The quarantine restrictions imposed on companies following the coronavirus pandemic outbreak back in March 2020 have been a major blow to business enterprises all around the world. However, the solid state support for business in Europe and the US (e.g. £27 billion invested for business support in the UK, €50 billion subsidies in Germany for small and medium enterprises and self-employed individuals) is in striking contrast to the Law 1071-IX that applies to Ukrainian companies - and that is a subject to well-founded critique because of the incompatibility of the minimum compensation under this law with the costs incurred by the companies, estimated at billions of hryvnias.
In addition to state support, a special form of insurance, known as business interruption insurance, is also available in the Western Europe, which has no equivalent in Ukraine so far.
What is BI?
Business interruption insurance is a type of insurance which provides for compensation for losses incurred as a result of involuntary interruption of business activities, in particular, interruption in the activity of an insured company as a result of restrictions imposed by the state, which do not allow the insured company to gain access to the place where business activity is conducted. One such case is the suspension of business activity by means of quarantine restrictions as a result of the Covid-19 epidemic.
However, if the issue of compensating damages resulting from business interruption as a result of quarantine restrictions imposed as a consequence of the Covid-19 epidemic was a questionable one in 2020 (e.g. in March - April of 2020 the restaurant business owners, concert organizers and entertainment center tenants in the EU and the US encountered massive refusals of insurance companies to compensate damages due to the fact that the insurance policies did not consist of indication as to the damages incurred by which particular virus are covered), in 2021 the Financial Conduct Authority v Arch Insurance Ltd and Others (2021), a recent decision of the UK Supreme Court, reversed this trend.
The FCA v Arch Insurance Ltd and Others (otherwise known as the FCA business interruption test case, which examined the key disputable points of business interruption insurance) involved a number of insured business enterprises taking legal action by filing a claim against a group of leading UK insurance companies to demand compensation for damages. A number of contracts with these insurance companies included cases of business insurance during an involuntary interruption of business activities, in particular, cases of infectious diseases or illnesses, the spread of which has caused an involuntary interruption of business activities ("disease monition") and restriction of access and closure of businesses ("access monition"). The questionable nature of such provisions was that, in some cases, insurers paid the claims under such contracts, while in others insured companies had to challenge the actions of the former who refused to pay the insurance compensation. The insurers claimed that the insured companies would have incurred similar losses from the business interruption, even if there had been no insured risk, hence there was no basis for reimbursement of the losses as it could not be proven that the losses had been caused by the spread of Covid-19 and the corresponding restrictions on the companies' work.
As the claim was satisfied only partially and the key points were not clear to both parties, and because of the exceptional significance of the case, the claimants filed a leapfrog appeal directly to the Supreme Court.
The Supreme Court ruled that the majority of insurers had no grounds to refuse to pay compensation to the insured companies, for in any event the losses were the result of the pandemic and it was the pandemic and the response of the government in the form of the corresponding restrictions that caused the losses from the interruption of the companies' business activity. The court noted that most of the provisions relating to insurance coverage for the involuntary interruption in business activities caused by the spread of infectious diseases (12 types of insurance contracts from a selection of 21), provide for mandatory payment of compensation in case of quarantine restrictions for business under Covid-19.
This decision has proved successful for UK insured companies as, by becoming a binding precedent, it has made it unnecessary for insured companies to settle many disputes with their insurers in court and has greatly increased the chances of obtaining a business interruption insurance payout.
The ruling in this case was equally effective for the insurers and insured companies: for the former, the court's findings provided clarity as to what constitutes an exclusion from insurance coverage and how the provisions of insurance contracts should be written concerning an involuntary interruption in business activities caused by the spread of infectious diseases; for the latter this decision gave the green light for fair claims for insurance compensation to quarantine-affected companies.
Summary
In the light of the continuous quarantine restrictions, the risk of incurring new losses due to an involuntary business interruption, continues to be the sword of Damocles hanging above Ukrainian companies and business insurance in the context of involuntary business interruption is in high demand.
Unfortunately, such an insurance programme is not yet envisaged in Ukraine and the Ukrainian Law on Social Support for Insured Persons and Entities during the Period of Restrictive Quarantine Measures, implemented with the purpose of prevention of spreading on the territory of Ukraine of severe respiratory disease COVID-19, caused by coronavirus SARS-CoV-2 provides for a one-time only material aid to business entities, which is not proportional to the costs incurred.
Therefore, Ukrainian insurers and Ukrainian companies should probably draw their attention to the Western business interruption insurance during the involuntary interruption of business activities, as it can serve as an effective method of covering imminent losses incurred as a result of quarantine restrictions.
Author: Anna Shvetsova, Junior Associate