COVID-19 lockdown, business interruption policies and insurance

To account for disruptions in their usual functioning, businesses safeguard themselves by purchasing insurances that mitigate such risks. These are usually covered through an ‘all risk policy’, a ‘business package policy’, or a ‘standard fire and special perils policy’, which generally cover loss of profit due to a business interruption.

In India, business interruption insurance is not sold on a standalone basis and is covered as a part of the aforementioned policies. COVID-19 and the resultant national lockdown which has been in effect since March 25, 2020 has brought regular functioning of businesses throughout the country to a standstill.

In these times, it is important for companies to understand the coverage provided under such insurance policies and if there is a ground to make a claim.

What is covered and what is not?

Generally, the wording of these polices limit the coverage only to loss of profit for a period during which business is interrupted or otherwise disrupted due to material damage to the property/asset. In other words, no claim can be made for a loss of profits due to business interruption, without there first being material damage to assets/property insured under such policies. As such, physical loss or damage is a precursor for a claim of business interruption.

Lockdown as a cause for business interruption

Even if one were to look past the requirement of physical damage, policies generally have a specific exclusion for any loss or damage caused as a result of an order of a government authority which results in the policyholder being prevented from accessing the property. This would further vitiate the chances of making a claim given that the business interruption has been due to the lockdown imposed by a government order.

Few policyholders opt for optional add-on features that cover loss incurred due to hindrance or prevention of use of premises as a result of a government or police action. Policyholders with such add-on features should be able to make a viable claim under their insurance policy.

However, it is to be seen how the insurers handle such claims. Also, the exact language in the policy would play a key role in determining the viability of the claim.It would be prudent for businesses who have taken such business interruption policies to look into the fine print to see if they are covered for disruptions on account of COVID-19.

Regulatory assistance

The insurance regulator, Insurance Regulatory and Development Authority of India (IRDAI) has emphasised the need for insurers to be sensitive to the needs of the policyholders in light of COVID-19.

Most insurers have taken a position that any business interruption due to COVID-19 is excluded from the policy as the coverage is only for material damage (and, also that the premium charged didn’t factor a disruption on account of a pandemic/lockdown). This view has also been backed by the General Insurance Council (self-regulatory body for all general insurers) (GI Council). This has led to some backlash from businesses that were hoping for insurers to take a more lenient and case by case approach. The Insurance Brokers Association of India has even written to the IRDAI to intervene in this unilateral decision taken by insurers.

What must be noted here is that the government has a monopoly in the re-insurance market and controls three large general insurers. It needs to be seen how it balances these interests while providing any relief to businesses.

A common condition in these policies is the requirement to take approval from insurers in case of non-occupation of the premises for over 30 days. In a relief to businesses, the GI Council has decided to give a one-time relaxation to policyholders from this condition for the period from March 25 till May 3, 2020. The IRDAI has also endorsed this move.

In other economies, such as the USA, several business owners have filed claims under business interruption policies and have seen these being rejected by insurers. These business owners are now coming together to file class action claims against insurers, with one of the grounds being that viral infections are not specified as exclusions under the policies.

There is speculation that the government might intervene and provide some relief. While the insurance policies in USA are surely different from that in India, what happens there, could very well have a ripple effect here.

Road ahead

Historically, businesses in India have been reactionary rather than precautionary when it comes to procuring insurance. For example, estimates of the insurance coverage to total losses suffered in the 2018 floods of Kerala ranges between three percent and five percent. In comparison, in USA the insurance coverage was about 64 percent for natural catastrophe losses in 2018.

COVID-19 and the nationwide lockdown are unprecedented situations for both insurers and businesses. However, these unprecedented situations have also further highlighted the virtue of being adequately insured.

From the perspective of insurers, it is an opportunity to roll out a new array of products and add-on features that protect businesses from such risks, albeit with high premiums and exclusions.

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For businesses, we will see a tectonic shift in approach towards insurance and seeing it as valuable investment for mitigation of risk. In the short to mid-term, a number of litigations around interpretation of business interruption provisions in policies seems inevitable.