Business Interruption insurance and COVID-19: the state of play in various jurisdictions

1. Types of BI insurance

Business Interruption or BI insurance can be taken out as 'standalone' insurance or as an extension of an existing policy, normally against payment of an additional premium.

In general - and seen from an international perspective - three types of BI insurance can be distinguished:

1. insurances that provide cover for business interruption loss as a result of material damage to an insured building / property, which takes place as a result of a specified event (a so-called 'named peril', such as fire);
   
   
2. insurances that provide cover for business interruption loss as a result of material damage to buildings / property of a third party, which takes place as a result of a named peril, and which affects the business operations of the insured company because this company is, for example, dependent on the supply by this third party; and
   
   
3. insurances that cover business interruption loss as a result of business interruption, for example as a result of restrictions imposed by the authorities that make it impossible to enter the business.

The first two types of BI insurance mentioned depend on any form of material damage - only the third type of BI insurance mentioned does not.

2. BI insurance in the Netherlands

In the Netherlands we have standalone BI insurances and BI insurances as an extension of (for example) a building- or machinery breakdown insurance. Such insurances reimburse the ongoing fixed costs of a company, against which income has been lost, plus loss of profit. For purposes of this article, we have compared 58 policies of 24 insurers.^[1] Our findings are set out below.

Standalone business indemnity insurances generally provide cover for:

1. material damage to buildings, inventory and/or property of the insured; or
   
   
2. material damage to buildings, inventory and/or property of a third party, as a result of a cause mentioned in the policy, if these affect the business operations of the insured.

This therefore concerns types i and ii as mentioned above and requires some form of property damage before BI insurance cover is provided. In these policies, cover is also almost always limited to the causes specified in the policy, such as fire, explosion, storm, etc. Some (extended policies) also provide cover for loss or damage resulting from the failure of the public supply of gas, electricity, heat or water. In addition, each policy excludes certain causes from cover, such as a nuclear reaction or an earthquake. We have not seen any standalone BI policies that specifically exclude a 'pandemic', but this makes sense, because these only include the causes of the aforementioned material damage and not the causes of subsequent business interruption. In any case, both the fact that there must first be a material damage and the fact that this damage must be the result of a cause mentioned in the policy, leads to the conclusion that trading losses as a result of the COVID-19 pandemic are in principle not covered under the standard Dutch standalone BI insurances.

With regards to BI insurances as an extension of (for example) a building or machinery breakdown insurance, these usually cover the business damage that is the direct consequence of the covered material damage to an insured building / property as a result of a specific event (for example fire). This therefore concerns the core type i as mentioned above, as well as requiring some form of property damage before BI insurance cover is provided. For example, under a building insurance, business interruption will in principle only be covered if (first) there is material damage to insured property (such as real estate or inventory), caused by a risk specified in the policy conditions (e.g. fire or storm). In the case of a machine breakage insurance/machinery breakage business interruption insurance, there must first be a machine stoppage, after which the insurer will cover both the repair of the machine and the business interruption caused by the stoppage (with an excess period).

We are not aware of other - broader - (standard) types of BI insurance on the Dutch market. The scope of a BI insurance is therefore limited: business interruption loss is in fact a consequential loss of the original defect and is only covered as a derivative thereof. Therefore, in the case of insurances that require such material damage before proceeding to cover the consequential business interruption loss, the COVID-19 pandemic will, in principle, not cover the trading loss. In general, damage resulting directly or indirectly from the pandemic - such as, for example, loss of business as a result of temporary or involuntary closure - does not qualify as material damage to property, nor will it entail an event specified in the policy. In the Netherlands, therefore, the insurance market appears to be unanimous in its view that such damage is not covered by regular BI cover.

This could be different in the case of a customised policy in which the wording of the cover description is broader. Depending on the wording of the risks covered (e.g. if there were all-risks insurance with exclusions, rather than insurance based on named perils) - and especially in the market for more complex risks - the range of causes of downtime, and hence the cases in which business interruption loss will be covered, may be bigger. This is certainly also the case for insurance taken out in foreign markets, such as the London insurance market, where type iii BI insurance mentioned above is available. In such cases, it is conceivable that business downtime, for example as a result of a government order or ban, will be covered.

3. A look across the border

3.1 France

In France, like in the Netherlands, most policies cover material damage caused by one of the events specified in the policy. However, there also seem to be policies which offer cover for damage as a result of a government order, such as the type iii referred to above^[2] Insurers operating in France nevertheless take the view that they do not have to cover losses as a consequence of the COVID-19 pandemic, on similar grounds to policies in the Netherlands.

Several court cases have already been initiated on this issue. A striking judgment is that of a French judge in preliminary relief proceedings, who ruled in favour of the insured.^[3] The insurer, AXA, was ordered in preliminary relief proceedings to pay an advance of EUR 45,000 to a Paris restaurant owner who was confronted with business interruption losses as a result of the corona virus. The restaurant owner took the view that AXA should provide cover for losses resulting from a government-imposed closure. The policy covered 'operational losses' caused by a business closure ordered by the police or health authorities. Under French insurance law, a risk must be 'measurable' in order to be insurable. There was no precedent already set as to whether a pandemic meets that criterion. The court ruled that the government measures, which prevented restaurants from having customers and offering their traditional services, provided a sufficient basis for business interruption cover. The Court rejected AXA's argument that the pandemic was an uninsurable risk and, referring to a provision of French insurance law, made it clear that if AXA had wished to exclude such a risk, it should have done so expressly in its policy conditions. Proceedings on the merits of this case will have to be conducted, so a final decision has not yet been made. Additionally, there are many other proceedings currently pending in France, awaiting an outcome.

The government and the French Insurance Federation are actively intervening in the dispute. They are trying to put pressure on insurance companies to change their policies in order to ensure cover can be provided, and future mechanisms for this type of crisis can be considered.^[4]

3.2 Germany

In Germany, similarly the insurance cover for the financial consequences of the coronavirus has been the subject of heated debate, and legal proceedings have been initiated in this area as well. In Germany too, most policies only cover material damage caused by an event mentioned in the policy, such as core type i and ii as mentioned above. Only in exceptional cases insurers will provide cover in cases where the damage is caused by government restrictions in the event of an infectious virus and/or pandemic.^[5]

Compromises now seem to be emerging. For example, the Bavarian Ministry of Economic Affairs, trade associations and some insurers have formulated a solution for businesses in the Land of Bavaria that have business insurance. Their (non-binding) joint recommendation is that insurers should cover a certain (capped) amount of business losses in the event of business closures due to the COVID-19 pandemic.^[6] Many insurers have announced that they will also apply this arrangement in the rest of Germany and cover 10-15% of the losses of all their German customers. Some insurers have even voluntarily agreed to meet their customers mutually in the middle. This voluntary contribution from the insurance sector, in light of the exceptional situation of the current pandemic, stands out. Payments are therefore being made without recognition of any legal and/or contractual obligation.

3.3 United States

The COVID-19 pandemic has also led to intense debate in the US as to whether its consequences are covered by business insurance. As far as we have been able to ascertain, in the United States - just as in the Netherlands - under most policies cover is provided for business damage in the event of material damage to the insured building, inventory and/or property ("direct physical loss of or damage"). Type iii insurance does not therefore seem to have a place here.

The States (and their courts) are not unanimous on the definition of ‘material damage’. Some courts require 'tangible' damage to property in order to have successful recourse to a business interruption policy.^[7] From this perspective, the consequences of the corona pandemic do not appear to be covered under the insurance. Other courts use a less strict definition. With their definition, the qualification of material damage is met when property has become 'unusable'.^[8] However, whether this broader approach would cover the damage caused by the pandemic is a complex question to which the answer may differ from case to case. Many companies are operating with limited capacity due to government measures, but have not come to a complete standstill as they are still engaged in some business activity (whether or not after adaptation).

There are already hundreds of lawsuits pending in the US in which policyholders take the view that the concept of ‘material damage’ should be interpreted broadly and include the consequences of the COVID-19 pandemic.^[9] Most of these lawsuits are still at an early stage. There are currently very few rulings, with a few positive but predominantly negative outcomes for policyholders.^[10]

In an effort to end the disputes and streamline cover payments, Congress and several states are considering legislation on business interruption insurance.^[11] This legislation should create a regime where insurers cover business interruption damage in exchange for a backstop mechanism for reinsurance. However, these measures have not yet been taken at the time of writing.

4. United Kingdom: the FCA test case

4.1 Discussion in the run-up to the FCA test case

In the UK, too, in the run-up to the test case, there was disagreement as to whether insurers should provide cover and, if so, what components of claims they should reimburse. In the UK there are many different (policy) formulations in circulation and there are also insurances of the third core type mentioned above; 'non-material damage' BI insurances. Some policy wordings might therefore offer an opening for insured parties.^[12] Since the outbreak of the coronavirus, several lawsuits have already been brought by policyholders as a result of a refusal of cover by insurers. However, these have been held pending the FCA test case (more on this below). Experts in the UK have initially stated that they see these cases as an uphill battle.^[13] They stressed that the coronavirus has not caused any material damage to organisations, but also that insurers may use other conditions and exclusions to withhold or minimise cover.

4.2 Starting points of the FCA test case

Within the context the above discussion, the FCA has started a test case against several insurers. The FCA, the Financial Conduct Authority, is the UK regulator of financial markets, including the insurance market. The FCA conducted the case on behalf of policyholders, examining at least 21 different representative and common standard type policy conditions from eight different insurers.

The case started on 9 June 2020 under the accelerated regime of the Financial Market Test Case Scheme. This regime can be used for claims that cover subjects of public interest that require immediate authoritative and guiding advice in the field of English law. In view of the importance and urgency of this case, two judges have given permission for this case to be heard in an expedited manner. This makes the UK the absolute BI leader in Europe today.

The eight defendant insurers have agreed to participate in the test case. As previously said, the FCA represented the interests of policyholders, most of whom were SMEs. Although, as mentioned above, 21 different policy wordings were examined, the FCA estimates that in addition to these specific wordings, a further 700 types of policies from 60 insurers and 370,000 policyholders may be affected by the decision in the test case.

The matter has been dealt with in an abstract way. No witnesses have been heard in this case and certain underlying facts have not been discussed by the parties (e.g. measures taken by the UK authorities). Two interest groups, the Hiscox Action Group and the Hospitality Insurance Group Action - action groups of angry customers who saw their claims rejected by their insurers - joined forces with certain policyholders and put forward arguments in addition to those of the FCA.

4.3 Relevant policy conditions in FCA test case

As stated, the FCA test case 21 examined various representative and common standard policy types of eight different insurers. It is very relevant that these policies concerned non-damage business interruption insurance extensions. It was therefore primarily not the type of BI insurance in the Netherlands - which covers business interruption as an extension of an insured property loss - but extensions included in policies for damage other than property loss.

The relevant provisions of these policy conditions can be divided into three categories:

• "Disease wordings": provisions providing cover for loss of business as a result of a notifiable disease that occurs within a specified radius around the insured location.
  
  
• “Prevention of access/public authority wordings": provisions providing cover in the event of an impediment to access to - or use of - the insured site due to restrictions imposed by the government or any other authority.
  
  
• "Hybrid wordings": provisions applicable in the event of restrictions being imposed in respect of the insured location in connection with a notifiable disease.

In addition, the test case also dealt with the question of how "trend clauses" work - clauses that consider how certain business trends would have affected the insured business if the specific issue on which the insurance claim is based had not occurred.

4.4 Outcome FCA test case

The ruling of the High Court of Justice (HCoJ) in this case was delivered on 15 September 2020. It covers 162 pages and is therefore not easy to summarise. Our findings are limited to the most relevant conclusions.^[14]

Disease wordings

Four of the insurers involved in the FCA test case (RSA, Argenta, MS Amlin and QBE) had policies in this category. Although the exact wording differed, almost all of these policies covered business losses as a consequence of: (1) interruption or interference with the business; (2) following / arising from / as a result of; (3) a notifiable disease / the occurrence of a notifiable disease / a human infectious disease or contagious disease manifested by a person; (4) within 25 miles / 1 mile / the vicinity of the insured location.

Based on these policy wordings, insurers took the position that there was (only) cover for the local occurrence of a notifiable disease. If, as in this case, the disease was widespread, only the effects of the local outbreak of COVID-19 on the company would be covered, and then only to the extent that these could be separated from the wider effects. For example, insurers argued that there could be no cover if - apart from the local outbreak - there had been the same interruption or interference in the business. In short, insurers argued that in this case, the local outbreaks of COVID-19 should have been the ‘effective cause’ of the interruption or interference in the business (in this case, the measures taken by the public authorities which forced the closure).

On the other hand, the FCA had stated that this effective cause would be met if, as in this case, the COVID-19 outbreak in the relevant area covered was an inseparable part of the disease, or if the local outbreak had to be one of many local outbreaks so that a pandemic could also be covered. The HCoJ agreed with the FCA's argumentation that the notifiable disease was the effective cause of the business interruption and that the local outbreaks were an inseparable part of it. An alternative interpretation that the HCoJ suggested was that each local outbreak was a separate but effective cause for the national measures taken by the authorities.

An important opinion of the HCoJ is that the coverage is not limited to outbreaks that occurred (only) entirely within the policy area concerned, because (a) the policy wording did not explicitly mention that the disease could only occur within the policy area concerned - the insured cause was a compulsorily notifiable disease that occurred in the vicinity of the insured location, and not limited to events that only occur locally; and (b) this construction is also consistent with the nature of the insurance with respect to a compulsorily notifiable disease. Nevertheless, diseases for which there is a notifiable disease are often also diseases that can spread on a large scale (e.g. SARS) and that are of such a nature that they require a response from national (and not only local) authorities. Infectious diseases and infectious diseases in humans can naturally spread in a very complicated and fluid pattern. Cases within the relevant policy area are therefore not unrelated to cases outside the relevant policy area.

For an analysis of the HCoJ's explanation of the term "vicinity" as used in the disease wordings we would like to refer to Patrick van der Vorst's blog "The FCA test case: does 'virus madness' strike at policy explanation?" in this magazine VAST 22020 / B-0048.

Prevention of access/public authority wordings

Six of the insurers involved in the FCA test case (Arch, Ecclesiastical, Hiscox, MS Amlin, RSA and Zurich) had policies in this category. These policies covered trading losses resulting from: (1) prevention / refusal / obstruction of access to the insured location; (2) by acts / advice / restrictions of, or imposed by order of; (3) a government / local authority / the police / another authority; (5) as a result of an emergency situation that could endanger life / neighbouring property / an incident within a specific area.

The HCoJ concluded that these clauses should generally be interpreted more restrictively than most Disease wordings, although some wording does provide cover for some policyholders. In the opinion of the HCoJ, they dealt quite specifically with certain elements of different policies, indicating when, in the opinion of the HCoJ, there would or would not be coverage. As this opinion deals very specifically with the different wording of the policies assessed in relation to the situation in the UK at the time of the first peak of the pandemic, and the measures taken by the UK authorities, this will not be discussed in detail here.

However, it is interesting to mention that the HCoJ appears to give a different judgement here regarding the link between the location of the incident and the measures taken by the government, in comparison to the case of the Disease Becoming. In this case, the HCoJ found that terminology such as "emergency situation in the area", "danger or disturbance in the area" and/or "incident in the area" refers to a specific event at a certain moment in time in the local area. The HCoJ therefore considered that such clauses were intended to provide limited local coverage. Coverage would therefore require action by the relevant authorities in response to a local outbreak of the disease - measures taken in response to the pandemic in general are not sufficient, according to the HCoJ.

Hybrid wordings

Two of the insurers involved in the FCA test case (Hiscox and RSA) had policies in this category. Again, there were variations in the wordings, but broadly speaking they offered cover for trading losses as a result of: (1) business interruption; (2) the impossibility of using the insured site; (3) as a result of restrictions imposed by a public authority; (4) in response to the occurrence of an illness.

These clauses are a mixture of the Disease wordings and Prevention of access / public authority wordings discussed above. For the "disease part" of the clause, the HCoJ took a similar approach to the one set out above under the Disease wording treatment and rejected the insurers' arguments - that there could only be cover as a result of losses arising from a local outbreak. On the other hand, as with the Prevention of access / public authority wordings, the HCoJ interpreted the meaning of terms such as "imposed restrictions" and "not being able to use" more strict, finding that "imposed restrictions" required something mandatory, such as the mandatory parts of the regulation, and that "not being able to use" required something more than a mere impairment of normal use. In this case too, therefore, a careful examination of the clause's specific conditions is required in order to determine the likelihood of coverage.

Trend clauses

As previously said, this test case also concerned the question of how "trend clauses" work - clauses that consider how certain business trends would have affected the insured business if the specific issue on which the insurance claim is based had not occurred. This is very important as the insurers in this case effectively claimed that the insured risk was only the local occurrence of COVID-19 and that the other effects of the pandemic and government action should be considered in the counterfactual. In other words, even if the local outbreak - against which the policies were insured - were to be eliminated, the company would still have had to close as a result of the national outbreak and the measures taken by the national authorities in the insurers' reasoning.

The HCoJ put an end to this argument, using the FCA's example of a restaurant that must close due to a pest infestation caused by construction work in the neighborhood. By analogy with this case, insurers would argue that government restrictions should be considered in the counterfactual, but not the pest infestation itself and any other consequences it might have had. The restaurant owner would then have no claim against insurers unless they could demonstrate that it was the government restrictions that had kept customers away, not the pest infestation itself. However, in that scenario, insurers would then argue that nobody wants to eat in a rat-infested restaurant, and so the same losses would have been made in the counterfactual. The HCoJ calls this "illusory cover" and states that this cannot be what the parties intended to agree when they entered into the insurance.

The HCoJ then indicates what the principle functioning of the trend clauses should be within each of the categories of policy wording. In short, these stipulate that the insured risk should not be included in the counterfactual. In this case, this means that the entire COVID-19 pandemic must be included in the equation, which is obviously advantageous for policyholders.

It will come as no surprise that this HCoJ judgment is still open to appeal, and that it is being used. Both the FCA and the insurers involved have requested - and obtained - permission to institute a (direct) leapfrog procedure before the Supreme Court. In the meantime, however, there are also negotiations between the FCA, the six insurers involved and the action groups, hoping that a solution can be found to the outstanding contentious issues that currently still prevent payment under the relevant policies. If such a solution cannot be found soon, and we know from experience that the cogs in the English insurance market often turn slowly, we are likely to see another interesting appeal in cassation in relation to the ruling that has now been handed down.

5. Effects of foreign approaches on the Dutch market

Are Dutch policyholders' policies affected by the FCA test case and/or developments in other countries? The answer to this question is not unambiguous.

Firstly, it is important to note that in the Netherlands we have almost exclusively (standard) BI insurances that depend on the occurrence of any form of material damage. This is not the type of BI insurance covered by the FCA test case, so the results will have limited importance for the Dutch insurance market.

On the other hand, policyholders who have a tailor-made policy, or policyholders who have a policy taken out (for example) on the London insurance market, could very well have cover for the business loss suffered. It is common for large companies from the Netherlands and other EU countries to insure their risks on the London market, sometimes even under English law. For them, the results of the FCA test case, and the binding nature of the ruling for the six insurers involved (and internationally operating), are essential. It is possible that these insurers are considering aligning their entire portfolio, or that brokers will put pressure on them.
However, there is also a trend in discussions taking place in various countries, for legislators, courts and insurance federations to look for ways to meet the needs of policyholders, even if policy conditions do not give rise to this (according to their literal text). It is conceivable that these developments will also be picked up on here and lead to lobbying.

6. Recommendations for practice

It is now important for policyholders who have a tailor-made policy, or those who have a policy that has (for example) been taken out on the London Insurance Market, to contact their insurance broker and have a good look at the policy conditions. The FCA test case deals with several common policy wordings in detail, and the ruling in this case can be used as a guide in determining whether a policy should provide cover. Of course, a lawyer with a background in insurance law can also help with this.

Companies that want to take out BI insurance in the future, for business interruption losses not related to material damage, would do well to discuss a tailor-made policy with insurers or to orientate on (for example) the London insurance market where such policies are offered as standard. It is advisable to consult exclusions in the policies before concluding them: due to the unfavorable statements for insurers, more and more insurers want to exclude pandemics. Independently, it may be that policyholders will face a substantial increase in premiums, so that insurers can (partly) compensate for the benefits to be paid for this pandemic. 

For further information on Business Interruption Insurance policies and COVID-19 across our jurisdictions, click here to visit our Business Interruption Insurance and COVID-19 tracker.

[1] https://polisvoorwaarden.moneyview.nl/

[2] Paris Commercial Court, 22 May 2020, n° 2020017022, zie: https://avocatsbcj.com/wp-content/uploads/2020/06/T-com-Paris-22-mai-2020-n-2020017022.pdf

[3] Paris Commercial Court, 22 May 2020, n° 2020017022, zie: https://avocatsbcj.com/wp-content/uploads/2020/06/T-com-Paris-22-mai-2020-n-2020017022.pdf

[4] https://www.ffa-assurance.fr/infos-assures/coronavirus-covid-19-et-assurance 

[5] https://www.en.gdv.de/en/issues/our-news/why-insurance-cover-rarely-extends-to-epidemics-57290

[6] https://www.bayern.de/betriebsschliessungsversicherungen-bayerische-loesung-fuer-hotels-und-gaststaetten/

[7] See among others Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E.2d 1130 (Oh. App. 2008); Universal Image Productions, Inc. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010).

[8] Zie Widder v. Louisiana Citizens Property Ins. Corp; Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am.

[9] Zie onder meer Chickasaw Nation Department of Commerce v. Lexington Ins. Co., et al., Case No. CV-2020-35, in the District Court of Oklahoma, Pontotoc County (Oklahoma); Mace Marine Inc. v. Tokio Marine Specialty Insurance Co., Case No. 20-CA-000120-P, in the Circuit Court of the 16th Judicial Circuit in and for Monroe County, Florida; Cajun Conti, LLC et al. Oceana Grill v. Certain Underwriters at Lloyd's London et al., Civ. Dist. Ct. La. (2020). Zie voor een COVID-19 Insurance Coverage Litigation Tracker: https://www.cov.com/en/practices-and-industries/practices/litigation-and-investigations/insurance-recovery/covid-19-insurance-coverage-litigation-tracker

[10] https://www.cov.com/en/news-and-insights/insights/2020/08/developments-in-coronavirus-coverage-litigation-and-legislation

[11] De "Pandemic Risk Insurance Act of 2020", zie https://www.natlawreview.com/article/federal-government-proposes-reinsurance-backstop-to-cover-insurance-industry-losses

[12] https://lexlaw.co.uk/specialist-business-interruption-insurance-claim-lawyer-policyholder-insurance-covid-19-coronavirus-litigation-settlement-fca-advice/

[13] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3639589

[14] As also included in this summary of the law firm that assisted the FCA in this case https://hsfnotes.com/insurance/2020/09/15/judgment-handed-down-in-fcas-covid-19-business-interruption-insurance-test-case/.