Expert View: Don't lose out on loss
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The global downturn has had many significant effects on the way companies do business. One change that has arisen is that companies are now showing greater levels of awareness of the risks they face, and as a result, there has been a greater demand for insurance. A particular type of insurance that is attracting attention is business interruption insurance.
This covers loss of income caused by disruption to a business after an unforeseen disaster, such as a fire or flood. For instance, if a shop premises was destroyed by a flood, the buildings and contents insurance might pay out to cover the costs of repairing the premises and replacing stock. But, without business interruption insurance, it would not cover the revenue lost by the company while the rebuilding was taking place.
However, businesses need to be aware that interruption insurance cannot always be relied upon, as illustrated in a recent High Court case, Orient Express Hotels v Assicurazioni General S.p.A. The case was brought by a New Orleans hotel owner whose premises were damaged by hurricanes Katrina and Rita in the autumn of 2005. The hurricanes also brought the city of New Orleans to a standstill.
The Court considered that the hotel's business would have been interrupted in any event as a result of the widespread damage to New Orleans. It therefore concluded that on a proper interpretation of the hotel owner's business interruption policy - which included a typical clause requiring loss to have been caused by damage to physical property - there was no insurance cover. The decision is considered controversial and is due to be appealed.
It seems that business interruption insurance, in its standard form, may provide more limited cover than insured businesses may at first think. When the Icelandic volcano Eyjafjallajökull erupted last year, leading to the closing of international airspace, many businesses may have thought their business interruption insurance would pay out for associated losses. But a standard business interruption policy will only respond to economic losses which flow from physical damage to the insured property. Companies suffering from loss caused by a widespread catastrophe cannot always point to physical damage to their property. A pure loss of revenue created by the grounding of air freight or the inability of employees and customers to travel does not satisfy this requirement.
However, the insurance industry is likely to develop products which are more tailored to respond to the type of operational risks faced by businesses demonstrated by the Eyjafjallajökull eruption, which reportedly costed BAA an estimated £6m a day. Surely, the demand for this kind of insurance can only increase.
Emily Lew is a litigation associate at Herbert Smith LLP