Business interruption (BI) insurance covers a downturn in your turnover or profit because of an insured event. The losses can be for 12 months, and a claim could be worth up to $1 million or more. This blog looks at whether COVID-19 can be covered by business interruption insurance.
Business interruption insurance & COVID-19
What insured events are covered by business interruption insurance?
Most BI policies cover downturns because of power failures, storm damage, fires and gas leaks.
They can also include infectious disease outbreaks such as legionnaires' disease.
Does business interruption insurance cover COVID-19?
Yes – if it had a Quarantine Act exclusion, or no exclusion clause, when the business downturn occurred. Importantly, at the time the pandemic hit, the Quarantine Act was no longer in operation. The correct Act cited in insurance policies, should have been the Biosecurity Act.
Approximately 50% of BI policies had a Quarantine Act exclusion (and not the correct Biosecurity Act exclusion) when COVID-19 first hit businesses in around March 2020.
Most policies with QBE, Hollard, Lloyds, Allianz, Swiss Re, and IAG had Quarantine Act exclusions.
Some policies with Vero, CGU, Zurich, Chubb, and Berkley Insurance had Quarantine Act exclusions.
When are you insured for COVID-19?
BI polices last for 12 months before they are renewed. After March 2020, most insurers 'fixed up' their policies to change the exclusion clause to the Biosecurity Act.
However, the changes only take effect after the policy is renewed.
Consider this scenario:
- Your business is in Melbourne and was affected by the second lockdown in July 2020; or
- your business is in Sydney and was affected by the Northern Beaches lockdown in December 2020.
You could still be covered by your business interruption insurance if the amended policy renewal was after those dates.
What cover do I have for COVID-19 losses?
Business interruption insurance includes cover for loss of income/profit/turnover, increased cost of working and claims preparation expenses.
Loss of income/profit/turnover
Business interruption insurance covers reductions in the following:
- Income – income of the business net of movements in stock;
- Profit – income of the business net of expenses;
- Turnover – gross income of the business.
It usually covers losses for up to 12 months with a lump sum cap usually between $100,000 and $1 million (but could be more).
Losses are usually calculated by comparing pre and post COVID-19 income/profit/turnover of the business over a 12 month period (or less if the business was less than 12 months old).
Assessment of a claim will often take into account trends in the business before COVID-19 first hit businesses.
Increased cost of working
BI insurance covers expenses incurred in keeping the business operating after the COVID-19 outbreak and expenses incurred to reduce or avoid further losses to income/profit/turnover.
It may include the cost of protective equipment, disinfectants, cleaning products, office and outdoor modifications, computers and IT supports for remote working etc.
The losses may be calculated over a 12 month period and capped at anything between $5,000 and $200,000.
Claims preparation
Business interruption insurance can include accounting and legal fees for the preparation of BI claims, usually capped at between $5,000 and $50,000.
The cover may be restricted to successful claims – but not always.
Offsets
Some BI policies have offsets for savings made by the business because of COVID-19. e.g. staff expenses and stock.
However, as a result of a court ruling, JobKeeper payments and most government cash handouts are NOT offset.
Types of COVID-19 business interruption insurance cover: from best to worse
If your business interruption insurance policy covers COVID-19, you might have a claim.
However, that depends on the type of cover you had and the wording. Based on the latest court rulings, the types of cover from best to worst are discussed below.
Pure ‘infectious disease' clause
Some policies have BI cover if there was someone with COVID-19 at the business premises / in the insured radius and that led to a downturn in income/profit/turnover.
This is generous cover, particularly if it has the usual 20 km insured radius.
Sometimes it comes with an added requirement for a total/partial lockdown which is a little harder to prove.
'Hybrid' disease clause
This requires that there was someone with COVID-19 at the premises / in the insured radius, which led to a government order closing some or all of the premises and this in turn, resulted in a downturn in income/profit/turnover.
Recent court rulings show that the requirement to prove the outbreak led to a government order makes these claims harder to prove. However, they are not impossible. Particularly if the order was targeted at areas that included your business premises.
For example, the below may still have good claims:
- Melbourne businesses with BI cover in July 2020 when the second lockdown orders were made, that targeted specific postcodes and then metropolitan Melbourne; and
- Businesses in Sydney’s Northern Beaches with BI cover in December 2020 when limited lockdown orders were made over that area.
Prevention of access cover
This requires a government order restricting access to your business which results in a downturn. It sometimes has a radius requirement, but that's often a very generous one (e.g. 50 km).
The policy may require that the order is because of COVID-19 generally, but not proof of COVID-19 at your business premises or in the insured radius.
This is the most generous cover, but there is currently legal doubt whether such cover overrides the requirements of a pure infectious disease or hybrid disease clause. That issue is currently being decided in the High Court.
The fine print on your business interruption insurance
Insurance policy terms and conditions are set out in your Product Disclosure Statement (PDS), which is typically 20-50 pages long and full of fine print.
Below are some explanations of some of the ‘fine print’ content particularly relevant to COVID-19.
What is an 'outbreak'?
If one or more people with active COVID-19 are present at the business premises (or within the radius of the premises as defined in the policy), that is enough for an 'outbreak'.
They don’t need to have contracted COVID-19 at the premises / in the radius, but they must have been infectious at the time they were there.
At the premises / in the radius
Some policies require that someone with COVID-19 had to be at your business premises. This may be hard to prove.
However, most policies only require that someone with COVID-19 was within a radius of the premises – usually 5 km, 10 km or 20 km.
If, for example, your business was within 20 km of a hospital that had COVID-19 cases, this may be easier to prove. Most businesses in cities will satisfy this requirement.
Berrill & Watson have details of most of the outbreaks, including when and where they occurred, that we can use to check your situation.
Want us to check your BI cover? Call 03 9448 8048 for free advice.
Closure of some or all of the premises
Some (but not all) business interruption insurance policies require the physical closure of part or all of the business premises because of COVID-19.
This will usually mean it's enough if a discrete part of the premises is shut, even if the business keeps running
Examples include closure of:
- sit down meal areas in a restaurant or café, even if take away service continues;
- restaurants or cafes attached to hotels/motels, even if the accommodation continues;
- public bar/lounge areas in a hotel/pub, even if the bottle shop continues;
- nightclub/reception centre dance floors or common areas for weddings/events/nightclub trading that still go ahead
- gyms/yoga/exercise centres, even if outdoor personal training and classes continue.
Check your business interruption insurance policy
- The policies to check for cover are 2019/20 and 2020/21.
- You need to check the wording of your policy schedules and the Product Disclosure Statement (PDS).
- Berrill & Watson will check your cover and policy wording and tell you your rights for FREE.
- Contact John Berrill on 0408 322 979 or by email [email protected].
Or contact our Melbourne office for further advice assistance.
Contacting Berrill & Watson
📞 Melbourne: 03 9448 8048
📞 Brisbane: 07 3013 4300
📞 Anywhere else in Australia: 03 9448 8048
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