Specialist insurance barrister, Graham Bartlett explores the impact of the Coronavirus crisis and Business Interruption Insurance:
The compulsory closure of many shops and businesses and the inevitable impact of the requirement to work from home if at all possible on other businesses will have many directors, managers and sole proprietors looking to claim on their business interruption insurance cover.
At their most basic level, business interruption policies cover the loss of profit or additional expenses incurred during the period in which the business is affected by damage or destruction of its premises caused by a specified peril (fire, storm, flood etc). Cover is conditional on the premises being insured against the same peril and liability under that other policy being admitted (known as the material damage proviso). It is unlikely that such policies would cover the interruption of business caused by the government ordering a business to close or by staff being required to work from home to reduce the transmission of the coronavirus.
Some policies may extend to interruption of the business when access to the premises is denied, perhaps for safety reasons when a nearby building has been damaged or because the premises have been ordered to be closed because of the outbreak within the premises of a notifiable disease. Such cover may operate where a business has been ordered to close because someone of the premises was diagnosed with the coronavirus. Even where cover is available for such an occurrence, if the business is one of those which were subsequently ordered to close it is likely that the insurers will try to restrict the period of interruption to the date on which the business would have been ordered to close in any event.
The sum payable – the measure of indemnity
The sum payable is usually the sum produced by applying the rate of gross profit to the amount by which the turnover during the period of interruption (known as the indemnity period) falls short of the turnover that would have been achieved in but for the incident (known as standard turnover). There is usually a maximum indemnity period of twelve months or sometimes longer.
Gross profit is the sum of net profit plus fixed costs during the financial year prior to the loss. The rate of gross profit is the percentage which net profit plus fixed costs bore to turnover during that previous financial year. So if fixed costs and net profit was 40% of the business’s turnover of £80,000 in the last year, and the turnover during the during the interruption period was reduced by £50,000, then the sum to be paid by the insurer will be £20,000.
Cover also extends to the increased costs of working incurred in order to avoid or reduce the reduction of turnover, provided that those costs do not exceed the sum produced by applying the rate of gross profit to the loss of turnover that was avoided.
Special circumstances clause
Most policies include a term permitting the calculation of standard turnover (the turnover that the business would have earned but for the loss) to be adjusted to reflect the trend in the business or special circumstances which would have affected the business in any event. It remains to be seen to what extent insurers will try to argue that all businesses would have suffered a reduction on turnover as a consequence of the downturn in economic activity caused by the coronavirus.
Rent insurance
Landlords with rent insurance policies may also find that their cover does not extend to loss of rent caused by tenants being unable to pay because of the compulsory closure of their business. Most loss of rent policies only cover loss of rent caused by their building become untenable after destruction or damage by an insured peril and the inability of the tenant to pay rent because of the impact of the coronavirus on its business would not be covered.
It is essential that anyone with business interruption insurance scrutinises the policy carefully and takes expert advice before submitting a claim.
Following his previous career as a Chartered Loss Adjuster, Graham advises extensively on insurance disputes, including in relation to breaches of warranty and utmost good faith. Graham has dealt with a number of building and construction disputes involving damage to both residential and commercial property. He has also been instructed in relation to claims under the insurance clauses in the JCT Standard Form of Building Contract and on Contractors All Risks insurance policies.
Graham regularly writes articles for The Journal, the Chartered Insurance Institute's leading insurance industry publication. Graham also writes a specialist Blog dedicated to legal developments and analysis of the ever evolving insurance industry.
In response to the escalating coronavirus crisis, Graham, other barristers in Chambers and staff are committed to providing as much assistance as possible, including urgent advice, online resources and other support, during these challenging and unprecedented times, as such Trinity have a dedicated section of the website focused on COVID-19.