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Mishcon Academy: Digital Sessions - COVID-19 and Business Interruption Insurance: Your Questions Answered

Posted on 28 April 2020

Mishcon Academy: Digital Sessions are a series of online events, videos and podcasts looking at the biggest issues faced by businesses and individuals today.

This live session was held on 23 April 2020. The information in the film is correct at the time of recording.

Miles Geffin

Good afternoon, welcome and thank you for joining us today for this Mishcon Academy Digital session focussing on Business Interruption Insurance.  I am Miles Geffin, I am a Legal Director at Mishcon de Reya and I will be moderating today's session.  I am delighted to be joined by our panellists, Sonia Campbell, Richard Leedham and Philip Edey QC.  Sonia is a partner in Mishcon de Reya's dispute resolution department, Richard is also a partner in Mishcon's dispute resolution department and Phillip is a specialist lead advocate at Twenty Essex Chambers.

So Sonia, starting with you, what is BII and what risks does it usually cover?

Sonia Campbell

Business Interruption Insurance is a form of insurance which is generally intended to protect against financial loss.  In usual circumstances, it is triggered by physical property damage is where you would usually see it.  So you would have material damage to property, which then triggers financial loss cover in the form of Business Interruption Insurance.

Miles Geffin

 In terms of the ordinary course of events, who would you have normally been seeing claiming on those types of policies and in what circumstances?

Sonia Campbell

It can be any kind of business.  You could have manufacturers that have property damage to equipment that they use in the course of manufacturing and because something has happened to that property and they can't operate their business in the usual way, that gives rise to financial losses that can be claimed under the Business Interruption so that is how they usually link.  What we are going to talk about is slightly different.

Miles Geffin

Philip, does a novel corona virus sit easily with the type of risks that Sonia has just described and the BII was designed to cover?

Philip Edey QC
 

The answer in simple terms and in general terms is not very comfortably because it is a novel virus, no policy I think is going to cover it in terms by definition because no one has seen it before.

Miles Geffin

Richard, I know you are getting a significant number of enquiries regarding BII.  What barriers are you seeing to policyholders notifying their insurers of claims?

Richard Leedham

There is a general point that the response from nearly all insurers we have seen on BI is pretty much a blanket denial of claims.  That feeds into, as I have said, an almost universal rejection of the claim early on.  We have had examples of clients having had an initial letter rejecting the claim from an insurer, gets sent then to the claims complaints department of the insurance company when it's very far from a complaint about how the insurers have behaved which is what that procedure is for.  It's a denial of the claim.  We have also had, I would say I hope not too controversially, a pretty mixed response from brokers who are right at the centre of the insured insurer arrangement and legally owe the strictest of duties really to the insureds as their principles and their [3.30]  ______ of them and we have had some pretty extreme examples of brokers positively advising clients not to notify claims.  I think the other thing that is a real issue is where there is cover under BI policies, it is very often what is termed sub-limited so the limit of cover will be a lot less than the overall limit of cover for all Business Interruption under the full property damage section of the policy.  So the amount of money in play for businesses are not massive and they are then faced with that dilemma of needing to spend money on lawyers against a relatively small return at some point in the future with an insurer who has put up all the shutters.

Miles Geffin

In relation to that latter point.  What are you looking at in terms of overcoming what appears to be a commercial barrier?

Richard Leedham

We have been appointed by the Hiscox Action Group and there is real interest in the case being  run on a group basis, there seems to me to be no doubt that if it works under a particular wording to group, claims together against when one particular insurer then that is definitely a route that policy holders should consider because by grouping together they defray the costs, litigation funders we know are interested in that type of action that takes the cost issue away from the insured and gives them the maximum clout I think of taking on what are some very large companies.

Miles Geffin

Philip, in light of what Richard has just said are you able to predict what the main preliminary disputes are likely to be, a row which one can imagine is going to be around policy wording definitions before you get into individual claims?

Philip Edey QC

The first question is going to be is there property damage, so that you are within the main Business Interruption Insurance cover.  Generally those wordings require loss of property or destruction of property or damage to property and often they actually say that the damage must be physical damage.  There are plainly going to be arguments, you can see that an insured might say 'well I had a number of people in my office who actually had coronavirus and that could constitute physical damage'.  The insurer is likely to say well even having got that far that is not what has caused your business interruption losses over months.  Once you move on from the main section you are going to be looking at the extensions which cover things that aren't necessarily dependent upon physical damage and there are three main types of cause that people are looking at and they are disease clauses or disease cover, denial of access, prevention of access cover and closure by Government or local authority.  If you have got a list of diseases and a lot of these policies have cover for closure because of disease but it is specified diseases and it will never say coronavirus.  The insurers have generally put in the front end of most policies wide exclusions relating to the sorts of things that they think are  potentially going to hit the entire market and they include nuclear, they include terrorist and events like that.  What I think insurers are going to be saying is what they haven't done is exclude on a wide basis pandemics.  That then brings us to the other two sections of some policies which might be available.  There is the prevention of access clause which sometimes exists, some of those require the prevention of access because of the physical damage and there may even be questions about whether access to the property is actually being prevented.  The fact that your customers have been told that they can't come doesn't necessarily mean that access to the property is being prevented or that is the argument that insurers may run and then a third area which I mentioned is closure by Government or by local authority.  Again, that may well require that closure to be for a specified reason in the policy and sometimes the specified event to which the closure needs to be related, needs to be something on site.

Miles Geffin

Richard, once cover has been established, briefly what are policy holders then going to have to do in terms of quantifying and proving their loss?

Richard Leedham

What would typically happen in that scenario would be that a loss adjuster would be appointed by the insurer to go through the losses.  That is what they do.  What the advice would be, once you have made your notification , got a declinature from the insurer and then the policy holder can decide what it wants to do in terms of taking action but every business needs to just take stock of what it has lost. We should say there is a duty to mitigate your loss, are you able to redeploy people, have you got people working from home, it's all just good common sense and financial housekeeping about the state of your business.

Miles Geffin

Richard briefly touched on the question of mitigating losses.  Can you see issues arising in relation to that?

Philip Edey QC

I think the starting point is that a lot of these policies contain a number of conditions precedents, they include prompt notification but they may also and slightly controversially include as a conditional precedent to minimise your losses.  There are two ways obviously of trying to do that one is to make sure that as far as possible you supplement the revenue in alternative ways.  You've got to try and do your best to keep your business running as well as you can even without property and the alternative is you need to save costs where you can save costs because generally speaking your business interruption loses will be your lost revenue compared to a previous period minus costs saved and I think it is at the costs saved point where the Government's furlough scheme could make some quite difficult decisions.  Is it your duty as an insured to save the insurer the cost by furloughing your employees and reclaiming that money.  If you were for example an employer who took the view that the Government shouldn't have to step in is it really right that you must furlough the employee, recoup the 80% and the insurer gets the benefit of that because that's a cost saved by you as opposed to you continuing to pay the employee and get that money from the insurer.

Miles Geffin

We have a very interesting question here and this leads into another issue.  The question is whether landlords should be looking to claim on their loss of rent policies as opposed to Business Interruption policies?

Sonia Campbell

So for a landlord policy and certainly the policies I have been looking at there is cover under sometimes the second section of the policy or the third section or a separate section of the policy that will normally be called something like loss of revenue or loss of rent and that section will say what cover is provided under that section.  You have the [11.30]  _______ extensions, you have denial of access or prevention of access extensions, you have loss of attraction extensions you have disease extensions and so you have to have a look at whether your loss arises because one of those [11.48] ______ clauses has been triggered.

Miles Geffin

At this stage, are we expecting any formal intervention from the Government in this area, such as deeming provisions or in conjunction with the furlough scheme?

Richard Leedham

There is no sign from central Government that they are going to interpose in inter policies but the FCA who are the overall regulator of the insurance industry, the Chief Executive Chris Willard wrote a letter last week to the Chief Executives of all insurance companies.  There is some comfort for policy holders there in that they made it clear that where there is cover they should respond and treat customers fairly as is their duty frankly anyway but he made the bigger point really that in a lot of instances in the view of the FCA there isn't cover.

Philip Edey QC

The corona jobs retention scheme is still in its early days.  For my part, I think if the Government gets wind that at some point in amongst all of the other things that it is doing that insurers think that the scheme is there to lessen their losses I think the Government might intervene on that.

Miles Geffin

Before we wrap up I think it would be helpful if I could turn to each of you in turn what you would say would be the key take aways from today's session?

Sonia Campbell

I would say there are a couple of things actually.  First of all, if you think you have potential cover then you really should be checking the notification provisions because quite often you have to notify promptly and that could be a condition precedent to liability so even if you otherwise have valid cover under your policy but you don't comply with the notification provisions then an insurer could be entitled to say "sorry you have no cover for this claim".  I also think the wording of these clauses is really important so I think if there's any doubt, get the policies checked and just don't take it at face value that there isn't cover when you think there might be because these are obviously valuable recoveries if you can make them.

Richard Leedham

From a more commercial perspective, if you're out there as a business and you have had your claim rejected don’t despair, you are not alone.   Do get online, do see what else is happening, there are various groups that are forming, not just ones we are involved in there are all sorts of groups out there, get involved and see if other people are raising the same issues.

Miles Geffin

And finally, Philip

Philip Edey QC

Getting your broker onside, they should be looking at this.  They shouldn't just be coming back and accepting the insurers 'there is no cover'.  Some brokers I know are doing that, some are really going out of their way to do it others at least instinctively just say it's all too difficult.

Miles Geffin

Thank you to all of our panellists today.  Please do visit Mishcon.com where you will find a wealth of material both in relation to insurance issues but also the other issues and thank you all once again.  We look forward to seeing you at future digital sessions.

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