Coronavirus: Business Interruption insurance and making a claim in 2020

There is wonderful picture drawn of the insurance industry in that magnificent book by James M Cain written just before the Second World War where a man and woman come together to murder her husband and then make out it was an accident by faking the circumstances of his death and then attempting to make a claim on the insurance policy in his name under a double indemnity clause.

Such a clause is designed to pay out double the usual award when death arises from any other circumstances. If the claim is successful, they both get away with the perfect murder and elope together with a substantial sum of cash and presumably live happily ever after. The book and the later film were called “Double Indemnity” after the eponymous clause.

The reason insurance companies offered such a “double indemnity“ provision was that they knew that accident rates in the US accounted for under 5% of all deaths and there would be so few claims as a result that pay-outs would be low but they pushed such cover like fury to policy holders on the basis of how cheap it was.

I suspect that the element of a business’ policy premium that relates to business interruption cover is similarly small given the rarity with which it might occur across entire swathes of the economy. It’s one thing providing cover to a small business that has had its activities disrupted in a life-threatening way but it’s entirely another matter paying out on similar clauses written into every policy made out to businesses when the entire economy is closed down and all business is disrupted for the duration. Notwithstanding that this could lead to the most severe of economic depressions taking thousands of businesses and jobs away in its wake, it could also have the side effect of destroying wholesale, the insurance industry and some of the biggest operators faced with a tsunami of claims across every business sector.

It reminds me of the Jack Benny joke – “I don’t want to tell you how much insurance I carry with the Prudential, but all I can say is: when I go, they go too.”

The insurance industry therefore has a serious amount of interest in ensuring that claims made for business interruption during this period are not allowed because to do so would possibly have the effect of disrupting its industry permanently. Expect therefore in the coming weeks some of the biggest operators such as Axa, Zurich and Hiscox to duck and dive over claims made under this head of cover and expect therefore claims to be taken to the courts.

We are already seeing the first claims developing in the hospitality sector from the likes of Raymond Blanc who heads up a 37-pub business with 1,500 employees. That action is against Hiscox who had contained, within their policy, cover for damage caused by “an occurrence of any human infection or … contagious disease” provided a local authority was notified. The Hiscox defence appears to be as I have suggested above and that is that their policies in this respect are not “ … priced to cover the extraordinary circumstances” caused by the COVID-19 pandemic.

One can see why the insurance companies are arguing they have no liability in such circumstances and it rather goes back to the point I made above on the double indemnity clause and the rate of genuine accidents caused each year. Insurance companies are confident on the basis of actuarial figures and tables that accidents generally run at such a low rate that they can provide cover cheaply and pay out speedily without it impacting in any way on their businesses. They have libraries equivalent to the size of the ancient library in Alexandria full of information on risk. They are taking in vast numbers of small premiums in this respect and make their money this way; the pay-outs are small when they relate to just a few cases.

With pandemics, the risk is small but the pay-out of a catastrophic proportion in the face of an economic Armageddon is sufficient for most insurers to ensure that they are never at risk themselves of such a pay-out which would ultimately break and destroy that insurer and the industry. It should not be forgotten either that most of the big insurers operate globally and their exposure would be total in the face of a pandemic such as COVID-19 which no one even knew about before cross-infection from possibly a pangolin into a bat and from that creature into humans just a few months ago.

All pandemics could have very different and far-reaching or not-so-far-reaching effect – take, for instance, avian flu and swine flu. The World Health Organization predicted that the former would kill between 5 million and 150 million people around the world, whereas the final death toll was less than 500 people. It said the swine flu was a pandemic, only to declare later that it was all a false alarm and that it was, in fact, no more lethal than normal flu. These potential terrible pandemics turned out to be a storm in a teacup. They acted slowly on COVID-19 and this became a terrible pandemic.

How can insurance companies ever be expected to provide cover for business interruption in these unknown and unforeseeable circumstances?

On the other hand, I must say that I find the defence by some insurance companies that bars and restaurants are only closed down now as a result of a government order and not as a direct result of the virus rather unattractive. I am pretty convinced on the current showing that they would be attempting to avoid liability even if the closures had been caused directly by the pandemic itself. It appears a very virulent virus and the likelihood is that many businesses may very well have been closed through staff illness and death in any event and there would still have been a great run on the insurance companies as businesses attempted to recover apparently insured losses.

So… off to court?

The stage is therefore now set for a legal battle in which large swathes of industry, but particularly the hospitality sector, challenge in the courts the decisions not to pay out by the insurers. The first cases are already coming through with Mr Blanc and now the Night Time Industries Association (NTIA) apparently pursuing Hiscox in court for its failure to pay out.

My thought, for what it is worth, is that the insurance industry will win in these major actions if they go the distance and live to fight another day. There will clearly be cases where perhaps exceptions within a policy lead to a requirement to pay out. These cases will usually be very clear and insurers will probably fulfil their obligations. The Association of British Insurers is obviously fighting in the corner of the insurance companies, but the Financial Conduct Authority has also indicated its view that the majority of policies do not cover pandemics such as this. It says in a recently issued letter that “most policies have basic cover” and “do not cover pandemics, and insurers have no obligation to pay out in relation to the COVID-19 pandemic”.

Many policies will cover what are referred to as “notifiable diseases” and insurers will have a list of these. However, my guess is that none will make any reference to COVID-19 as this was not a notifiable disease until last month when the government made an announcement to this effect. This would cover the instance where a single or group of premises are required to close because of an outbreak of, for example, norovirus. This would mean that a restaurant or bar needs to be closed to carry out extensive cleaning operations to make it safe for the public once again. Accordingly, this line of attack against insurers may be ruled out.

There is also a form of cover under business interruption clauses which allows for payment out in cases where premises such as restaurants, bars or shops are closed because they are in the centre of a police-cordoned-off area, perhaps as a result of a murder or other serious incident, and no one can obtain access. This again would not apply in the COVID-19 circumstance where all premises in the land are closed by order.

Or off to politics?

However, ultimately the matter will be taken into the political realm and I am sure that even now officials are working in the Treasury on a potential bailout should legal actions look like succeeding. There will be a political imperative operating here also as ministers attempt to assuage public concerns about mass unemployment that will result with so many thousands of businesses large and small also passing away in this dreadful period.

If there is a bailout, then expect demands from politicians of all political colours to demand a payback to the taxpayer at some point which will very likely be covered by way of windfall taxes and taxes on insurance premiums as well. All of which ultimately means that the policy holders will end up paying anyway in a vast circular movement of cash around the economy from policy holders (all of whom pay taxes) to taxpayers (a substantial number of whom will have business insurance of one form or another).

So how does this all move forward?

Firstly, with a potential plethora of actions now in the pipeline, premises owners should be scrutinising their policies now more than ever. There will be a substantial number of claims at the micro level which I am sure will be resolved because of individual clauses written into the contract of insurance specific to that business, or a variation might be made to standard terms and conditions.

Secondly, businesses should be checking business interruption schedules in policies. If there is a notifiable diseases section, then this needs to be studied to see what is included and if there is wording which allows of a claim in some circumstances. There will usually be a list of the notifiable diseases covered and I guarantee that COVID-19 will not be there but nonetheless all policies are business-specific if negotiated by a good broker and there could be a claim. Checks should be carried out with brokers. Get a lawyer to check the wording.

Thirdly, seek advice on joining a class action against the big insurers.

As I indicated above, they will clearly fight tooth and claw to defend actions on the basis that they are likely to go out of business if awards are made by courts. They have substantial resources to fight and you can guarantee they will deploy those resources using some of the best and brightest insurance law QCs to resist claims. There is strength in numbers and if hundreds or indeed thousands of businesses club together, then it will be a fairer fight and may ultimately encourage some kind of compromise in these extraordinary circumstances. Such a compromise would, undoubtedly, not be binding on the insurance industry in the future. Such an action is already envisaged by the Night Time Industries Association on behalf of its many members.

The insurance industry is already attracting the opprobrium of the hospitality sector for the way in which it is approaching claims made by restaurants, bars, clubs, etc. and, if we all get through this crisis in some way, we will all have to work together later. Does the insurance business wish to be seen in this highly negative light for many years to come by those with whom it would wish to continue doing business? I think not. Perhaps a compromise could be in the air.

Back to “Double indemnity” and that claim. As I said above, insurance companies have libraries full of data covering every situation going back decades. It is used to calculate pricing of policies and denying liability in many situations and this is what claimants are up against and the thinking inside the insurance industry. This is just a tiny illustration.

The insurance company in that case sought to dispute the claim at one point by arguing that the death occurred as a result of suicide (for which there could be no recovery) by the insured individual, apparently by leaping off the back of a moving train whilst it was travelling at 15mph. However, the wily insurance investigator is not convinced. Insurance companies calculate risks and likelihoods by examining a million tables. He goes on:

“Here’s suicide by race, by color, by occupation, by sex, by locality, by seasons of the year, by time of day when committed. Here’s suicide by method of accomplishment. Here’s method of accomplishment subdivided by poisons, by firearms, by gas, by drowning, by leaps. Here’s suicide by poisons subdivided by sex, by race, by age, by time of day. Here’s suicide by poisons subdivided by cyanide, by mercury, by strychnine, by thirty-eight other poisons, sixteen of them no longer procurable at prescription pharmacies. And here – here are leaps subdivided from high places, under wheels of moving trains, under wheels of trucks, under the feet of horses, from steamboats. But, there’s not one case here out of all these millions of cases of a leap from the rear end of a moving train. That’s just one way they don’t do it.”