What is business interruption insurance & how the COVID-19 pandemic has impacted the cover?
Written By Thomas Penney, Get Indemnity™ a Willis Towers Watson Network Broker
Business interruption (BI) insurance covers the policyholder for the loss of income following an event that has financially impacted the business. This may be due to physical loss or damage, whether it’s been stolen, or due to natural disasters such as a flood. As a Willis Towers Watson Network Broker, we are well placed to guide our clients.
What is business interruption insurance?
There are three main types of business interruption insurance, the first is loss of gross profit. This covers the loss of net profit following a reduction in turnover, standing charges and any increased cost of working. Secondly, there is loss of gross revenue. This covers the reduction in turnover following a loss event and any increased cost of working.
Finally, there is increased cost of working. Although increased cost of working is included in the two prior types of business interruption insurance cover, often there is a financial limit imposed in the policy. However, increased cost of working cover can be arranged in isolation so that the financial limit can be set to the policyholders needs.
Normally, the two most common reasons for insurance companies having to pay out are if your business has been affected by a fire or by a flood, where you cannot operate at the same level and therefore the business has lost income and profit.
Business interruption insurance is often misunderstood by companies when looking to take out insurance, mainly because individuals think that it will be covered under other existing insurance policies. For example, while buildings and contents policies will usually cover the cost of repairing the initial building damage, it does not cover the consequential financial losses which, in a worst-case scenario, could lead to your business activities ceasing.
Covid-19 pandemic and business interruption insurance
The issues that businesses have faced due to the pandemic are vast, but arguably one of the biggest problems we have seen is that some businesses were not initially able to claim on their business interruption insurance. This followed the SARS outbreak in 2003, which though not as widespread as COVID, started the introduction of specific exclusion clauses for communicable diseases and pandemics. As a consequence, many losses incurred by businesses were having to be taken on by the affected companies.
Many companies have seen severe financial hardship due to these exception clauses in business interruption insurance, where losses incurred during a pandemic were exempt from pay-outs. Neil Alldredge, senior vice president of corporate affairs for National Association of Mutual Insurance Companies, says, “Before the pandemic, most business interruption policies did not cover infectious disease or pandemic related losses, and while there are thousands of pending lawsuits on the question of coverage, most believe that policy language was clear. Already, several lawsuits have been resolved in favour of insurers, and we expect that insurers will continue to prevail in the courts.”
However, on the 15th January 2021, the Financial Conduct Authority published a letter to all CEOs, setting out expectations to insurers for where there are valid business interruption insurance claims under the test cases. However, the test case does not apply to all business interruption insurance policies, and in the letter, the FCA said “it remains the case that most SME BI policies are focused on property damage and only have basic cover for BI as a consequence of property damage, so are unlikely to pay out in relation to the COVID-19 pandemic and its effects.”
The cost of Covid-19 on the insurance market
Lloyds of London are expecting to pay out up to £5billion, with Insurers around the world have paid out on event cancellation, travel, trade credit and business interruption policies due to the virus. In the first half of 2020, Lloyd’s expected to pay out £2.4bn in pandemic-related claims, after reinsurance recoveries. They are reporting a £400million loss in the first half of 2020, as opposed to the first half of 2019 where they reported a £2.3billion profit.
Although it is too early to make a definitive comment on whether insurance premiums have been inflating in price due to the pandemic, insurers are now more at risk than ever for pay-outs, especially due to more and more businesses claiming due to the effect that COVID has had on their business.
What is clear is that the recent COVID pandemic has led many companies across various different business sectors to reassess their insurance protection in light of the enforced closures during the lockdown periods. As a consequence, any new BI insurance policies have much clearer terms regarding the level of insurance cover during a pandemic-type event, important for both the policyholder and the insurer.
This may ultimately lead those insurers and brokers who take a more digitalised approach to be more price competitive than others in the market as they look to provide policyholders with a BI insurance policy which enables them to manage this risk in the future.
