It is usual for parties to a contract to agree on the type of insurance
to be obligatorily obtained by one of the parties and for
businesses to obtain insurance for interruptions to their
businesses. We discuss these below.
Force Majeure Insurance
Force majeure insurance provides coverage for financial losses
arising out of the inability to bring a project to completion. The coverage
encompasses delays as well as total termination of the contract resulting from
events totally outside the control of the contractor (i.e., fire, earthquake,
war, revolution, flood, and epidemics). Types of losses covered by the policy
include continued debt servicing, loss of income, ongoing fixed costs,
spoilage, and related contingencies. The
insurer will interpret the words used strictly and may not pay a
claim where the policy did not use words like pandemic etc. The Courts
have however interpreted the policy words less strictly.
In the case of Western Fire Ins. Co. v. First Presbyterian Church, 437, P.2d 52, 55 (Co. 1968), the Court in disagreeing with the insurance company, held that the plaintiff suffered direct physical loss to insured building when gasoline infiltrated soil surrounding basement, contaminating foundation and rooms and rendering use of building dangerous. The policy provided for the insured to have suffered “a direct physical loss” and the insurer argued that the loss the company suffered was consequential to the damage to the building and not a direct physical loss.
Business Interruption (BI) insurance is insurance coverage that replaces income lost if business is
halted for some reason, such as a fire or a natural disaster. This type of
insurance also covers operating expenses, a move to a temporary location
if necessary, payroll, taxes, and loan payments. BI insurance also applies
if government actions cause operations to cease temporarily, resulting in a
loss for a firm, such as the government-mandated shutdown of all non-essential
businesses in the wake of the COVID-19 outbreak. This type of policy pays
out only if the cause of the business income loss is covered in the underlying
For example, if a policy document states that it will cover financial
losses for businesses which are unable to use their premises following “an
occurrence of any human infectious or human contagious disease, an outbreak of
which must be notified to the local authority or any government
restrictions making it impossible for the building to be used.” This clause
should cover financial losses incurred because of Covid-19 due to the
direct reference to “infectious or contagious disease”, an outbreak of
which the local authority is already notified or due to the
lockdown restrictions. This is however subject
to the actual clauses
used. The insurer may interpret the words strictly and
may reject claims not directly attributable to the words used.
Possible Regulatory Interventions?
Some insurance regulators have intervened to ensure insured businesses
are settled. For example, on 27 March 2020, New
York Legislatures introduced a bill to actively override the Virus
Exclusion. The bill, A10226, states, “Notwithstanding any provisions
of law, rule or regulation to the contrary, every policy of insurance insuring
against loss or damage to property, which includes loss of use and occupancy
and business interruption, shall be construed to include among the covered
perils under that policy, coverage for business interruption during a period of
a declared state of emergency due to the coronavirus disease 2019 (COVID-19)
The Financial Conduct Authority (a financial regulatory
body in the United Kingdom but operates independently of the UK
Government) has ordered insurance companies to pay out claims to
firms “as soon as possible” or explain themselves to the
watchdog. In its letter dated 15 April 2020, the FCA told
insurers and brokers that they have an essential role to play in
supporting their customers who may be unclear whether they have appropriate
cover in place. The Authority admits that most policies do not cover
pandemics and they cannot intervene in such matters they however expect a quick
assessment and settlement for those policies where the firms
have an obligation to pay.
In light of these developments, it is very important that companies aggressively assess the specific terms and conditions of their governing insurance policies to determine whether disruptions from the COVID-19 pandemic would be covered, and review their policies’ insurer notice requirements to ensure careful compliance with those provisions in the event coverage is needed.