By Bill Dunkerley, director in the regulatory team, Pannone Corporate
No one quite envisaged a year like 2020. It has thrown up a plethora of obstacles and challenges – the likes of which have not been seen or experienced before by many businesses.
Even the most watertight of enterprises, and the hardiest of sectors, have been significantly affected by a pandemic that’s taken no prisoners. However, while the aftermath of Covid-19 still seems like some distance away, there are many lessons that can be learned, as businesses continue to adapt and rethink the way in which they operate in a Covid world.
One such area that has been grabbing the headlines in recent months is the issue of protection – and more specifically, business interruption insurance. While the most scrupulous of business owners will pore over the finer details, few would have paid close attention to the inclusion, or exclusion, of specific diseases in their policy. Yet, for many, this particular detail has left them potentially out of pocket and exposed, as a result of Covid -19.
So, why has it been dominating the front pages? Last month [November 2020], the Supreme Court heard the appeal of a case initially brought by The Financial Conduct Authority (FCA), concerning the correct interpretation of business interruption insurance policies. Since the pandemic began, thousands of policyholders have had their claims rejected, with insurers arguing that ‘BI’ policies were not meant to cover businesses for lockdown losses.
Initially, the FCA brought a test case against eight insurers as to the extent they were able to reject claims relating to lost trade during national lockdown. In September the High Court broadly ruled in favour of businesses, but six of the eight insurers involved launched an appeal – the judgement of which is pending [as we write].
It’s a contentious issue and one that many businesses will be eagerly watching to see if insurers will be forced by the courts to pay out on claims relating to trade lost during the coronavirus.
However, let’s rewind a little. What exactly is business interruption insurance and what is it for?
Business interruption insurance – what is it?
Put simply, business interruption insurance covers organisations for financial losses, such as loss of revenue, rental income and additional staff costs, during a period of time when you cannot carry out business as usual due to an unexpected event. The aim of the policy is to maintain stability and ensure you can return to the same trading position that you were in before the business interruption occurred.
Typically, the policy will cover events such as fire, storms or flooding or, in some cases, the breakdown of essential equipment. In certain instances, the policy also extends to people not being able to get into your business premises, or damage occurring at the premises of a supplier or customer.
Unfortunately, BI insurance can often be confused and misunderstood, with many business owners mistakenly believing that cover, such as stand-alone buildings and contents policies, will protect their business in the case of an unforeseen occurrence. However, it’s important to note that while those policies will typically indemnify physical damage caused, what they don’t necessarily do is protect against the subsequent loss of earnings as a result of short or long-term interruption to trading. Together, the trio of policies should work effectively to cover against business interruption – the question now is whether the most unexpected of unexpected events is likely to change the way in which BI insurance is administered in future?
How will the policy evolve?
Subject to the Supreme Court’s imminent ruling, it’s highly likely that policy wording will remain king. In other words, when considering whether a policy provides an indemnity in any given scenario, you’ll firstly have to consider what that policy actually says. It’s very difficult to imply terms over and above the specific words and phrases used. Therefore, if X risk is not expressly stated, it will be difficult for a policy to be construed to include cover for that risk.
Although only 21 sample policies were considered by the court in the first instance, it is anticipated that potentially hundreds of policies may ultimately be impacted. The ruling(s) will be beneficial to some policyholders, in confirming that cover is available following business interruption/prevention of access, and less so to others – for example those who have policies which have very narrow or restrictive wording.
It’s extremely unlikely that ‘pandemic’ was on any organisation’s risk radar this time last year, or was considered anything more than a theoretical risk. Although the pandemic may have initially caught a number of businesses and sectors off-guard, it serves to demonstrate that pandemics are a real threat and businesses must be alive to all potential risks, including those which may only currently be theoretical in nature.
There is evidence – across liabilities and sectors – that premiums are increasing on renewal but, in addition, it is understood that a number of insurers are considering withdrawing from certain markets, or if they remain, issuing significantly restricted policies. To respond to any such perceived gaps in the market, we may see the entry of insurers into new markets, and potentially an increase in the number of unrated insurers – insurers without a recognised financial strength rating. While unrated insurers may offer attractive premiums to potential policyholders, there may also be delays by them in handling claims and a lack of financial stability.
What should small businesses do next?
Once you’ve identified the potential risks to your operation, you will need to engage with your broker or insurer to obtain adequate cover for those identified risks.
Given the possible restrictions by insurers in issuing widely-drafted policies, we may see the emergence of increasingly specialist brokers, who are alive to specific risks within individual sectors. As such, it’s important for businesses to engage more actively in their insurance arrangements, to ensure that indemnity is available in respect of anticipated risks.
Regardless of the outcome of the appeal to the Supreme Court, in a world where protecting the unknown has suddenly become a reality, it’s essential that – through proactive broker relations – you invest in adequate cover and understand the emerging risks that may impact on your business in future, for which additional cover may be required.
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