What happens when there is a delay in repairs, due to COVID-19, that affects an existing insured business interruption

Saga [surname withheld], asks the following question that stems from a post I made explaining how business interruption insurance works, when the period of disruption overlaps with disruption due to COVID-19:

Hi Allan,

This is Saga.

I have a query here related to the hypothetical situation cited.

During the period of closure due to COVID 19 i.e. from 1st February to 31st May, we will not be paying for business loss as they would have anyways not earned revenue, treating these as uninsured delay. But it is important to ponder here that during this repair, work was hampered too. Because of which, it might have taken more time to come back to original position for the client. In absence of COVID, possibly business would have been up and running by June.

So, shouldn’t we be paying for the period during which the business was closed due to COVID-19 i. e overlapping period of interruption, due to insured peril and uninsured peril?

This is a interesting question and one that arises in business interruption claims more than many people think. A period of bad weather, delays the ground works during the rebuilding phase. Replacement equipment on route via sea from overseas is lost when the ship sinks, are just a couple of examples. COVID-19 is no different.

You can either jump down to the summary for the quick answer, or read the following for a detailed explanation of the rules that you follow when looking at this issue.

The rules to follow:

I address this in great detail in my book, Understanding the ISR Policy Volume 3 [1]. As such, I will simply summarise the position by modifying Hickmott’s (1990) [2] conclusions, to reflect the position in respect of a traditional business interruption policy you would see in much of the world, as follows:

1. The policy becomes operative in consequence of damage to Insured Property, arising from a circumstance that is not excluded by the policy. In respect of most policies the damage must occur “during the period of insurance”. This can be extended by the additional benefits provided by the policy, such as Public Utilities, or endorsed onto the policy, for example “Port Blockage”.
2. The cause of the disruption needs to be considered carefully, to ensure that either the Material Damage proviso is activated, or a extension of coverage is available to trigger a claim. This needs to be considered in precise, actual terms and then reviewed regarding their applicability to:

• the initial damage; and
• the effect on the interruption, subsequently.

3. Interruption caused by a parallel cause, that is not covered by the policy, e.g. treatment of injury by rioters (not in itself insured), running in conjunction with interruption due to damage to the insured property caused by the rioters (an insured loss), is met in full by the policy. This only applies when the interruption is being caused by both the insured and uninsured cause. As soon as the business is no longer sustaining interruption due to damage to insured property, the cover is at an end even if the parallel uninsured cause continues.

4. The adjustments clause, which I addressed in my earlier post, applies where the uninsured loss affects the expected Turnover, Rate of Gross Profit, Rate of Pay-roll and or Annual Turnover.

5. Industry practice in Australia, follows the more formal approach utilised in the United Kingdom in respect to the aggravation of an insured loss. That is, the Insured is entitled to claim for interruption losses due to the aggravation of the loss, whether it was caused directly or indirectly, but subject to the fact that the loss would not otherwise have occurred but for the original damage, and that it arose from matters beyond the Insured’s control. COVID-19 would fall into this category, although the Adjustments clause still applies to reflect what would have occurred but for the initial disruption.

6. The definition of property insured can have a direct effect on the extent and nature of cover afforded by Section 2 – Interruption Insurance.

7. Definition of the Insured can introduce further business operations of a group with the policy terms.

Summary

If a loss occurred a month before the COVID-19 hit, and for COVID-19 the insured would have been back and running by 1st June, but because of COVID-19 there is a delay of two months beyond the expected date of reopening.

The Insured would get the claim paid as normal, from the date of the disruption until the outbreak of COVID-19. The client would also be paid right through to the end of the period of disruption to the business, even though it was longer than expected due to the uninsured COVID-19. But reasonable adjustments would be made to the Standard Turnover, Rate of Gross Profit, Rate of Wages and Annual Turnover to, assuming no under insurance penalties, and the Indemnity Period is long enough, put the Insured back in the same financial position they would have enjoyed but for the insured event.

I hope that explains it sufficiently, if not, please buy the book.

[1]     Manning A., 2005, Understanding the ISR Policy, Volume 3, Aids to Understanding, Mannings of Melbourne, Camberwell.

[2] Hickmott G.J.R., 1990, Interruption Insurance – Proximate Cause Issues, Witherby & Co Ltd, London, p.15.