Business interruption insurance is intended to cover losses resulting from interruptions to a business’s operations, and generally covers lost revenue, fixed expenses such as rent and utility, or expenses from operating from a temporary location.
While these policies most frequently relate to physical property damage, businesses should nevertheless assess their coverage to determine whether they might be covered for losses due to business interruptions resulting from Covid-19.
Several companies were able to recoup losses through business interruption insurance for various operational disruptions after the global outbreak of Severe Acute Respiratory Syndrome (SARS) in 2002-2003.
In turn, however, many insurers have now excluded viral or bacterial outbreaks from standard business interruption policies.
As a result, it is critical for companies to proactively assess the specific terms and conditions of their governing insurance policies to determine whether interruptions from Covid-19 would be covered.
In connection with that assessment, companies should review their policies’ insurer notice requirements to ensure their scrupulous compliance with those provisions in the event coverage is ultimately sought. Taking these proactive steps will help companies be prepared for any financial or legal implications that may result from the continued spread of Covid-19.
And don’t forget to mitigate
It is virtually certain that economic and business impacts of the type seen already in China, Korea, Italy and Japan will spread to other jurisdictions. Due to the risks that Covid-19 poses to ongoing business operations, companies should proactively consider the potential impacts a global pandemic will have on their operations, take steps to mitigate their operational risk, and assess the availability of insurance coverage in the event that risk materializes.
Taking affirmative steps now is especially important given the ability that companies currently have to foresee and attempt to mitigate any potential operational impacts in advance of the outbreak spreading to any new locality. Ideally, businesses will be able to plan accordingly to avoid any disruptions in their operations if the virus continues to spread.
Examples of steps companies might actively consider taking now (and seek to ensure that counterparties are taking) include:
securing alternate supply streams in the event a supplier’s operations are impacted;
planning for how employees can continue working remotely, or how functions can be transferred to other locations, in the event of quarantines and business closures;
mitigating the impact of restricted travel both around the globe and within countries.
Even if such steps are not successful in avoiding the need to declare a force majeure, a company’s attempt to mitigate its risk in advance will be highly relevant to a court’s determination of whether reasonable steps were taken to continue to satisfy contractual obligations, and whether performance was truly impossible.
Affirmative measures to help ensure a company is prepared for the possibility of business interruption resulting from Covid-19 include a careful review of insurance policies that may cover such an event.
Taking these proactive measures will decrease the likelihood of force majeure disputes in the future; it will also help any party asserting a claim of force majeure to establish that it took reasonable steps to avoid contractual interruption.