What is business interruption insurance?

A business undertaking is set up to trade at a profit. They generate an income from which they earn a net profit, pay variable costs (including buying stock, electricity usage, wages, etc.), and pay their fixed costs (such as insurance premiums, rent, interest on loans, salaries, marketing, etc.). Business activities may be impacted by an occurrence, such as a fire, a flood or malicious damage, which results in the business not being able to generate an income, and, therefore, being unable to earn a net profit or pay their fixed costs. The physical damage to the buildings, plant and machinery, and stock can be covered under a fire section or buildings combined section.

Business interruption insurance covers businesses for loss of their net profit, the fixed costs they still need to pay, and the variable costs that did not reduce in relation to the reduction in the income during periods when they cannot carry out business as usual due to damage caused. Business interruption insurance will respond following physical damage caused by perils insured under the fire section (for example, fire, explosion, storm, wind, water, hail, and malicious damage).

This type of insurance may also compensate a business for any increased running costs incurred to maintain the normal operations of the business (for example, over-time salaries and wages), up to the limit as set out in the policy.

How do businesses purchase business interruption cover?

Commercial insurance policies consist of various sections that allow flexibility in addressing businesses’ insurance needs. These policies provide cover for buildings, plant and machinery, and stock. Some businesses will also purchase business interruption cover as an optional extra. Many businesses purchase their insurance through a broker/adviser who will work with them to ensure that they have the appropriate cover to match their needs.

What do standard business interruption policies generally cover?

All policies will provide cover if the buildings, plant and machinery, equipment, or stock are damaged by a peril insured under the fire section, such as a fire, flood, storm, or malicious damage (not accompanied by theft).

Some policies may also cover business interruption as a result of people not being able to access the business due to specific circumstances (such as a fire at a neighbouring building) this is known as “restricted access”’ cover.

Does standard business interruption insurance provide cover for businesses who are not able to operate because of COVID-19?

Standard business interruption insurance policies are designed and priced to cover standard risks, i.e. for interruption of the business when physical damage was caused to property. They will, therefore, not provide cover for the effects of global pandemics, or forced closure by the authorities because of diseases or pandemics.

Businesses may have chosen to purchase an extension to cover business interruption arising from infectious or contagious diseases, sometimes referred to as “contingent business interruption” or “murder, suicide, shark attack, and contagious diseases extension”. This type of extension is, however, not commonly available, although some market-specific policies (such as guesthouses, bed and breakfast, and tourism policies) may include limited cover.

Does having an infectious or contagious disease extension to business interruption cover a business for COVID-19?

Insurers are busy engaging with various stakeholders (including brokers, reinsurers, legal counsel, the regulator and other industry bodies) to agree how these extensions and claims will be handled. They are nearing the end of these engagements and will issue a formal communication in this regard shortly.

Some infectious or contagious disease extensions exclude cover for specific diseases that will be named.

Some notifiable disease extensions are more general and do not specify certain diseases. In these cases, business interruption cover for COVID-19 may apply if COVID-19 is present at the premises, or within a specified radius, and all policy conditions are met.

Source: Old Mutual Insure