Does business interruption insurance pay for pandemic damage? The first rulings by European courts on the insurers’ obligation to cover these claims have been positive for the insured.

Business interruption insurance (BI) shall reimburse losses and expenses in the event of a total or partial standstill of the company after the occurrence of a property damage, e.g. after a fire. In recent years it has become internationally common to insure business interruption scenarios without any associated damage to property. A special form of this is the cover known in Austria as “Epidemics BI, which is offered specifically to the restaurant and hotel industries.

After the first lockdown, it was obvious that the affected companies would turn to their insurers for compensation from their BI contract. It turned out that in many cases the claim was refused. Of course, the insurers were just as surprised by the pandemic as all other branches of the economy and were not prepared for the expected claims. According to a specification of the European supervisory authority, each damage had to be handled in an open-minded manner, but the basis for compensation was to be checked according to the wording of the insurance conditions in the respective contract.

Insured versus insurer

Differences in the interpretation of these contractual terms ultimately led to claims before the courts. So far there have been a number of first-instance decisions that shed light on jurisdiction concerning the problems of interpreting insurance wordings. A supreme court ruling from Great Britain has also already been received.

What all the judgments have in common is that more importance is attached to the interpretations of the insured than to the arguments of the insurers regarding the pandemic situation. The following tendencies can be deduced from the judgments issued so far: basically, the BI contract must include damage not related to property damage. The insurance contract must not contain any exclusion of infectious or contagious diseases.

Tricky details

But in detail, the question will be whether the insurance contract is an all-risk cover or whether the insured risks are specifically listed. In the all-risk case, according to courts in Germany and France, cover is provided, unless there is an explicit exclusion of the pandemic. If diseases are explicitly listed, coverage is rightly rejected because Covid-19 did not even exist as a disease and could therefore not be mentioned in the conditions. The courts (e.g. Higher Regional Courts Essen and Hamm in Germany) admit that the insurer only wanted to insure the diseases listed. The situation is different when all diseases are basically covered and the list shows diseases as an example only – probably because of their rather frequent occurrence.

Epidemic or pandemic?

Furthermore, the question arises whether a pandemic is an epidemic if the insurance wording is based on epidemic laws. So far, the courts have not followed the insurers’ argument that a pandemic is an unmanageable risk due to its size and effects that they cannot bear. On the contrary: This would not be understood by the clients, since the damage was definitely caused by a disease or epidemic against which they insured themselves. There should also be no difference made between the Epidemic Act and the Covid 19 Measures Act, according to the Higher Regional Court Feldkirch, Austria.
In France, there was a discussion whether the pandemic is not automatically excluded in all those contracts that have an exclusion of “force majeure” and “orders and measures by authorities”. However, in previous epidemics such as H1N1 or dengue fever, French courts had already determined that it was not a matter of “force majeure”. Judgments on this aspect of Covid-19 are still pending.

Business shutdown or denial of access?

In the meantime, the definition of the term BI is also being discussed: Does the insured standstill of business activity require the company to be closed or is the denial of access imposed by authorities sufficient for cover? As in the Austrian epidemic BI, in which the occurrence of the epidemic in a company is decisive, other insurance contracts also require that the company concerned must be closed. In the majority of the BI wordings, the general prohibition of providing a service, for example as a restaurateur or hotelier, is, in the opinion of the courts, sufficient for cover being given by the insurer. Denial of access was recognized by courts in France, Great Britain and other countries as the cause of an insured standstill.

Then there was the rule in British and Irish insurance wordings that the epidemic must occur within a close radius of 25 miles (40 kilometers) from the affected company in order to have the claim paid by the insurer. Here, the courts recognized this condition to be automatically fulfilled by the pandemic.

Some of these issues have so far found their way to the Supreme Court via urgent proceedings in one country, the UK. The above arguments in favor of the insured were confirmed in a procedure initiated by the financial market supervisory authority to help 370,000 companies get their insurer to pay claims. The Supreme Court paid particular attention to an argument of the insurers, which read as follows: Even if the companies had remained open, no customers would have come due to the lockdown, so the damage would have occurred “anyway” ─ a classic exclusion. However, the Supreme Court overturned an earlier ruling which, after the hurricane disaster in New Orleans, had found the insurer to be right on this line of argument. This objection must therefore not play a role for the actual claims.

As last news before the editorial deadline, we received the message that the Austrian Supreme Court, contrary to the opinion of the lower courts, has rejected cover from an epidemic BI. The senate regarded the measures taken by the authorities during the pandemic as substantial increase of the risk to be taken over by the insurer, for which, however, no premium had been paid and therefore no cover could be provided.

You can see: the decisions of the courts are the result of an interpretation of new facts and situations to be matched with traditional insurance wordings.

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Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229