Do business interruption policies cover damages caused by COVID-19?

1.- Introduction: 

After ten months of fighting the devastating social, economic and health consequences of the pandemic caused by the Covid-19, questions arise about the possible coverage of loss of profits and business interruption policies. In addition, the recent decision of the UK High Court in the test case initiated by the Financial Conduct Authority (FCA) appears to leave the door open to possible coverage of the economic consequences of the business interruption caused by the Covid-19 pandemic in this type of policy.  

However, the configuration of this type of policy in our country could lead the Spanish courts to unequal conclusions and, foreseeably, contrary to the ruling of the High Court of the United Kingdom. 

2.- Loss of profit and business interruption policies in Spanish Law

The business interruption insurance covers the economic loss and additional expenses that a business suffers as a result of the interruption of the activity or interference of the insured business, which it suffers as a consequence of physical or material damage, for one of the risks covered by the policy. In this context, it seems logical to conclude that the coverage of the business interruption policies would only be activated in those cases in which physical damage occurs in the structure, assets or operations that thus 

Consequently, to the repeated question of whether the closure and the paralysis of the activity caused as a result of a government order – in Spain, the Royal Decree 463/2020, of March 14 that declared the State of Alarm and its successive extensions – constitutes damage insured under the business interruption insurance, and everything indicates that the insurers could reject the coverage of the losses derived from the interruption of the business during the pandemic, precisely because of the non-existence of direct physical damages that caused the interruption of the business.

Having said that, the truth is that, although in the majority of policies, only material damage is covered, we could find policies that include extensions of coverage for non-physical damage, where coverage for the consequences of the interruption of the business by the Covid-19 could be assessed. 

3.- The ruling of the High Court of the United Kingdom in the Business Interruption Insurance Test Case

Contrary to what seems to be the majority trend in Spanish law, the High Court of the UK has concluded in a Test Case in which numerous policies were reviewed, that most of them provided coverage for damages caused by the closure and cessation of activity arising from the pandemic. Consequently, in many cases, insurance companies would be obliged to pay such compensation. The decision of the Court tried to resolve the uncertainty of many insured persons regarding the scope of these clauses and whether or not they could cover the foreseeable claims derived from the interruption of business as a consequence of the Covid-19. 

However, although the High Court of the United Kingdom has ruled in favour of covering the damage caused by the business interruption, it is foreseeable that the affected insurance companies will bring the necessary appeals against this ruling. 

It should be noted that this decision is relevant to insurance companies, as they will have to examine the way in which the loss of profit clauses are worded, and note whether or not these clauses could give rise to uncertainty or lack of clarity for policyholders. What is clear is that in general terms this ruling will produce a revisionist effect on the part of all those interested in the policy. 

4. The future of the policies and clauses of BI 

However, in a context of uncertainty and in view of the differences and diverse content foreseen in the business interruption insurance policies, it will be necessary that the all the provisions, the coverage and the exclusions applicable by them are analysed case by case, in order to advise whether or not the damage caused by the Covid-19 pandemic and, in particular, those derived from the closure of the business, may be covered. 

In many cases, we must start from the undefinition of the cases of business interruption caused by the existence of epidemics, pandemics, or the interventionist response of governments. The unheard-of situation generated by the pandemic means that the contractual wording of most policies does not fit the current context. 

The truth is that although the real magnitude of the insured’s claims for loss of benefits derived from the Covid-19 is still unknown, the FCA (Financial Conduct Authority) estimates that around 370,000 policies could be affected by the British High Court’s Ruling. 

If the lack of definition leads us to situations of indeterminacy and lack of clarity of these type of clauses, and consequently, to a contractual interpretation in favour of the insured person, it seems evident that the future tendency will be to foresee in the policies of business interruption situations similar to those experienced as a consequence of the Covid-19 pandemic.