Business Interruption Insurance in the wake of Covid-19 pandemic |26 October 2021
It has been well over a year since the outbreak of the Covid-19 pandemic across the globe. A year on and still the war to combat this disease endures. Vaccines are being developed by multiple organisations and vaccination programmes are well underway in various countries, albeit with different level of success, for now.
The Covid-19 is presenting unprecedented challenges to individuals, governments and businesses across the world and Seychelles has not been spared from the wrath of the pandemic. Some businesses have had to temporarily halt operations due to government measures whilst others are questioning their financial viability this year and in the coming years. Halting of operations has led to loss of potential income. Faced with this new reality, some entrepreneurs have resorted to re-engineer their business model and become more innovative. The tourism sector which is the major contributor to our economy was, in 2020, practically on its knees and the then government had to introduce the Financial Assistance for Job Retention (FA4JR) scheme to help alleviate some financial burden being faced by various local companies.
In time of crisis, businesses tend to turn to their insurance policies for relief to find that many business interruptions policies exclude pandemics or require physical loss for the policy to kick in, surprising many business owners who did not pay close attention to their policy document. However, many others are unaware of such insurance product and in cases where they are aware, opt not to purchase it, relying mostly on their property fire and special perils insurance.
What is Business Interruption Insurance (BI)?
Business interruption insurance (BI) is also known as time loss, consequential loss and loss of profits insurance. Normally, it provides cover for the financial losses due to an interruption to a business caused by material damage to property. Notice here I mention “normally”. Why? Before answering let us try to understand BI with the following example:
Say, a restaurant is destroyed or damaged by fire. Apart from physical damage, the business may also suffer a loss of business income. The restaurant may also incur extra costs, such as renting alternative premises to maintain the turnover of the business. Other expenses are payroll for the employees. All these losses are covered by business interruption insurance.
Whilst BI is primarily focused on financial losses suffered as a result of physical material damage there are exceptions. Certain business interruptions insurance does provide cover for pandemic risks. Although this is true outside of Seychelles, the case is different here. In the local context, BI cover tends to be linked to physical material damage to property. In fact whilst gathering data for this article, it has been noted that the local insurers does not provide coverage for pandemic risk under the business interruption insurance policy dashing all hopes for financial insurance assistance under these circumstances.
Many insurers have successfully argued in court that for BI claims to be triggered, there need to be physical material damage. The mere presence of staff or customer being contaminated nor the government measure to restrict or stop access to the property does not constitute physical damage.
Lo and behold.
Starting late 2020 and well into 2021, the insurance world is witnessing a turn of events linked to some landmark ruling against insurance companies across the globe.
One such ruling was in the United Kingdom (UK). In January 2021, in the case of Financial Conduct Authority (FCA) v Arch Ins (UK) Ltd) [2020] the United Kingdom’s Supreme Court issued a landmark ruling analysing the extent to which business interruption coverage applies to losses caused by Covid-19 and resulting government restrictions. The UK Supreme Court found that some losses caused by Covid-19 and consequent local or national restrictions should be covered by business interruption insurance policy.1
Closer to home, more precisely in South Africa, in the case of (1) Ma-Afrika Hotels (Pty) Ltd (2) The Stellenbosch Kitchen (Pty) Ltd v Santam Limited, the High Court of South Africa ruled in favour of the policyholders. The case related to business interruption losses suffered by the policyholders as a result of the impact of Covid-19 and related restrictions imposed in South Africa.2
More and more cases of these nature are being brought to court by policyholders across the globe as a consequence of UK Supreme Court ruling in the case FCA v Arch Ins., in what is considered as FCA Test Case Judgment.
Final observation and conclusion
In a few countries, certain insurance companies have resorted to offer additional coverage or making voluntary payments or support business affected by the disruptions caused by Covid-19.3
According to the Organisation for Economic Co-operation and Development (OECD), many countries are exploring ways to provide support to commercial policyholders (particularly small and medium sized enterprises) in the relation to uninsured business interruption losses that they have faced as a result of the Covid-19 pandemic. OECD further stated that policymakers are examining longer term solutions to address the gap in financial protection for pandemic-related business interruptions that has come to light as a result of the current crisis. (OECD, 2021)
Amongst the many global initiatives taking place across the world, the French government has established working group to develop a framework for providing insurance for exceptional events such as global pandemic. There are working groups in the United Kingdom developing solutions to business interruptions protection gap for pandemic risk. The United States has introduced a legislative proposal called the ‘Pandemic Risk Insurance Act of 2020’ in congress.
In the local context, while the stacks are against the policyholders, some insurance companies are considering the inclusion of pandemic risks as part of their policy coverage. However, it is worth noting that many customers are still unaware of the benefits that BI insurance does provide, hence, the low level of intake. More effort is needed to redress this status quo and to find tangible long term solutions to business interruptions protection gap for pandemic risk.
Contributed by: Gary A. Jupiter Snr., AMII, ACII, Chartered Insurance Practitioner