Many businesses turned to their insurance policies for help in coping with the effects of the coronavirus.

They often discovered – or were told – that they weren’t covered for business interruption caused by the pandemic.

The pandemic has severely tested assumptions about how the insurance industry works. Politicians and the industry will have to consider how best to manage such risks in future.

This Insight gives an overview of what has happened with business interruption insurance, how current policies were shaped by lessons from SARS, and some of the questions that have arisen.

Business closures

Facing closure and declining demand, many businesses turned to the Government for changes that would allow them to claim under their business interruption insurance policies. There were calls to declare the novel coronavirus a notifiable disease and for the Government to instruct (rather than advise) businesses to close.

The Chancellor announced a wide range of economic support measures on 17 March. He said “changed medical advice” would be sufficient to allow claims from businesses with “a policy that covers pandemics”.

The Chancellor’s comments focused attention on implementing changes that would trigger claims. But this raised a second and more fundamental question: how many businesses had policies that covered pandemics at all?

According to the insurance industry it was likely that very few businesses were covered against such a risk. The Association of British Insurers (ABI) had been making this point since at least early March. The industry argued that relevant sections of policies were designed to respond to such events as local norovirus outbreaks or temporary closure of buildings by the emergency services. They did not cover a pandemic.

Insurers’ response to previous health threats

The insurance industry is based on assessing quantifiable risks. It aims to collect more in premiums from customers than it pays out in response to claims.

That isn’t possible if a new contagious disease emerges. A pandemic complicates this further – insurers can’t rely on a pool of unaffected businesses to help subsidise pay-outs.

The potential effects of the SARS outbreak in 2002/03 alerted insurers to the risk that the rapid spread of a new disease might bring. As a result, insurers around the world reviewed and rewrote policies to exclude such events.

Few businesses were likely to have noticed or been concerned about the absence of such coverage from their policies before the current outbreak. Margins for many small businesses are tight. The rise of price comparison websites has also led to a heavier focus on lower prices than on complex and comprehensive policies.

Who’s covered?

It’s still not clear how many businesses have policies they can claim against.

But there is general consensus that the industry was correct in its initial warning that very few businesses were covered.

On 19 March, John Glen, Economic Secretary to the Treasury, said “5% [of businesses] take out insurance for non-specified diseases, and 5% for specified diseases”. Later, the Association of British Insurers (ABI) told the Treasury Select Committee that its members expected to pay £900 million in business interruption claims.

Policy wording varies, and standard advice is for customers to read their policy and seek the view of their insurer or broker in the first instance.

The Financial Conduct Authority (FCA) and the ABI both issued guidance seeking better and speedier management of claims.

Legal action

Despite the industry’s assurances, many policy-holders argue that specific sets of wording are at best obscure.

In mid-April, a group of Hiscox customers announced a potential legal challenge to the company’s rejection of their claims. They argue that Hiscox was rejecting claims, “on the basis of what they would like the policy to say not what it actually says.”

Concerns about such policy wording are not limited to Hiscox. In May the FCA signalled its own intention to get the courts to consider wording across a wide range of policies. That process has now begun, with judgment expected in July. The FCA hopes that legal interpretation will help all involved to come to swifter resolution of disputes on these and other sets of wording.

The future of coverage against pandemics

Attention turning to how the insurance industry and society as a whole might better deal with such risks in future.

As early as March, Sir Charlie Bean of the Office for Budgetary Responsibility referred to the potential role of the State as “insurer of last resort” in such extraordinary circumstances, as “insurers have limited pockets.”

The range of support measures established for businesses by the Government implicitly follows this logic.

It’s probable that in future customers will seek coverage against new pandemics. But the insurance industry will further tighten wording and offer cover at high prices, if at all.

In other cases, the Government has already stepped in to provide backup to the insurance industry for domestic flooding and terrorism. But some commentators have suggested a need to look at wider solutions.

Further reading

Coronavirus: Business interruption insurance, House of Commons Library.

Coronavirus: Support for businesses, House of Commons Library.

Business interruption insurance, Financial Conduct Authority.

Pandemic insurance and government as insurer of last resort, House of Lords Library.

Coronavirus (COVID 19) Information Hub: Business insurance, Association of British Insurers.

About the author: Steve Browning is a researcher at the House of Commons Library, specialising in insurance.

Photo by Tim Mossholder on Unsplash