The changing shape of business interruption losses due to COVID-19
Businesses across the globe have been impacted by COVID-19, and lots has been written about whether this triggers covered business interruption (BI) losses. In this article I explore the impact of COVID-19 on pre-existing BI losses and also subsequent losses triggered by a covered event other than COVID-19, for instance a fire or machinery breakdown.
[Note: for all items related to policy interpretation we would defer to the loss adjuster/legal advice]
Sales projections
The majority of the businesses around the world have been impacted in some way by COVID-19, mainly negatively, although some positively. Travel has all but ceased, hotels and restaurants are closed, and most commodity prices have fallen. However, some businesses are thriving – medical supplies, disinfectants, indoor leisure (such as home gyms) and electronics.
But how does COVID-19 affect sales projections? The Insured’s policy may include actual loss sustained wording, and/or a trend adjustment clause; one must take into account events that would have affected the business, had the covered loss not occurred.
In this instance, a sales projection for a hotel would factor in reduced occupancy due to COVID-19. For medical supplies, sales demand may increase dramatically, although this could be limited by production capacity. A review of the adequacy of the BI Sum Insured may be necessary in case of underinsurance.
We would defer to the loss adjuster and/or legal advice if it is determined that the loss should be calculated using a different approach, for instance without a downturn following the COVID-19 outbreak.
Extension to interruption period
Movement and travel worldwide is restricted, with countries adopting anything from ‘social distancing’ to full-blown quarantine. This could lead to a significant extension to the interruption period, for instance, if engineers are unable to travel to site to inspect damaged machinery, or if parts are sent overseas for repair and the workshop receiving the parts is closed.
Many policies include wording to the effect that the Insured must act with due diligence and do all things which may be reasonably practicable to minimise any interruption of, or interference with, the business or to avoid or diminish the loss. Therefore, if the Insured has acted with due diligence and the extensions to the interruption period are outside of the Insured’s control, the policy may respond. This could significantly increase the potential exposure and require an increase in the reserve; however, it may be mitigated by a downturn in sales projections.
Construction projects may also suffer severe delays with Advanced Loss of Profit/Delayed Start-up losses. It would be necessary to evaluate delays related to the covered losses, and COVID-19 delays that would have occurred in any event.
If it is determined that sales projections must be made without consideration of a downturn following the COVID-19 outbreak, then perhaps a notional reinstatement period is appropriate, based on a ‘normal’ (i.e. no COVID-19 ) interruption period.
Other policy response items
There may be additional items to review in relation to the interruption period and policy response.
If a civil authority deem that all non-essential work must stop and this extends the interruption period, does the civil authority cover restrict the prolongation? If there is no civil authority cover, is the delay covered?
Some policies may give the Insured the option of claiming on a Gross Profit basis, for instance with a 12-month maximum indemnity period, or on a Gross Earnings basis until restoration. Delays related to COVID-19 could be covered for a period well in excess of 12 months if claimed on a Gross Earnings basis. But when must an Insured decide which basis it claims under?
Questions to ask
For BI losses where the cause is a covered event, other than COVID-19, the following questions can be asked:
- Would the Insured’s business have been impacted by COVID-19?
- How does the policy respond, should the negative (or positive) impact of COVID-19 be taken into account?
- If there is a positive impact, would there have been sufficient capacity to meet sales demand, and is the BI Sum Insured adequate?
- Are there other potential policy issues that can impact the covered interruption period, such as a Gross Earnings wording or a civil authority clause?
- Do the initial estimates for the interruption period still look reasonable and, if the period has been extended, is the reserve adequate?
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
