PAGEMARKS DEFINITION FILE ERROR
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.
IN CASE OF
EMERGENCY
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
20 Legal Week 3 August 2006
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PAGEMARKS DEFINITION FILE ERROR
INSURANCE, PROFESSIONAL INDEMNITY AND PENSIONS
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 cir-
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.
IN SOME CASES, THE LOSS OF BUSINESS
Extensions to cover
There are further extensions to BI cover which policyREVENUE AND ASSOCIATED INCREASED
holders may want to consider depending on the nature
BUSINESS EXPENSES RESULTING FROM
of the business. One example would be interruptions
THE PROPERTY DAMAGE MAY BE MORE
caused by physical damage to suppliers’ or customers’
FINANCIALLY SIGNIFICANT TO A BUSINESS business premises or by failure of public utilities, such
as the supply of electricity, gas or water, which mean
THAN THE PHYSICAL DAMAGE ITSELF
that the business is no longer operational.
cumstances. 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.
Empics
Denial of access
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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.
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
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
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.
3 August 2006 Legal Week
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