The problem with business interruption insurance

By Vanessa Chance

Business interruption (BI) insurance has a big reputational problem right now. Brokers will tell you that it has never been an easy product to sell as many people simply don’t understand it. If you have a shop, you can see and touch the physical building, the stock and cash; all of which need to be insured. You can see the people working in the shop and the people coming into the shop, and by law you must have public liability and employer liability insurances for both respectively. But you can’t see or touch a scenario when the shop isn’t able to trade and what would be insured then.

BI cover was explained to me in terms of a pub that had a flood on the morning of 31 December, traditionally the pub’s busiest night of the year. The pub owner needed insurance to pay for the flood damage repairs to the building and stock; but the real cost was the loss of income on the last night of the year that people want to party on. BI cover is an add-on and is not automatically included in commercial insurance policies, so has to be sold to clients. It also relies on an insurable event taking place to trigger the cover. So with the pub example, if there is no insurance in place for the flood, there is no cover for the subsequent closure. You also need to have kept your books up-to-date to show how much you made last New Year’s Eve and the ones before, to prove how much income you would have lost out on by not opening that night.

In March last year thousands of businesses were forced to close temporarily because of the pandemic and we had a worldwide example of the need for BI cover. Almost a year later, we have seen many casualties of the High Street and sadly, many businesses will not re-open on the other side.

For those that had BI cover, many had their claims rejected. Insurance is a contract and all policies have clauses to ensure that the cover is not abused. Frustratingly, many policies had no mechanism for insurers to pay out at the beginning. While the government initially refrained from ordering businesses to close, it did forbid their customers from leaving home. This meant there was no mandatory closure and therefore no cover. Even when this changed, many policies had exclusions, which meant that business owners had no cover for closing in the pandemic and no way of recovering their losses.

In the year that has followed, there has been a class action lawsuit, an appeal, a High Court judgement and further appeals, until finally last week the Supreme Court ruled that insurers must pay these claims. This is a great outcome for business owners and one that will hopefully help more to survive but is a blow to the insurers who not only have to pay the claims but have now damaged their reputation in the process.

Unfortunately, this whole business will have wider consequences for the insurance industry as a whole. People love to say insurers never pay out and will find every excuse to deny a claim. I know that this is not true but for many looking at so many businesses closing down, this will have confirmed their opinion. Insurance has never been an easy sell but it feels like it just got a lot harder.

So what can insurers do to restore their reputation in 2021?

Working for an organisation that specialises in managing reputations, we always advise clients that how you act in a crisis is how you will be remembered. There have been some great examples of insurers doing the right thing. We have seen car insurers proactively refunding motorists who have stayed at home and we have seen travel insurers developing new products to cover Covid to protect future holidays.  In the commercial space, these examples are harder to find as they are not often publicised but I know that my loss adjuster client is working wonders for the travel industry to help manage grounded planes so that they are ready to take to the skies on the other side. 

There is no denying that insurance is a grudge purchase for both consumers and businesses, but those that step up to help their clients in this difficult time can make their brand stand out. In the personal lines space, insurers can go directly to clients to show what differentiates them from the rest. With commercial lines, this means working with the intermediary community to communicate what support they can offer businesses and also educating clients on BI cover.

Insurers may have lost in this latest judgement when it comes to the Covid BI claims, but those that settle claims quickly and move forward will be the brand winners.