insured party has not complied with their obligations under the insurance contract.
Insurance companies are regulated by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). Sometimes disputes between the insurer and the insured party can arise which can then lead to complaints being made against the insurer. If an insured party has a particular problem or situation which needs to be resolved by a complaint, the first step is usually to follow the insurer’s internal complaint procedure before taking the matter any further. If the insurer fails to resolve the complaint to a satisfactory standard, the insured party is able to pursue a complaint through the Financial Ombudsman Service (FOS). The FOS are an independent party who assess whether the complaint has been effectively dealt with. The FOS has the power to award compensation to the insured party in the event that a complaint is successfully upheld. If you have any queries on the FOS and their procedure, please visit https://www.financial-ombudsman.org.uk/consumers/complaints-can-help/insurance.
If a complaint cannot be resolved, even with the involvement of the FOS, you may decide that Court action is unavoidable.
If you require any assistance or information about how we can deal with a claim on your behalf, the costs involved and funding options, please speak with Russell Davies, Partner and Head of Dispute Resolution on 01332225381, who will be happy to assist.