Will Business Interruption Insurance cover the losses caused by COVID 19

The deadly pandemic of COVID 19 has not only brought the governments of the most powerful and developed countries of the world down to its knees but also forced the governments of many countries to impose a nationwide lockdown. The lockdown imposed by the governments has had a catastrophic  effect on the businesses with the government shutting down the industries and allowing only the operations related to “essential commodities and services” to function. In addition to the loss of profit due to the imposed lockdown, businesses are incurring the costs of maintaining the plant & machinery, paying rents, paying wages to the employees, etc. which is taking a heavy toll on the business sector. 

In the present situation, the widely debated question is whether the insurance policies taken up by corporate houses can come to their rescue when there are losses due to the stoppage of businesses due to the imposed lockdown. 

In view of the lockdown, Insurers have agreed to extend the cover under Fire and Special Perils policy SFSP upto 3.5.2020 without the requirement of any notice from the insured. The General insurers have been advised by the Insurance Regulatory and Development Authority of India (IRDAI) vide press release dated 30.4.2020 to inform the policyholders of how the relevant clause(s) would apply beyond 3rd May 2020 in all policies and what action is needed by the policyholders to avail of uninterrupted coverage. The corporates have suffered heavy losses due to the shutting down of factories and businesses because of the lockdown imposed by the government due to the COVID 19 pandemic. So the companies can claim insurance cover if the property is damaged due to fire or any other loss till 3rd May, and the insurance cover will not be lost because of the factory premises remaining unoccupied for more than 30 days in view of the general standard condition in all Fire and Special Perils Policies that the insurance cover is lost in case the building insured or containing the property insured remains unoccupied for more than 30 days. However, besides this, the burning issue is that of the losses due to the halting of the business and manufacturing operations during the lockdown.  

Companies in India usually take two types of insurance policies – Property/Material Damage Insurance Policy and Business Interruption Insurance Policy.  

If there is loss or damage to the property due to Fire, Flood, Riots, Explosions, Storms, Cyclones, Machine Breakdown, etc. it is covered under Material/Property Damage Insurance Policy. Business Interruption Policy comes into play, if the losses incurred are a due interruption in business which is because of occurring of events listed in the clauses mentioned under the Property Damages Policy. 

Insurance companies are contending that the claims for compensation for loss of profits due to lockdown imposed because of COVID 19 pandemic are not admissible, as loss of profit is not due to any of the above reasons. Lockdown due to a pandemic has not resulted in any physical damage to the plant or machinery and the business interruption is not due to the insured perils mentioned under the insurance contract and hence insurers are not liable to pay. It is quite likely that the insurance companies may also try to invoke the clause of “Act of God” in their insurance contracts while rejecting the claims.  

With the already battered companies looking to recover their losses by trying to invoke their insurance cover and make a claim under their Business Interruption Insurance Policies (for which they are paying hefty premiums), it is likely that this may lead to several litigations in the coming months once the lockdown is lifted. It is advisable to seek legal and expert advice regarding the interpretation of insurance contracts particularly where the policy wordings are ambiguous. It will have to be seen whether the courts go by the rule of strict interpretation or liberal/beneficial interpretation of the insurance contract in deciding the claims of the insured businesses considering the fact that this is an unprecedented situation faced by the companies with business activity coming to a virtual standstill because of the lockdown imposed by the government due to the COVID 19 pandemic.