Business Interruption Claims
What happens when the interruption is interrupted?
Michael Wilson – Flaxmans Regional Director
The Red Lion Hotel suffered a fire in March 2019. It was a thriving business through its drinks and restaurant activities as well as a successful B&B offering. After some delay, the material damage claim was agreed and it was estimated it would take 18 months to reinstate the damage to the building and contents.
The policy contained BI cover with an indemnity period of 18 months.
On the 12-month anniversary of the fire in March 2020, UK pubs and hotels had to close by order of central government as its response to the Covid-19 crisis. This also meant that the building works were interrupted. There was no reliable estimate as to how long the lockdown would last.
The loss adjuster acting for the insurer agreed to settle the BI claim for the first 12-month period of loss but stated that, as from March 2020, the BI claim would terminate. The stated reason for this decision was that the fire was no longer the cause of the Insured’s loss, and that current losses flowed direct from government action, for which the policy would not respond. The adjuster took the view that government restrictions were likely to last for another six months, by which time the 18-month indemnity period would have been exhausted. The Insured was therefore put under pressure to accept an offer to settle for the first 12 months of interruption only, which represented a payment of two-thirds of the total loss.
The adjuster defended his position by issuing a reminder that an Insured cannot profit from obtaining an indemnity and that, had the insurer paid for losses over the full 18-month period, this would have represented an advantage over businesses that had had to close but had suffered no insured loss.
Was the Adjuster, right?
At first sight, there might seem to be some logic to the adjuster’s opinion. The insurer is only obliged to compensate for losses arising from the insured peril and such losses that occur within the stated indemnity period.
In this case, the BI wording defines the Indemnity Period as being:
The period during which the business is affected, starting on the date the incident occurred and ending not later than the maximum indemnity period.
The country’s lockdown has proven to be something of a leveller affecting most businesses. In the case of the Red Lion, not only did trade stop, but so did all efforts to reinstate the property. This had the effect of time standing still until the country was again operating normally. If, as predicted by the adjuster, the period of lockdown did turn out to be for six months, at that time the work of reinstatement would start again. The total time taken for the contractors to complete the work would still be for the 18 months originally anticipated (the period during which the business is affected) and this is still the time during which the Insured should be compensated for the BI loss.
In a situation such as this, the only equitable solution is for the insurer to suspend the rate at which the indemnity period is being exhausted, so that any period of lockdown is disregarded. The end result would be that the business would still be compensated for the full 18-months’ BI loss even though the business would have been closed for 24 months. This leaves the Insured with an uninsured period of six months which only places the Insured in the same position as any other business. It is not making a profit from the BI insurance claim. For the (expected) six-month period of lockdown, the business must avail itself of what government assistance is available, just like any other business.
The insurance industry is already receiving criticism for its refusal to deal with BI claims that arise as a direct result of the Covid-19 shutdown. We can only hope the industry does not pave the way for further criticism by attempting to curtail ordinary peril BI claims as outlined above. There would be no equity in that.