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28 July 2020
The rapid spread of the COVID-19 pandemic has affected business operations worldwide. For many companies, business interruption (BI) as a result of the pandemic is one of the greatest operational risks of 2020.
Although many companies are insured against BI, their coverage may not extend as far as they believe. In legal practice, the question of whether BI caused by infectious diseases is covered by a BI insurance policy has been highly debated.
The mainstream view is that BI insurance is generally additional to all-risk or other types of property insurance. Therefore, only losses resulting from property damage are covered by BI. However, if a BI extension clause (eg, an infectious disease clause) expands the scope of the covered losses, the BI losses caused by an infectious disease can be compensated based on the relevant applicable extension clause, even if the insured has suffered no property damage.
Why is compensation under a BI policy based on the condition that damage to property has occurred? This article sheds some light on the numerous historical and contextual factors behind this rule.
In China BI is considered a transplanted product. Most mainstream Chinese insurers adopt terms similar to those used in the UK or US insurance markets.
For example, a Chinese large property insurer registered with the China Banking and Insurance Regulatory Commission uses the following BI clause in its policies:
[D]uring the insurance period, where the insured suffered losses on the property used for its business operations due to the risks covered by the main property loss insurance clause (hereinafter referred to as the "property insurance loss"), resulting in the interference or interruption of the insured's business operations, the loss of gross profit thereof occurring during such indemnity period shall be compensated by the insurer in accordance with this insurance policy. The indemnity period mentioned in this insurance contract refers to the period from the date of the occurrence of the insured property loss, to the insured's business continuously affected by the insured property loss, but the maximum period shall not exceed the maximum indemnity period agreed in this insurance contract. (Emphasis added.)
Traditional property insurance compensates only for direct property losses of the insured subject matter against the risks within the scope of insurance liability. The insurer is not responsible for indirect property losses of the insured arising from, among other things, the suspension or reduction of production or BI.
At the end of the 18th century and the beginning of the 19th century, after experiencing a significant increase in productivity owing to the Industrial Revolution, business risks increased. Traditional property insurance (eg, all-risk insurance) could not cover the indirect loss of profits due to accidents. The time had come for a compensation policy based on recovery of daily losses, which became the prototype for modern BI insurance.(1)
An earlier name for BI, use and occupancy insurance, better reflects its direct relationship with property losses.(2) Under this type of policy, the insurer must pay, according to the calculation method agreed in the insurance clauses, for the losses resulted from the interruption of the insured's normal use and occupancy of the insured property because of the insured property risk. Different disputes might arise in different cases because of the specific wording of the insurance clauses, but the general principle is that BI covers losses resulting from damage to insured property.
As discussed, the idea behind BI insurance is to cover the indirect profit losses that result when an insured peril arises. The period of BI is the period required to repair or replace the damaged property – namely, from the time that the insured must interrupt their business due to the occurrence of the insured accident to the time that the insured resumes business. BI will thereby ensure that the insured can still operate with the same business revenue that it would have generated had the accident not occurred. However, that is the limit of what BI insures: no more, no less. Therefore, the insurable interest of BI is the business profits brought by the insured property.
Domestic underwriters will generally calculate the insured BI losses by referring to the losses during the indemnity period in terms of gross profit. The calculation involves three aspects:
The sum of the first two minus the amount from the third generally equals the gross profit losses that must be indemnified.
The above calculation of BI losses is based on the premise that the insured property suffered damage which led to BI losses. Based on the different needs of insureds from different industries, BI policies often have respective BI extension clauses to extend the concepts such as the insureds, business types and business premise, thus covering some circumstances that the parties intend to cover.
Common BI extensions include:
However, even if the extension clauses are applied to expand the scope of insurable losses, the premise for establishing the insurer's BI liability is still that it incurred an insured risk of damage to the insured property.
Most BI insurance clauses provided by domestic insurers constitute additional insurance, thus making the limit of the indemnity foreseeable. However, BI does not by itself need to be a form of additional insurance in terms of its original purpose. If the underwriting risk and the scope of property can be clearly defined in the BI policy, there is no major threshold for the insured to apply for a separate and independent BI policy.
In practice, disputes arising out of BI will also concern:
However, it must be noted that BI insurance does not cover all losses due to BI, but rather those losses caused by BI due to losses arising out of damage to insured property. Otherwise, all unforeseen circumstances that may affect the insured's business will be the cause of possible claims, deviating from the spirit of BI and its coverage of insurance liability.
For further information on this topic please contact Jia Wan or Liu Sichen at AnJie Law Firm by telephone (+86 10 8567 5988) or email (email@example.com or firstname.lastname@example.org). The AnJie Law Firm website can be accessed at www.anjielaw.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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