Connecting Insurance and BCM ... A legal perspective

Insurance, Professional Indemnity and Pensions: In Case of Emergency

Recent natural and man-made disasters are a chilling reminder that no business is immune from unforeseen circumstances.

Sound business managers plan to mitigate against such risks, says Sarah Turpin The past decade has witnessed severe flooding in parts of the UK, devastating hurricanes in the US, the 9/11 terrorist attacks on New York and Washington DC, the 7/7 terrorist attacks in London and countless other disasters such as the Buncefield oil depot explosion.

The ways in which business processes can be interrupted seem to multiply every year. Recent disasters, both domestic and international, are timely reminders of the significant risks faced by any business in the event that they are involved, directly or indirectly, in a natural or man-made disaster. The 7/7 terrorist attacks prompted many businesses, particularly those based in London and other major cities, to review their business continuity plans.

Most businesses have been reviewing those plans afresh in the light of the furore about avian flu, which the Government regards as the highest risk currently faced by the UK. The potential for significant disruption to business is obvious, with some observers suggesting that 25% or more of the world's population could become infected in the event of a pandemic. This would impose severe strains on staffing levels that are likely to be exacerbated by disruption to travel, school closures and illness of other family members.

Any business which has not yet put contingency plans into action may be exposed, not only to the significant disruption that can result from these types of risk, but to potential claims of mismanagement. Some regard another terrorist attack on a major European city so likely that it would be negligent of business managers not to put in place appropriate business continuity planning.

In the face of these threats, many businesses are asking to what extent their business interruption (BI) insurance provides protection against these and other risks faced by their business. What is business interruption cover? The general purpose of BI cover is to protect against the economic losses arising from an inability to continue normal business operations. BI cover is normally combined with commercial property insurance, although separate BI policies are now available.

Commercial property insurance provides, at its most basic level, cover for loss and damage to the business premises. However, it does not cover the economic losses arising from a catastrophic event, which may extend far beyond the costs associated with repairing or replacing a damaged building. In some cases, the loss of business revenue and associated increased business expenses resulting from the property damage may be more financially significant to a business than the physical damage itself. BI cover may prove invaluable by providing the business with protection against these types of loss, but the cover does vary and policyholders need to check the wording of their policies to ensure that their cover takes account of the particular risks faced by their business. The scope of the cover available will ultimately depend upon the precise language of the policy wording.

Commercial property cover used to be written on a named peril basis; such cover was only available if damage was caused by one of the perils named in the policy, such as fire, explosion, lightening, storm or flood. Most policies are now written on an all risks basis, which means that they cover all risks unless specifically excluded in the policy. It is therefore essential to establish precisely what risks are excluded and whether there are any carveouts from the exclusion. For example, many policies specifically exclude "pollution or contamination" (except where the pollution or contamination itself results from an insured peril) and "war and terrorism", although extended cover should be available for terrorist risks.

Requirement of physical damage

It is important to bear in mind that BI cover (when combined with property insurance) will normally only be triggered in the event of physical damage to the insured property. In other words, the interruption must result from the physical damage to the business premises which is insured under the policy. This makes sense in the context of certain businesses, such as a manufacturer whose turnover depends on the output of its factory and where the factory premises is damaged by fire or flood. In these types of cases, the physical damage will be easily visible and is unlikely to be a cause for dispute. There may, however, be circumstances where the requirement for physical damage could prove problematic.

Following the 9/11 terrorist attacks on the World Trade Centre, some policyholders whose property had escaped direct damage but whose business was affected relied on the presence of noxious particles in the interior of their property to establish the requisite physical damage in order to trigger coverage.

This may, however, be difficult to demonstrate in certain circumstances. An outbreak of avian flu at the premises, despite causing significant disruption to the business, might be disputed by insurers on the basis that it does not involve any such physical damage to the insured property. It is therefore important to consider whether any extensions to the BI cover are available where there is no requirement for any physical damage to the insured property. Infectious disease Extended cover may be available for business interruption resulting from "infectious disease, murder or vermin". Infectious disease is usually restricted to any "notifiable human infectious disease". In itself, this may not prove problematic in the event of a flu pandemic, given that any human contagious variant of avian flu would no doubt be formally categorised as notifiable.

There are, however, likely to be further restrictions included in any infectious disease extension. For example, the clause may specify that the disease has to manifest itself at the premises and result in the closure of the premises by order from a competent authority. The difficulty with this is that it remains questionable to what extent any outbreak will result in the closure of business premises, given that the Government's current objective is to maintain business continuity and reduce disruption to society as far as possible. This type of extension, even if taken out by the policyholder, may therefore prove to be of limited benefit in the context of the flu pandemic scenario. Some policies based on older wordings may have fewer restrictions in their infectious disease extensions, but insurers will no doubt be imposing greater restrictions in future.

Denial of access

Some policies offer extended cover for business interruptions resulting from "denial of access" to the insured premises. Denial of access cover is usually triggered where access to the insured premises is prevented as a result of physical damage to nearby premises. This type of cover could prove invaluable in the event of another terrorist attack (assuming terrorism cover has been taken out) but the precise wording of any denial of access clause may be crucial.

The protection offered by such policy extensions does vary and there are likely to be geographical and time restrictions which require careful consideration. Some policies restrict denial of access cover to circumstances where access is prohibited as a result of physical damage to adjacent premises. The use of the term "adjacent premises" could present difficulties. What if bomb damage to property at the other end of the street results in the entire street being cordoned off? What if there is no damage to premises as such? The 7/7 terrorist attacks demonstrated the scope for severe disruption resulting from bomb attacks on the public transport system but, if the denial of access cover specifically requires physical damage to adjacent premises, there may be scope for insurers to dispute cover.

Careful consideration needs to be given to how such risks might impact on the business premises, taking account of its geographical location and its proximity to potential targets, such as underground stations, government offices, state buildings, monuments and so on. Some policies do provide rather more extensive denial of access cover where access is denied, not only as a result of damage to nearby premises, but as a result of any action or advice of government, police or local authority. This could prove beneficial in the event of a bird flu pandemic, for example, if an outbreak in particular parts of the country resulted in the Government imposing a quarantine in certain areas.

However, it remains questionable whether the authorities would go as far as this. There may also be further restrictions in the cover provided by this type of extension. For example, cover may be restricted to situations where the order prohibiting access to the property is due to an emergency which could endanger life or property. This might cover certain situations' such as where access is denied as a result of a hostage situation at nearby premises, but in other circumstances could prove overly restrictive. Extensions to cover There are further extensions to BI cover which policy-holders may want to consider depending on the nature of the business. One example would be interruptions caused by physical damage to suppliers or customers business premises, or by failure of public utilities, such as the supply of electricity, gas or water, which mean that the business is no longer operational. It is worth giving some thought to particular risk scenarios and revisiting your BI cover with these risks in mind. There is a wide variety of ways in which a policyholder's business may be interrupted, and these will vary depending on the nature of the business.

Businesses which rely heavily on computer processes and are therefore vulnerable to so-called 'cyber-risks' such as computer viruses, hackers and software failure, may wish to consider taking out specific BI cover. The precise wording of the BI cover and any relevant exclusions are not the only provisions likely to dictate whether a particular claim is covered.

The policy conditions require equal attention to detail. It is beyond the scope of this article to consider all of these issues, but it is worth bearing in mind that the BI policy will normally include detailed provisions regarding such matters as claims notification, proof of loss and loss calculation. The policyholder will need to demonstrate that, but for the suspension of operations, it would have earned a certain income during the period of interruption.

Needless to say, the quantum of BI claims gives significant scope for dispute with insurers. The outcome of major catastrophes may take many years to resolve. There are steps which businesses can and should take to minimise the impact of such disasters, both in terms of business continuity planning and the acquisition of BI cover. The nature and extent of BI cover does vary, however, and it is important to review the wording to establish how the cover is likely to respond in practice. Many insurers now rely on standard policy wordings, but the fact that they are described as ‘standard’ does not mean that they are not negotiable. Policyholders should take a proactive approach to their insurance and seek to negotiate improvements where required. Seemingly minor variations in the wording can have a significant impact on the cover available.

Sarah Turpin is an associate at Kirkpatrick & Lockhart Nicholson Graham.

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