Question: how does BI operate following a fire along side COVID-19

In the event of Business Interruption,

how would an insurer respond to a claim given the current economic circumstances, if a business has been forced to shut down due to COVID-19, therefore not earning an income and then suffers a fire during this time. Assuming the business is already struggling to keep its head above water and given the complexity of BI claims, would it

a) respond at all?, and
b) given the length time frames involved in these claims would there even be a business for the insured to go back?

Anonymous [Question asked via comment section 4 March 2020]

This was, in fact, one of a couple of similar questions posted as a comment to my post, on client’s cancelling policies.

This situation has, as a matter of fact, happened several times, since the outbreak of COVID-19.

The underlying principle of a typical business interruption insurance policy is to indemnify the insured. As we know, this means to put the insured back into the same position as they would have experienced (normally, I would use the word ‘enjoyed’, but do not feel this word is appropriate during these times), but for the insured event.

Before I go on, I have to stress that I am talking about typical business interruption coverage, that you find in an Industrial Special Risks (“ISR”) Policy or a Business Pack. There are some agreed valued wordings that this may not apply to.

To achieve this, a policy with the traditional wording has a documented formula to calculate the claim. The most powerful clause in the policy to achieve this, is known as the ‘Adjustments Clause’. In the ISR policy this states:

“Adjustments shall be made to the Rate of Gross Profit, Annual Turnover, Standard Turnover and Rate of Pay-Roll as may be necessary to provide for the trend of the Business and for variations in or other circumstances affecting the Business either before or after the Damage or which would have affected the Business had the Damage not occurred, so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which, but for the Damage, would have been obtained during the relative period after the Damage.”

I went to emphasise the key words but, in fact, the entire paragraph needs to be read and understood.

So, what does this mean?

Say a fire happened on New Year’s eve 2019, and the business could not trade at all until repairs were completed.

It is agreed that, but for the fire, the business would have achieved the same turnover, with the same rate of gross profit in January 2020, as it did in January 2019.

As a result of COVID-19, the business would have closed the business by government order on 31 January 2020. During the closure, the business would not have been able to make any sales, whatsoever, even if they had not had the fire.

The Government lift the closure order on 1 June 2020.

It is agreed the business would have bounced straight back to where it was the same time last year, but for the fire from 1 June 2020.

The building and contents are repaired, and the business immediately comes back to normal on 30 November 2020.

Under these hypothetical circumstances, the insurer would indemnify the Insured for losses arising from the disruption of the fire, for the month of January 2020.

From 1 February 2020, to the end of May 2020, there would be no claim payable by the insurer, as the Insured would not have earned any income, anyway.

However, and this is the key bit that should not be forgotten, from 1 June to the 30th November, the Insured is able to claim for the loss of gross profit, and increase in cost of working that they incur. Having this protection, will make the difference between survival or business failure for many businesses that are hit with a storm, fire, civil unrest, or any other insured peril.

Of course each claim is different, and it is never as clear cut as this example, but the principle around the application of the Adjustments clause remains the same.

If you think about this, it all makes perfect sense. If the policy was to pay the entire period, every insured business would be having a fire to get around the infectious diseases exclusion.

I hope this adequately answers the way a traditional business interruption claim would be calculated, when you have an insured peril working along side an uninsured or excluded peril.