Clearer future for BI cover after pandemic turmoil despite ongoing claims, says GILC report

There is now more clarity for both businesses and insurers around what can be expected from a business interruption policy, according to a report from Global Insurance Law Connect (GILC). This is despite the backdrop of high inflation, increased scrutiny on wordings and higher premiums.

The GILC Business Interruption Report says that since the outbreak of the pandemic there has been a noticeable growth in demand for BI coverage globally. However, it notes that insurers have become more cautious about the risks they are willing to take on.

Giorgio Grasso, partner at BTG Legal in Italy, comments in the report: “There is more demand for BI cover. Economic trends mean that companies have wider and more vulnerable supply chains than ever before, which leaves them open to interruptions in new and more complex ways, but carriers seem to be cautious about extending their capacity.”

The report states that nearly all of GILC’s members from 19 countries highlighted that there will be increased scrutiny of BI policy wordings by insurers and insureds going forward.

“Insurers have strengthened their insurance policies on renewal or new policies in terms of operating losses by multiplying the exclusion clauses, or by formulating more specific coverage clauses,” it states.

Robert Byrd, partner at Byrd & Associates in France, said: “Insured companies have noted an unprecedented hardening of negotiations with insurers. Insurers have tended to increase premia, add exclusions and limit their coverage. Thus, pandemics, as well as cyber risks, are frequently now excluded from multiline insurance policies. In addition, some companies bound by old policies have been required to sign endorsements to exclude coverage for pandemic-related risks for future losses.”

Justus Könkkölä, partner at Socrates in Finland, added: “In Finland, similarly, BI cover is still available but some insurers have sharpened their terms and conditions to clearly exclude pandemic-related interruptions and non-local circumstances.”

As for claims, the report finds that there is little consensus globally as to whether claims for business interruption should be paid by insurers.

Currently, the number claims paid out across the world remains relatively low, the report explains, largely as a result of insurers contesting payouts. This is leading to litigation, especially in Australia, the UK, US, France and Spain. In some other markets, including Brazil, Denmark and Italy, insurers and policyholders largely accepted that business interruption due to Covid-19 or lockdowns were not covered under standard policies, with no claims or judicial disputes as yet.

However, the report says that the upside for insurers to the negative press generated by some claims is that they have made many businesses “newly aware of the need for the right BI cover”.

“In some markets, double-digit growth is expected in the year ahead, and in many places it seems that BI insurance could see a period of growth and stability (particularly in more traditional areas of coverage) as the market embraces a new wave of covid-responsive policies that either clearly exclude or include pandemic cover,” it adds.

Gillian Davidson, GILC’s chair and a partner at Sparke Helmore, said: “Business interruption insurance was thrust into the spotlight as the pandemic took hold and the world went into lockdown. The report highlights that even though businesses globally were facing similar challenges, the response from the insurance industry, governments and regulators varied markedly in each jurisdiction. However, a consistent picture is that globally, demand for business interruption has increased as businesses have become focused on the need to have the right type of cover.”

She added: “Despite some short-term pressures on pricing caused by global inflation, a recent wave of cases in Asia (including a potential new variant in China), and ongoing legal challenges hanging over from the pandemic, the outlook for business interruption insurance as a class is more positive than it has been for some years. The pandemic has focused the market on the need for clarity in policy drafting and has led to a proliferation of covid-responsive policies that either clearly exclude or include pandemic cover, providing more certainty for insurers globally, and their clients.”

Looking ahead, the report says there is a nascent market for BI in some countries, such as Brazil and China, and there is growing awareness of the product thanks to the pandemic. Brazil is expecting growth of 6.6% to 14.9% for the sector in 2023, according to data from the National Confederation of Insurance Companies.

João Marcelo dos Santos, partner at Santos Bevilaqua Advogados in Brazil, said: “Considering the low claims ratio in the sector, an increase in demand is to be expected, in line with better market conditions and new players entering in this market. The offering of a more diverse range of BI policies and coverages is also expected because of new product rules that opened up the development of tailor-made large risks policies by the insurers since 2020.”

The report concludes: “Businesses and insurers have spent the last two years looking at how to recoup the losses they have experienced. Business interruption insurance has been the front line of that battle globally, with legal challenge and debate on both sides. However, as 2023 unfolds, it is possible that we may turn a corner and both parties will find a way to leave behind the disputes of the past and move to a brighter future for this much-troubled class of insurance.”