The COVID-19 pandemic and the practical impact of frequent and lengthy closure orders in 2020 and 2021 hit the hospitality industry harder than most sectors. Business interruption (BI) insurance protects businesses against financial losses suffered as a result of such a disruptive event. Most policies offer BI cover as an extension to cover for loss or damage to property. In the UK at least, the courts have resisted characterizing the presence of COVID-19 as causing such physical loss or damage. But “non-damage” BI cover has also been available (for a price), and it was the scale and volume of COVID-19 claims under such cover that caught insurers and regulators by surprise in 2020.
The COVID-19 BI “test case” pursued by the Financial Conduct Authority all the way up to the Supreme Court, as well as more recent decisions, provided policyholders with mixed comfort.
What insurance cover is still available for BI losses?
The answer is bleak.
The insurance markets take the view that a pandemic represents a fundamental, societal risk that a government should underwrite, and they have little or no appetite for non-damage cover in the pandemic (or broader disease-based) context.
Further, the hospitality sector has been particularly hard-hit. Most underwriters, with the possible exception of Allianz, are currently wary of providing any property or even liability coverage relating to pandemic risk to hotels, restaurants, pubs and bars.
How are the insurance industry and others helping to resolve this?
Hospitality trade associations are continuing to pressure the UK government into endorsing schemes similar to those developed for flood and terrorism risks.
Separately, insurance industry bodies, such as the British Insurance Brokers’ Association and Lloyd’s of London, continue to explore solutions from within the insurance markets (albeit backed by government guarantees).
The various risk-pooling mechanisms proposed include an after-the-event insurance product affording small and medium-sized enterprises in the hospitality sector and elsewhere a cash injection and recovery support, backed by a government credit risk guarantee.
Insurance brokers are also looking at accessing non-traditional forms of protection.
Research conducted by the Federation of Small Businesses’ Insurance Service indicated that should a future lockdown be declared, 75 percent of SMEs (Small and Medium Enterprises) would, in principle, be interested in purchasing set amounts of coverage delivered via a “parametric”-triggered policy. Broadly, such parametric cover protects a policyholder against the occurrence of a specific event (for example, earthquake-related risks) by paying a set amount based on the magnitude of the event as opposed to the magnitude of the loss suffered.
But such initiatives take time to develop, and at this stage, hospitality businesses are left with the distinct feeling that they are on their own.
Risk mitigation
Insurance brokers are resourceful. If a business can demonstrate that it is taking all prudent steps to mitigate the impact of pandemic or other no-damage risks of closure, then brokers may be in a position to tap at least some coverage (even with the expected exclusions, premium hikes, etc.). Evidence of contingency planning, in terms of the creation of appropriate “bubbles” among staff cohorts, the documenting and monitoring of cleaning procedures, and so forth, will be essential.
Regardless of the insurance position, however, any prudent business should identify its risk profile and implement appropriate mitigating steps.
