Written by Manish Jha
COVID-19 has already proven to be an unprecedented disaster, with a much broader impact than any other disaster in the history of mankind, be it the loss of human life or economic loss. In India, due to COVID-19 outbreak, the central and state governments have imposed restrictions on businesses across industries. Due to nationwide three-week lockdown and social distancing, businesses are facing various operational constraints, resulting in severe disruptions and temporary closings. The result is huge business losses for various businesses.
Companies, in India, having Business Interruption Insurance will rely upon them in funding the recovery of their loss due to COVID-19.
This article explains what this insurance typically covers, and whether losses caused by COVID-19 are or will be covered by BI?
What is Business Interruption Insurance?
Whenever any losses incurred due to an insured peril to an insured business establishment or property or machinery, the fire and machinery policies compensate for the loss of property. However, when a property is damaged, the affected industry may not be able to carry out business. But the industry or the business may still have to pay salaries, rent, and incur other operational charges. Further, the profits that one would have otherwise made are also lost. All these losses are covered by Business Interruption Insurance.
What is covered under a Business Interruption Insurance Policy?
Business Interruption Insurance can be issued as a separate stand-alone policy, but in India, it is incorporated in Fire Policy or Machinery and Boiler Explosion Policy. It offers protection to the net profit, standing charges, and an increase in the cost of working to maintain normal output or turnover.
Whether losses caused by COVID-19 are or will be covered by insurance?
Recently, it has come into media that insurers and top companies are likely in for a tussle regarding claims arising out of COVID-19 outbreak; and quite a few companies are eyeing claims under the “loss of profit” clause in their insurance contracts.
For the business interruption cover to trigger, according to industry pundits, it is necessary for the property insured to suffer physical damage due to a covered peril such as fire, flood or earthquake, and hence, such policies would not cover loss caused due to COVID-19.
In India, Business Interruption Insurance is not sold standalone and is dependent upon property coverage. BI cover in India can be taken as a separate policy only in conjunction with fire insurance or as part of a package in products such as industrial all-risk insurance which covers both property damage and business interruption. Hence, if a claim is triggered on property damage, only then is the Business Interruption Insurance cover triggered.
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The Business Interruption Insurance Policy—being a consequential policy—always has a condition that insurer must have first accepted liability under the fire policy before any claim is settled under this policy. Therefore, unless there is an underlying fire or machinery policy, an insured will not be able to enforce a claim.
Another reason, which may be given by the insurer to reject any COVID-19 claim is that insured has not made any contributions by way of premium for covering such a loss.
Though the courts in the US have consistently held that if a condition makes a property uninhabitable or deprives the insured of use of the property, that condition will constitute physical loss or damage, the applicability of those decisions in India may be seriously challenged, firstly, because of the specific wordings of the insurance contracts in India, and secondly, the US decisions would only be applicable in cases of presence of COVID-19 at the insured property. However, in India, the business establishments are closed not due to the presence of COVID-19 at their premises but due to the lockdown enforced by the government authorities. In these circumstances, it is highly improbable that the Indian companies having Business Interruption Insurance will be able to take benefit from the US case laws.
The Supreme Court of India has while interpreting the insurance contracts held that the terms of the policy will govern the contract between the parties (Shree Ambica Medical Stores and Ors. vs. The Surat People’s Co-operative Bank Limited and Ors. (28.01.2020 – SC). In interpreting insurance contracts, the constitution bench of the Supreme Court (General Assurance Society Ltd. v. Chandumull Jain: AIR 1966 SC 1644) has held that the court must interpret the words in which the contract is expressed by the parties because it is not for the court to make a new contract, however reasonable if the parties have not made it themselves.
Therefore, the court through its interpretative process cannot rewrite or create a new contract between the parties, and the court must simply apply the terms and conditions of the agreement as agreed between the parties.
Therefore, the financial loss will be paid by the insurers only if the terms and conditions of the relevant policy provide for that and not otherwise. Given the long line of decisions of the apex court of India that court has to simply apply the terms and conditions of the agreement as agreed between the parties, it will be difficult for the companies having Business Interruption Insurance cover to argue that the loss on account of business interruption due to the COVID-19 should be paid by the insurers.
But despite the aforesaid challenges, there is every likelihood that some of the insureds will approach the courts for claiming the loss suffered on account of business interruption due to COVID-19. It will be quite interesting to see how the courts deal with such claims and interpret the insurance contracts in a situation like COVID-19 which is peculiar; and whether the courts deviate from their strict interpretation of insurance contract standard to help insureds to get their claims by expanding the interpretation of “physical damage” to include COVID-19, on the ground of legitimate public purpose, even though the relevant policy does not have the express extension to COVID-19 like situation.
Manish Jha is Partner, J. Sagar Associates. Views are personal
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