Lockdown, following ‘COVID-19’ Pandemic has caused immense socio-economic impact in India. While everybody is affected by this, Business Interruption is one of the most significant issue, which has come-up in the context of Insurance cover under ‘Loss of Profit (LOP)’ and ‘Industrial All Risks (IAR)’ policies. In this connection news, that was doing rounds in social media about huge compensation received by Wimbledon Organization has generated great hope in the insuring community to find financial succor under their LOP and IAR Policies.
Also, the interpretation or rather misinterpretation of ‘ALL RISK’ Cover under Material Damage Section of the INDUSTRIAL ALL RISK Policy, which was made in some quarters has also added fuel to this burning issue.
However, ‘GENERAL INSURANCE COUNCIL’ in India in its’ PUBLIC ADVISORY dated 21.04.2020 clarified to the insuring public that the provisions of such policies does not provide cover against business interruption due to lockdown as also advised and cautioned them not to fall prey to the wrong interpretations and advises to lodge claim under the policies advised and offer to help by certain Advisors, Consultants and Legal Experts.
As such, the question arises whether LOP and IAR policies provide or not provide cover for current ‘Business Interruption’ resulting in loss of Gross Profit and increased cost of working due to loss of turnover. To understand this, following aspects are important:
- First of all, cover under LOP and IAR should not be compared with the case of compensation received by Wimbledon Organization for the simple reason that cancellation of event is covered under Special Contingency Policy and the insured had covered Pandemic Peril specifically under the policy and paid additional premium for the same.
- LOP and IAR policies undoubtedly covers Business Interruptions, but the current Business Interruption as a result of lockdown following ‘COVID-19’ Pandemic does not fall within the purview of these two policies. The important aspect of these two policy/Covers is that they are not independent standalone policies. While LOP is to be taken in conjunction with a ‘Material Damage policy (Fire or Machinery Breakdown Policies), the IAR policy has two sections. Section I is Material Damage Section, whereas Section II is Business Interruption Section. The concept on which both the policies operate is that there has to have admissible claim for “Physical Loss, Damage or Destruction (Damage)” to the insured property under Material Damage Policy/Section I, which will trigger claim for Business Interruption loss under LOP or Section II of IAR Policies.
An impression has been created that Since Material Damage Section (Section I) of IAR policy operates on ‘ALL RISKS’ basis and since Pandemic is not an excluded peril, it automatically covers Pandemic as an Insured peril. This interpretation may or may not be correct but to say that this automatically covers loss due to lockdown related business interruption. This position is totally wrong. For any claim to generate under Section II, precondition is that there must be an admissible claim due to “Physical Loss, Damage or Destruction” to the insured property under Section I of the Policy. Moreover, the Exclusion Causes under the policy inter alia includes “Cessation of work, delay or loss of market or any other consequential or indirect loss of any kind or description whatsoever”.
‘COVID19” is definitely an insured or insurable peril, which is established by the fact that under Health and Life Insurance policies claims are admissible as also concerned Authorities have confirm the position by press releases addressed to the insuring public. However, regarding LOP and IAR, as on date it is not an insured peril. Even if the meaning of ‘All Risks Perils” is stretched to include Pandemic as an insured peril, non-compliance of other important condition of ‘Admissible claim for Damage under Material Damage Policy/Section as also excluded cause of ‘Cessation of Work’ will prevent claimant from establishing claim under Business Interruption Policy/Section.
In the current situation Reinsurers and Insurers have excluded any kind of loss for Communicable diseases by express warranties but over a period consideration of such peril may become reality for policies like Interruption cover for business & supply chains, surety & credit Insurance, Contingency cover for Event cancellations, travel related insurance, health policies, workers compensation insurance, employers’ liability insurance, Life and retirement savings insurance etc. Insurers and Reinsurers have shown their capability to accept many challenging situations and they will surely come forward to meet this kind of challenges also. They will be well prepared with current experience and data.
To overcome constrain of concept of ‘Admissible claim for physical Damage under Material Damage Policy/Section of LOP and IAR policies, cover for Pandemic induced Business Interruption can be provided by modification of policy wordings and/or by a special proviso.
