Coronavirus: will UK insurers cover business losses?

Businesses are increasingly facing disruption to supply chains, loss of customers and workforce illness as a result of the pandemic, any of which have the potential to affect revenue generation.

However, businesses should check the terms of their cover carefully to see whether any potential losses are covered. Proving that coronavirus is the cause of any insured losses may be challenging where they are multiple intervening causes, such as disruption to supply chains.

‘Notifiable disease’

On 5 March, the UK government legislated to add Covid-19 to the list of notifiable diseases in England and Wales and SARS-CoV-2 to the list of notifiable diseases.

Declaration as a notifiable disease means that medical professionals must report suspected cases to public authorities immediately. The term is also commonly used as a trigger in certain insurance policies.

At the time, the BBC had reported that some small businesses had been told that their policies would not protect them against losses until the government made such a declaration.

Business interruption insurance

However, the declaration by the UK government does not automatically mean that coronavirus-related losses will be covered by the likes of business interruption insurance.

Business interruption insurance traditionally covers loss of revenue or profit experienced by a business following damage to property and the cost of mitigating that disruption. It is usually added to and forms part of a commercial property insurance policy. The trigger for coverage is property damage - for example, due to a storm or fire - and so this type of policy will not cover losses from disruption caused by coronavirus where there has been no property damage.

Contingent business interruption insurance is broader and covers loss of profits to a business resulting from disruption to the business caused by loss, damage or destruction of property owned by a supplier of goods. It is intended to cover a situation where a supplier’s business is disrupted and that causes disruption to the insured’s business.

Again, the trigger for cover is property damage, in this case damage to a supplier’s property - for example, fire at a manufacturing plant. This will not cover disruption caused by coronavirus where there has been no property damage.

Extensions to cover

The most likely route to cover for coronavirus-related losses are extensions to cover found in some business interruption policies. These are often triggered by non-physical damage such as closure of premises or denial of access.

There are extensions which specifically cover infections or contagious diseases or losses flowing from the inability to use business premises due to restrictions imposed by a public authority. However, there is no market standard for these extensions, so the wording of the policy must be checked carefully to see what is and what is not covered.

The current coronavirus outbreak appears to satisfy some definitions of disease now that it has been designated as a notifiable disease and declared a ‘pandemic’ by the World Health Organisation (WHO). Some policies even cover business interruption where there has been a notifiable disease within a certain radius of the insured building.

However, there may still be challenges to claiming under these extensions.

The business would likely be required to demonstrate that it was unable to use its business premises due to restrictions imposed by the government or on the order or advice of the government. If the business chooses to close its premises out of an abundance of caution, there would be no cover. Insurers are likely to take a strict stance on causation.

Some policies require there to be an outbreak at the business’ premises, so there would be no cover where the business has had to close as a result of, for example, supply chain disruption.

Some policies only cover certain specified diseases which are set out in a list appended to the policy. As Covid-19 is new, it will not be listed.

Extensions often have a low sub-limit, such as 10% of the total amount insured or a shorter fixed period of only a few months for which the business can claim loss of revenue. They are also subject to all other policy terms and exclusions.

The Association of British Insurers (ABI) has published guidance on insurance and the coronavirus and has said that it expects that "insurance for business interruption resulting from COVID-19 is likely to be rare".