"What's Covered with Business Interruption Policies"

An update from McCormick Harris Insurance

This article is from Various Projects for Financial Services

Business interruption policies have come under the microscope during the pandemic, with legal class action claims and test cases helping delineate the extent of coverage.

So here's your update on what these policies cover (and don't cover) and why businesses continue to harness this often misunderstood insurance as an essential safeguard.

BI – an overview

Business interruption can be a stand-alone policy included in your commercial policy package or an endorsement to your property insurance policy.

Also called business income insurance, it protects your operating expenses plus lost income for a set time frame. Some insurers also call it consequential loss or loss of profits insurance.

It comes into force when your company closes or can’t operate normally due to physical damage to:

  • Your business property
  • Your customers’ or suppliers’ premises
  • Premises nearby, such as when you operate from a shopping centre.

Business interruption cover can also protect you from the effects of government-ordered shutdowns or curfews and other unforeseen circumstances which stop your business from operating normally. An unusual reason your business can’t operate temporarily may be because of a murder or suicide on your premises.

But business interruption insurance only covers stated ‘perils’, that is, events listed in your policy that can cause a loss. Typical perils include a fire destroying your retail premises, so you can’t sell stock, generate revenue, pay bills and staff while you’re closed for repairs or rebuilding. However, business interruption insurance won’t cover you if you can’t access your computers for weeks due to a cyber event, but a cyber policy would.

Typically, business interruption cover will compensate you for:

  • Lost revenue, based on your financial records before the ‘peril’ event
  • Mortgage and rent as well as lease payments
  • Staff payroll
  • Taxes and loan payments which are due during the covered period
  • Training costs, if you need to retrain employees and replace equipment
  • Relocation costs if you need to move your business to other premises to continue operating.

COVID test cases

If your business interruption policy explicitly states it excludes loss directly or indirectly caused by or arising out of a virus or other contagion, you’re unlikely to succeed with a claim. That’s what happened with a recent complainant who claimed on their IAG policy for loss of business income due to the pandemic. The Australian Financial Complaints Authority ruled against them in its determination handed down last year.

In another case, Star City Casinos in Sydney tested their policy coverage regarding the loss resulting from or caused by any lawfully constituted authority and whether COVID-19 constituted a catastrophe. The Federal Court dismissed the casinos’ claims. It held that the losses weren’t from physical loss, damage, or destruction of the company’s properties and that the pandemic was not a catastrophe within the meaning of the ‘Civil Authority Extension’. Lawyers Colin Biggers & Paisley go into more detail about the judgement here.

Last November, the Insurance Council of Australia issued its guidance on interpreting and applying the wording of business interruption insurance policies. It follows the judgements of the two test cases in the Federal Court.

When these policies are useful

It’s good to know exactly the kind of circumstances in which business insurance claims are upheld. For example, a Melbourne café successfully claimed on its policy after many patrons suffered salmonella from the homemade mayonnaise.

Therefore, it was considered a reasonably unforeseeable incident with far-reaching ramifications. The café’s business interruption policy meant they could pay their staff, honour contracts with suppliers and patch the revenue shortfall for the time they had to close shop.

Meanwhile, in another case, a small printing shop suffered a manufacturing fault which caused a fire leading to major damage to the premises and equipment. They stopped trading before moving to a temporary site. Their business interruption policy covered their relocation costs, staff salaries and compensated the firm for lost profits.

When to review your BI cover

It’s wise to review your cover quarterly, but your business circumstances might dictate you do that at other times, too, such as due to:

  • Acquiring new or additional premises
  • Staffing changes
  • Increasing revenue
  • Offering new services or products
  • Updating your business practices.

Be sure to check the indemnity period stated in your business insurance policy is a good fit for you. It refers to the time in which you can claim benefits under your policy. Look to your updated and comprehensive business continuity plan to accurately guide you on how long recovery could take after a crisis. It should factor in investigations, repairs, rebuilding and council planning, which can take longer than expected."

For more information, please contact our partners at McCormick Harris Insurance.