Business interruption insurance: Could you be covered for Covid-19?

© Jakub Jirsak – 123RF.com

“Contingent” losses are those stemming from damage to property not owned, controlled, or operated by the insured. Businesses can purchase contingent business interruption coverage, an aspect of business interruption insurance, where the coverage is triggered by property damage at the premises of a supplier or customer, or another trigger such as loss of utility, denial of access or an act of a local authority which results in a financial loss to the business.

Most contingent coverage is designed to protect the insured when suppliers, customers, or property on which an insured may depend suffer damage or are prevented from delivering or receiving goods and/or services.

Not all contingent coverage requires damage to property. Some merely requires loss caused by an insured peril or, in the case of all-risk policies, a non-excluded peril. For example, losses suffered as a result of the national lockdown may trigger a response under an all-risks policy.

In Fountain Powerboat Indus. v. Reliance Ins. Co., a policy that covered “the necessary interruption or reduction of business operations conducted by the insured and caused by loss, damage, or destruction by any of the perils not excluded” did not require physical damage to trigger what is known in the USA as civil authority or ingress/egress coverage.

The purpose of business interruption insurance is to restore the business to the same financial position as if the loss had not occurred, as well as to cater for additional or increased costs/expenses incurred to minimize further loss of revenue and lessen the time to do so, subject always to the terms and conditions of the policy.

Examples of impacts associated with Covid-19 may include:

• Contingent business interruption loss as a result of government-imposed quarantines of individuals and communities deemed to have clusters of cases, as well as enforced closures or severe restrictions on businesses, as in the current national lockdown;
  
• Income loss and business interruption resulting from closure of a business or significant curtailment of business activity, or extra expenses due to the closure of a facility of a key customer or supplier;
  
• Resulting loss of income, either from the closure of the insured premises or loss of customers due to identification of the coronavirus at the insured premises;
  
• Costs of evacuation of the insured property, and
  
• Costs of testing and sanitizing of the insured premises.

Generally, the applicable standard conditions for coverage for a contingent business interruption include:

• 15km radius within the insured premises and territorial limitation;
  
• Specified suppliers/customers listed in the policy schedule;
  
• Interference/interruption to endure up to 30-60 days; and
  
• Applicability of sublimit.

From decided international cases, it is evident that the requirement of “physical damage” or “loss” to trigger a policy response can be given an expansive meaning depending on the policy wording and the cause of the interruption/interference in the business.

For example, in Wakefern Food Corp. v. Liberty Mutual Fire Ins. Co. 2009 New Jersey Appellate Division, the court determined that the term “physical damage” was ambiguous and should be construed in favour of coverage where a grocery store suffered loss following a blackout.

Similarly, in Gregory Packaging Inc. v. Travelers Prop. Cas. Co. of Am., the District Court for the District of New Jersey found that “courts considering non-structural property damage claims have found that buildings rendered uninhabitable by dangerous gasses or bacteria suffered direct physical loss or damage”.

In American Guarantee & Liability Insurance Co. v. Ingram Micro Inc, 2000, the court held that “physical damage” could not be restricted to “physical destruction or harm” to the computer network system, but includes “loss of use, loss of access and loss of functionality”.

One of the key considerations to determine coverage of claims arising from Covid-19 related losses will be whether businesses incurred “direct physical loss or damage” to the insured peril(s) or a non-excluded peril in the case of all-risks policies. International cases, in part, may offer an answer or some guidance in this regard.

There is no standard contingent business interruption policy, and coverage will need to be determined based on the specific facts and type of insurance cover. All businesses must immediately take steps to carefully evaluate their insurance coverage.

If there is a possibility that coverage is available, the insured should promptly notify their insurers, take steps to minimize damage (where possible), and diligently quantify and categorize their losses. Similarly, insurers need to assess and determine their exposure for potential claims arising from the Covid-19 outbreak and the resultant lockdown.