COVID-19 business interruption claims – your questions answered

When the UK went into lockdown in March, hundreds if not thousands of businesses across the UK will have turned to their business interruption policies to claim for loss of income. Many claims to date have not been successful.

At the heart of the issue is policy wording and the potentially ruinous liabilities insurers are facing. Businesses have found claims stalled or denied even when the policy wording makes specific references to ‘infectious disease’, arguing that it did not refer to a worldwide pandemic.

The Financial Conduct Authority (FCA) has taken the unusual step to seek legal clarity on business interruption insurance claims. A test case involving 500 policies from 40 insurers and 17 policy wordings will be scrutinised with the case keenly watched by businesses that have had claims rejected or have yet to make a claim.

Will my business interruption insurance policy cover any losses caused by COVID-19?

To answer this, careful consideration of clauses in your insurance policy will be required. At present, the clauses in most insurance policies are not expected to cover losses caused by COVID-19. However, in some cases there is uncertainty as to whether cover is provided, hence the FCA case.

We are pleased to report that we are already seeing positive movement in this area as some clients have reported that their insurers who had previously rejected claims have now paid out. The change of approach is advised to be due to the insurer reassessing their policies where the client’s premises were in effect closed by legislation, possibly following recently released FCA guidance on “non-damage business interruption policies”.

Why are claims being turned down?

Claims for COVID-19 may revolve around denial of access to premises and many such claims are being rejected on the basis that the cover normally requires damage to the premises. Alternatively, while extended cover may have been sought, specific exclusions may be included for a global pandemic or previously unknown diseases.

My insurer is involved in the test case. Is there anything I should be doing now?

Whether or not your insurer is involved in the test case, if you think you may have a claim it is important to make sure you are recording and retaining all the necessary information and documentation to compute and substantiate the value of a claim.

It will be important not only to understand how the business has actually performed and how it is now expected to perform, but also how it was predicted to perform through the period of indemnity had the virus not happened. In addition to factual accounting records, you should therefore be retaining historic forecasts and potential opportunities, cancelled orders and preparing and updating current forecasts.

You will also be required to demonstrate that you have attempted to mitigate, as best as possible, the losses, so retaining evidence of relevant decisions and measures that you have put in place will be important too.

You should also consider alerting your insurer to the fact that you may have a claim so they can put a reserve in place for you.

Even if you do not think you will have cover, there are wider accounting implications arising from the outbreak. Please see our guidance here.

My insurer is not involved in the test case. Will this court case affect my policy?

Potentially, the case is being used to determine which types of clause provide cover and the selection of insurers was made to ensure as many clause types are covered as possible.

Your insurer’s involvement in the case does not impact on what you should be doing now as the outcome of the case will be used to interpret clauses on all insurer policies – see above.

If the test case shows that insurers are liable, will they pay-up on our policy?

The test case is expected to determine which types of clause within insurance policies provide cover, and which do not across all insurers. If the relevant clause is included in your policy, then your insurer will be expected to settle a claim assuming you can demonstrate a loss.

If the test case shows insurers are not liable is there anything further we can do?

Unless there are any specific clauses within your policy that do not appear to have been considered by the case, then it is unlikely that you will be able to take any further action successfully.

How do I assess exactly the value of business lost because of COVID-19?

Whether or not you are covered for COVID-19 losses you may want to understand the impact of the pandemic on the business. There are different elements of any loss and each case should be assessed on its own specific circumstances. The elements of loss will include actual and projected lost net income (lost income less saved expenditure and government grants received), the impact of taxes, other directly related expenditure and potentially (in a fail scenario) the total capital value of the business beforehand.

What should I do if our insurer challenges the value of a claim?

Challenges to the value of claims are inevitable and it is then important to be able to robustly defend and demonstrate the claim value with supporting documentation. There will be a degree of negotiation required and it is important to have the right professional advisers on your side. Ultimately if agreement cannot be reached, it may be necessary to go to Court.

When are we likely to know the outcome of the case?

As noted above, it appears that there may already be some positive movement as a result of the case.

However, as to the final outcome, the case was brought by the FCA in early June under a never before used test case scheme. The insurance companies were due to file their defences by 23 June and the FCA is due to respond by 3 July. Thereafter skeleton arguments will be served and it is expected that the case will be heard at the end of July. The final outcome is therefore expected to be known shortly after that.

How can Kreston Reeves help?

Determining whether you have a claim or not may be a simple matter of discussion with your broker and / or insurance company.  However, if you would like assistance in quantifying your claim, please contact either Tom Wacher or Richard Heasman who would be delighted to have a conversation with you. Kreston Reeves have specialist teams covering most business sectors who would be happy to help.