Insurance Policy Claims and Covid 19
Written by: Anubhav Seth
COVID-19 already has emerged to be an unimaginable catastrophe, having a much wider impact on mankind, than any other tragic incident, be it the loss of life or economic collapse. As a result of the ongoing lockdown and social distancing, companies are facing various working limitations, resulting in significant setbacks and temporary closures. The impact of the COVID-19 pandemic on corporations is unparalleled and incredibly hard to guesstimate in terms of magnitude and nature.
As a precautionary measure for COVID-19 control, the nationwide lockdown by the Indian government in exercise of control under the Disaster Management Act, 2005 has brought huge insecurity in the corporate companies, with corporate houses finding it tough to survive in the market. While confronting these obstacles, companies are searching for ways to stabilize and survive the short- and long-term economic implications of this disruption, and there is a lot of thought and consideration going on to address the downturn and also about the sustainability of the insurance claim on grounds of business interruption due to government implementation of the lockdown.
However, it is highly unlikely that Indian companies with business interruption insurance will be eligible to get some support under the policy due to COVID-19 or lockdown orders. Let us know why?
TYPES OF INSURANCE
Corporations generally opt for two types of insurance policies — the policy for material damages and the policy for business interruption. Material damage policy is implemented if damage to property occurs or is caused by fire, flood, or mechanical failure, etc. Business interruption, on the other contrary, only takes effect if there has been a loss of profit owing to the clauses listed in the policy on material damages.
BUSINESS INTERRUPTION INSURANCE: NATURE, SCOPE, INTERPRETATION BY THE APEX COURT
When a property used for the conduct of a business is wrecked by an insured risk, ordinary business activities are disrupted resulting in a severe financial failure in terms of “lost profits” which is not covered by a basic fire policy. The objective of business interruption insurance is to safeguard the business against the shortfalls in its revenues, following an insured peril, like fire, storm etc.
It will provide for all continuing or operational expenses that have to be met regardless of a halt on trading activity, like the lease of company premises, payroll and mortgage, along with covering the loss of revenue. In effect, the insurance provider steps into the shoes of the business’s customers, thereby covering up the consequent loss of gross profit, incurred by a decline in the turnover. Furthermore, it is known in numerous forms. In colloquial terms of insurance, it is also called “consequential Loss insurance” or “Loss of Profits Insurance” etc.
It is pertinent to keep in mind that Business Interruption Insurance is not sold standalone, and is dependent upon and covered as a part of the policies for material damages. The design of these policies restricts the protection, limited to lost profits, only for the time period during which the business is interrupted or otherwise affected because of substantial harm to the property. Therefore, material damage or substantial harm becomes the condition precedent for any claim to be admissible on the grounds of business interruptions. Physical damage or harm is, as such, a prerequisite to a business interruption claim.
Therefore, if a claim is made on damage to property only then the insurance cover for business interruption allowed, which is lacking in the given circumstances owing to COVID 19. Another possibility for the insurance provider to deny any COVID-19 claim is that the claimant has made no premium contributions towards covering such a risk. Further, The Indian insurance sector is also at a budding stage, where Business Interruption Insurance coverage is generally bought by medium and large corporations only.
Moreover, the Corporations are shut not so much because of the presence of COVID-19 in their premises, but because of the lockdown enforced by the government. Thus, in such conditions, it is highly unlikely for the corporations to be able to reap the benefits, having Business Interruption Insurance.
While interpreting the insurance policies, the Apex Court ruled that the terms of the policy would regulate the contract between the parties. The terms of the policy are framed and authorized by the Tariff Advisory Committee (TAC) established pursuant to Section 64 U of the Insurance Act, 1938 and it is settled law that the Court cannot write a new or create a whole new agreement while dealing with the claim under business interruption insurance, it will simply apply the terms of the contract as they are.
The insurance policy must be understood as applying only to the clauses contained in it and no abstract far-fetched interpretation should be given to the expressions used in it. An insurance policy constitutes a contract between the insurer and the insured. Since the insurance provider intends to make good the loss suffered by the insured for the perils protected by the insurance policy, the terms of the contract must be carefully interpreted to evaluate the insurer’s amount of liability. The claimant cannot seek anything more than what is protected by the insurance policy and must also act necessarily in compliance with the policy’s statutory limits and terms specifically contained therein.
The basic rule guiding the claim on account of disruption of business is that there must be a causal connection between the compensation payable and the insured risks. In other words, the damage must be a necessary consequence of the insured risk, not a peripheral one.
Therefore to maintain business interruption claim without actual real physical damage under the insurance policy is still an arduous challenge and it is highly unlikely that the Indian corporations with business interruption insurance will be able to receive any gain under the policy due to business interruption due to COVID-19 or lockdown.
The General Insurance Council had also released a public advisory that the losses incurred from COVID-19 business interruption attributable to lockdown are not payable and a claim under loss of profit (LOP) business interruption shall only be allowed if the claim is permissible under the clause on material damages.
THE “TEST CASE”, LONDON HIGH COURT
The English High Court recently delivered its much-anticipated judgment in the “Test Case,” a ruling that has impacted how policyholders and insurers around the world would tackle business interruption insurance for COVID-19 claims.
In its role as a regulatory authority for UK-based insurers, the UK Financial Conduct Authority (‘FCA’) had requested the High Court to determine as to whether business interruption insurance policies could cover losses related to COVID-19 to be able to aid policyholders and insurers in resolving conflicts concerning the validity and interpretation of such policies. On behalf of primarily small to medium-sized business interruption policyholders who had purchased policies from eight insurers, the FCA claimed that COVID-19 losses must be covered by the policies in the issue.
A sample of the standard form of business interruption policies offered by the insurers was considered by the Court. The insurers who participated in the case argued that the “insured risk” protected by the business interruption policies should be strictly interpreted as the pandemic of COVID-19 itself, implying that determination of the amounts to be paid out should be in the light of government restrictions and the public interest. Therefore the amounts to be compensated under such policies would be lowered by the damages incurred by the limitations imposed by the government and the public response. The provisions of these policies were grouped into the following categories:
- Disease Clauses – provisions covering business losses in relation to BI following the occurrence of a notifiable disease within a specified radius of the insured premises (the “Relevant Area”)
- Denial of Access Clauses – provisions covering losses in relation to an incident occurring that results in a denial or restriction of access to the insured premises
The court was also asked to consider causation issues including whether the required link between COVID-19 and the policyholder losses could be established taking into account “trends clauses”. “Trends clauses” allow insurers to adjust profit, turnover and revenue figures (for the purpose of calculating losses) to take account of trends in the relevant business or other circumstances that would have impacted the relevant business even in the absence of the relevant event.
In a complex judgment, the court decision is broadly positive for policyholders. In general, the court favoured the FCA’s interpretation of the relevant policy wordings and held that most, but not all, of the Disease Clauses provide cover in respect of COVID-19 and that certain of the Denial of Access Clauses also provide cover (depending on the detailed wording of the clause and how the particular business was impacted by the Government response). There should now be some clarity as to when insurers have to pay out where similar policy wording has been used and in the light of the generic issues that have been determined.
- Unless successfully appealed, the judgment is legally binding on the defendant insurers in respect of the policy wordings considered by the court. The judgment also provides guidance for the interpretation of similar policy wordings.
- While this is a positive development for policyholders, and insurers now have some direction for settling claims, each case will turn on the wording in the relevant policy as well as the position of the relevant insured party.
- It should also be noted that none of the clauses were drafted specifically to cover pandemics but, on the basis of the test case, many clauses were nevertheless considered wide enough to allow COVID-19 to be covered.
- The insurance market may end up paying for claims it did not expect to meet and therefore there is likely to be a more considered approach to providing coverage for pandemics in future insurance policies.
- The Test Case does not, however, cover all business interruption insurance policy wordings. Irrespective of the outcome of the Supreme Court hearing, we can expect there to be continued litigation and arbitration on this issue for years to come.
COVID-19 and the country-wide lockdown are unimaginable circumstances for both insurance providers and corporations. Nevertheless, such exceptional circumstances, have also indeed highlighted the importance of being sufficiently insured. From the insurance providers’ viewpoint, this is an opportunity to bring out a fresh range of products and add-on services that shield corporations against these risks, with even increased premiums and exemptions.
Businesses need to constantly identify potential threats for their operations and insurance providers need to broaden product offerings. We shall see a paradigm shift in corporations’ approach towards insurance and seeing it as a worthwhile investment for risk management. A proliferation of lawsuits regarding the implementation of business interruption clauses in policies seems imminent. It’ll be very intriguing to see how courts handle these assertions and interpret & analyze insurance contracts in a bizarre situation like COVID-19.
 Shree Ambica Medical Stores and Ors. vs. The Surat People’s Co-operative Bank Limited and Ors., Supreme Court of India, 28-01-2020
 General Assurance Society Ltd. Vs. Chandmull Jain, 1966 AIR 1644, 1966 SCR (3) 500
 Oriental Insurance Co. Ltd. Vs. Sony Cherian – II (1999) CPJ 13 (SC)
 General Insurance Council Public Advisory issued on 21.04.2020, https://www.gicouncil.in/gi-council-initiatives/gi-council-public-advisory/
 FCA v Arch Insurance (UK) Ltd and others  EWHC 2448 (Comm), https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-judgment.pdf
About the Author
Student at Vivekananda School of Law and Legal Studies, VIPS.
He traces his academic roots from majoring in CBSE Class XII Commerce from Lancers Convent Senior Secondary School, Delhi. His areas of interest and research work are Constitutional Law, Criminal Law, Corporate Law, Intellectual Property Rights, and International Laws.
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