Executive Summary

1. Many policies of business interruption insurance will not respond to revenue losses caused by the COVID-19 pandemic. Nonetheless:
2. 1. even standard property damage based business interruption policies may respond in certain factual situations; and
   2. certain broader policies will respond more readily, but careful analysis is required.

Analysis

Coronavirus and Business Interruption Insurance: The Issue

1. On 5 March 2020, England declared COVID-19 a notifiable disease. A spokesperson for the Department of Health and Social Care said in terms:

“This will help companies seek compensation through their insurance policies in the event of any cancellations they may have to make as a result of the spread of the virus.” [2]

2. This governmental comment recognised the political importance of whether insurance policies respond to losses flowing from COVID-19, and the restrictions imposed to fight it. Business interruption (‘BI’) policies are a potential lifeline to businesses that would otherwise have gone under. On the other hand, BI insurers and their reinsurers face unprecedented losses if the policies that they have written respond en masse.  So do typical BI policies cover profits lost as result of coronavirus?  This bulletin explores that question.

A.     The nature of the policy

3. The starting point is that – regardless of whether or not COVID-19 is a ‘notifiable disease’ – many BI policies will not cover losses caused by anything other than physical damage.
4. Many BI policies are purchased as extensions to property damage (‘PD’) policies and cover under the BI policy is therefore frequently tied to the cover provided under the PD policy by a ‘material damage proviso’.[3] One common form is as follows:

“[The Operative clause will trigger] provided that at the time of the happening of the damage there shall be in force an insurance covering the interest of the insured in the property at the premises against such damage and that payment shall have been made or liability admitted therefor under such insurance.” [4]

5. The effect of a clause bearing that particular language is straightforward. If the underlying PD policy has been triggered, business interruption losses arising as a result of the triggering property damage are covered (subject to the policy terms, such as the excess and relevant exclusions);  if the PD policy is not triggered, there is no cover under the BI policy.
6. In most cases, COVID-19 will do no harm to property. Sadly, it will do its greatest harm to human life.  That being so, BI policies linked to physical property are unlikely to respond to the vast majority of revenue losses.
7. Accordingly, the first and critical question in most cases will concern the nature of the BI policy. Is it a cover in respect of physical damage to property only? Or is there broader cover?

B.     Facts which might give rise to a claim under a property damage policy

8. It is, however, conceivable that the ‘material damage proviso’ may be satisfied on certain facts, even in the context of a physical damage policy. We anticipate that arguments will arise that will be sensitive to their own particular facts and the particular policy wordings.
9. Consider the following facts, for example:
   1. In early March, one of Company A’s employees unknowingly became infected by coronavirus;
   2. She came into work before she realised that she was unwell. Upon developing symptoms, she informed Company A;
   3. Company A immediately instructed all of its employees to work from home (prior to any general lockdown), and performed a deep-clean of its premises;
   4. Company A’s employees continue to work from home. It has suffered revenue losses as a result of its employees being shut out of the office since early March.
10. On those assumed facts, there is a credible argument that there was physical damage to the property:
    1. Many insurance cases have raised fine distinctions about what does and does not constitute physical damage. In general, some physical change in the relevant property itself is required, even if limited in extent;[5]
    2. This does not appear, however, to be an absolute rule. In particular there are cases, both in an insurance context[6] and more widely,[7] in which property contaminated or overlaid by a dangerous or deleterious substance has been held to be damaged;
    3. On the basis of those contamination authorities, it can sensibly be said that when Company A’s premises were contaminated by coronavirus it suffered ‘property damage’.
11. Company A may, therefore, be able to satisfy the ‘material damage proviso.’ It would follow that it can claim an indemnity from its PD insurer in respect of time lost, subject to the policy excess and limits, and subject to any relevant exclusion.[8]
12. Given the sheer number of businesses that are currently suffering revenue loss, it is expected that at least some will find themselves in situations like the above. There are undoubtedly other fact patterns that will result in insurers potentially being liable under BI policies.  Businesses and insurers will need to deal with each claim on a case-by-case basis.
13. Even in cases where cover is triggered, there are likely to be difficult issues as to the period of indemnity (if any). For example, considering the same facts as above:
    1. Does the indemnity end when the deep-clean is completed, because the property damage is then remedied?
    2. Does the indemnity end when employees are free to emerge from self-isolation?
    3. Is the period of indemnity interrupted when the government orders ‘lock-down’ (since business would be interrupted then regardless of any property damage)?
    4. Would the insured in fact have sent its employees home, in line with governmental advice, at the same time in any event?
14. These questions raise issues about the effect of concurrent causes of loss, amongst others. In the event that loss is caused concurrently by an insured peril and an excluded peril, the exclusion will bar indemnity; but where it is caused concurrently by an insured peril and a non-insured peril, the policy will respond.[9]
15. Ultimately, each case will of course depend on the particular policy wording and the precise circumstances leading the interruption of the business.

C.     Wordings not contingent on property damage

16. Although much BI insurance is placed as an extension to PD cover and contains a ‘material damage proviso’, this is not invariably so. Policies written on some other basis may respond more readily to the current COVID-19 pandemic.
17. The most important variant is likely to be ‘non-damage business interruption’ (‘NDBI’) insurance policies. As their name suggests, these are designed to respond to business interruption even in the absence of direct property damage.  Nonetheless, their response will not be automatic or invariable.
18. While NDBI policies forgo the ‘material damage proviso’ discussed above, they do not typically respond merely because revenue has fallen. To the contrary, they tend to contain a non-damage trigger.  Common examples include:
    1. property damage within a certain radius of the insured’s premises;
    2. denial of access to the insured’s premises;
    3. government instructions; or, pertinently
    4. the occurrence of a notifiable disease within a certain radius of the insured’s premises.
19. The application of such triggers will not necessarily be straightforward:
    1. Some clauses that prima facie respond will not do so on closer inspection. Regardless of what the government does, a ‘notifiable disease’ trigger will not assist if the policy wording lists the relevant diseases and does not include COVID-19. We understand that issues are arising about whether policies that list SARS as a covered disease also cover COVID-19.  The answer to this may well call for scientific evidence;
    2. Conversely, some clauses that at first appear irrelevant may trigger cover. For example, if a local business experiences the situation set out in section B above, that may trigger a clause premised upon property damage within a set radius.
20. Whatever the relevant trigger, careful analysis will therefore be required to assess whether the BI policy responds and, if so, for what duration.

D.    Conclusion

21. There can be no doubt that COVID-19 will have an unprecedented impact upon businesses and insurers. That impact will not, however, fall evenly.  Two businesses with identical cover may find that their policies respond differently, depending on precisely how their business interruption arises. Likewise, two businesses that suffer precisely the same interruption will find that cover varies depending upon what they have agreed with their insurers.  Ultimately, all will depend upon the relevant facts and the relevant terms.

Rebecca Sabben-Clare QC

Andrew Pearson

The contents of this bulletin, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.

[1] https://www.gov.uk/government/news/coronavirus-covid-19-listed-as-a-notifiable-disease.  COVID-19 is the illness caused by SARS-CoV-2.

[2] https://www.bbc.co.uk/news/business-51730412

[3] See Insurance Disputes (3^rd Ed, Informa, 2011) 19.130 – 19.132.  See also <https://www.marsh.com/us/insights/research/business-insurance.html>

[4] Taken from Business Interruption Policy Wordings (Insurance Institute of London / Chartered Institute of Loss Adjusters, 2019) para 1.4.1.  The clause is in materially the same terms as the clauses considered by the court in Commonwealth Smelting v G.R.E. [1984] 2 Lloyd’s Rep 608; Glengate v Norwich Union [1996] 1 Lloyd’s Rep 614; Ted Baker plc v Axa Insurance UK plc [2013] 1 All E. R. (Comm) 129, amongst others.

[5] See, for instance, Quorum v Schramm (no. 1) [2002] 1 Lloyd’s Rep IR 292 (sub-molecular changes caused by fire to Degas’ La Danse Grecque amounted to physical damage);  Tioxide Europe Ltd v CGU International plc [2006] 1 Lloyd’s Rep IR 31 (change to pigment in paint was physical damage); but c.f. Pilkington United Kingdom Ltd v CGU Insurance plc [2004] 1 Lloyd’s Rep IR 891 (defects in glass at Waterloo station were not property damage, notwithstanding that they impaired usefulness of glass, because “damage requires some altered state”).

[6] Jan De Nul (UK) Ltd v Axa Royale Belge SA (formerly NV Royale Belge) [2002] 1 Lloyd’s Rep IR 589 (siltation of a river was held to amount to property damage under a liability policy).

[7] See e.g. Losinjska Plovidba v Transco Overseas Ltd (The Orjula) [1995] 2 Lloyd’s Rep 395 per Mance J at 398 – 399 (temporary contamination with hydrochloric acid amounted to property damage); Hunter v. Canary Wharf Ltd [1997] A.C. 655 per Pill LJ at 676 (contamination of land by dust amounted to property damage) (overturned on other grounds); Blue Circle Industries plc v. Ministry of Defence [1999] Ch. 289 (topsoil contaminated with radioactive materials constituted property damage).

[8] See, by analogy, Jan De Nul (UK) Ltd v Axa Royale Belge SA (supra).

[9] Wayne Tank and Pump Co v. Employers’ Liability Corporation [1974] QB 57; The “Miss Jay Jay” [1987] 1 Lloyd’s Rep. 32. In Orient Express Hotels v. Generali [2010] EWHC [2010] LRIR 531 the insured’s claim in respect of business interruption caused by Hurricane Katrina failed even though the hotel had been physically devastated because damage to the surrounding area and accompanying governmental strictures would, in any event, have closed the hotel, which meant that an exclusion clause applied.