Ramzi Ghurani reviews pandemic coverage in a dynamic environment.
Businesses around the world are only just beginning to understand the total economic impact of the COVID-19 pandemic. In addition to navigating their operations in a world grappled with closures due to emerging variants, there are a host of other emerging issues impacting success and growth. One of the emerging concerns is whether business interruption insurance (BII) will cover lost income for companies affected by the pandemic.
As the pandemic continues to evolve, regulatory and legislative authorities are taking actions in the form of directives and orders that could directly impact companies’ business interruption coverage. As businesses look toward the future, a careful review of insurance policies and insurers’ responses in light interruption, coupled with regulatory and legislative developments monitoring, will be crucial in protecting businesses’ rights to coverage for COVID-19 losses.
Business interruption: Wording Matters
Due to the quarantine guidelines, businesses had been forced to intermittently close during the pandemic. Business interruption insurance is designed to replace any business income lost due to closure or decreased operations resulting from a disaster, the pandemic has caused a gray area for coverage. However, the global pandemic is not currently covered in basic business interruption, and depending on their specific plans, clients need to purchase pandemic insurance as an extension of their existing plan.
It’s important to check the wording of policy extensions, as current wording for BI policies generally require some form of physical damage (for instance, physical damage caused due to a fire) that results in business interruption. Middle East insurers will need to look specifically at the definitions in a policy to consider if an insured event or peril has occurred and whether any BI losses claimed are in consequence of the insured event. While some policies do provide an extension of coverage when an insured has been unable to use its premises due to a lockdown imposed by the government or regulatory body where a virus outbreak has occurred, not all policies include such verbiage.
Regulatory & Legal Implications
In October 2020, The English High Court handed down a judgement in a test case related to Business Interruption insurance in the context of the COVID-19 pandemic, which provided an interesting angle in respect of BI policy issues and general insurance law contract interpretation.
In a landmark case, the Financial Conduct Authority vs Arch and Others essentially addressed the legal construction of business interruption policy provisions including the extensions of coverage provisions related to “Disease” clauses and pandemic exclusions as they relate to the current COVID-19 pandemic for losses arising from the government actions to stop the spread of the virus.
The Financial Conduct Authority (FCA) issued proceedings for and on behalf of the policyholders. However, the case was determined in the absence of live factual evidence and without quantifiable evidence, which are commonly used in the local courts of the United Arab Emirates for all types of disputes including insurance disputes. Throughout the UAE and MENA, whether COVID-19 falls under BI protection coverage is increasingly being left to local courts to decide. We are only now beginning to quantify how BI coverage will impact businesses affected by closure due to the pandemic.
Responsibility to the Insured
Tools of interpretation regarding insurance coverage and causations are codified under UAE law and found both in the UAE Civil Code and UAE insurance laws. These aids to construction and interpretation of insurance law, while not the same as the English law, provide a degree of assistance when a contract dispute arises in the local UAE courts.
The UAE insurance laws and the UAE Civil code provide for the condition that any exclusion clauses or clauses that result in arbitrary outcomes to the insureds. These exclusions must be apparent and highlighted in a different text or color to warn the policyholder of the potential limitations. In the backdrop of the Financial Conduct Authority v Arch and Others, it’s clear that excluding “epidemics” would need to be made evident within the policy terms and conditions. As leaders in the insurance sector, the responsibility to ensure clients are aware of their specific coverage falls on the insurance professionals, to include any modifications to the exclusion/limitations of the BI policy.
Moreover, it is their responsibility and should motivate the insurers to create packages to cover pandemics moving forward and not completely exclude them. There is a market opening. whereby clients are willing to pay top dollar to be protected from pandemics and other reasons for work stoppages that we have not even thought about yet.
The Future
An overwhelming majority of the experts surveyed by the Department of Risk and Insurance at the Wisconsin School of Business Center for Insurance Policy and Research at the National Association of Insurance Commissioners believe that the legislative proposals occurring around the globe requiring business interruption insurers to cover claims relating to COVID-19 shutdowns, even if the insurance policies exclude pandemic-related losses, threaten the solvency of the insurance industry. Therefore, it’s essential for BI to clearly define what aspects of the current pandemic and any future pandemics may be covered in their policy.
Concerning how BI insurance for pandemic-related claims should be covered moving into the future, many industry experts believe that the private market may have difficulty efficiently sustaining business interruption insurance coverage for pandemics given the systemic, correlated, and non-diversifiable nature of the pandemic peril.
As insurance professionals, we need to ensure our clients understand the specifics of their BI policy coverage as we work to protect their interests long into the future.
RAMZI GHURANI
Managing Partner