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Author - Advocate Rashi Suri (Managing Partner), Pradyun Chakravarty (Associate)

The manifold rise in Covid-19 positive cases and an early and decisive step by the Central Government along with some states like Haryana to instill national and territorial lockdowns have helped much in the containment of the spread of this highly virulent type of disease, but the collateral damage from the pandemic itself and the slew of government actions, have an exacerbated effect on a business’ sustenance, viability and profitability. The businesses are continually facing numerous operational constraints and inability to perform contractual obligations which is resulting in severe disruptions and temporary close down even. It is unlikely that businesses would come out of this crisis totally unscathed and un-affected. However, there are numerous measures that can be taken by a business to control its damages and depleting resources, one such measure is to get a Business Interruption Insurance.

You can also refer to our previous article wherein we have discussed the rights and duties along with the various options available for a Lessor and Lessee in a commercial lease agreement.  

What is meant by a Business Interruption Insurance?

Simply put, a Business Interruption Insurance (“BI insurance”) is a type of insurance that underwrites the loss of income of a business on account of certain pre-stated disaster(s). The BI insurance essentially indemnifies a business’ income loss, the loss of profits, the costs borne for salaries, rents and other operational charges which accrues to a business but which, may be due to disaster-related closing of the business facility or due to the rebuilding process after the disaster, the business is unable to furnish such costs and operational charges. 

A BI insurance is also different from other insurances like fire insurance, plant & machinery insurances which only covers the losses borne due to the physical damage to a business’ tangible assets, a BI insurance on the other hand provides an additional cover and indemnifies those losses that is caused to the business when the business is unable to function or operate due to the disaster’s ensuing effect such as the above stated temporary close down. 

Business Interruption Insurance: Cases in point

India

A BI insurance in India can be taken by simultaneously and conjointly subscribing to a fire insurance or a property coverage insurance which will thereby indemnify both the property damage caused due to the fire (or flood or earthquake etc.) and the resultant operational interruption of a business.

Accordingly, for a business to get a protection and indemnity in the current circumstances of Covid-19 related lockdown and disruption, it will be necessary to show the property insured has suffered some physical damage due to the pre-insured peril of fire or like disasters and therefore, Covid-19 related business interruption and losses therefrom are not qualified to be covered and indemnified under such insurance policies.

USA

In the USA, there has been reassuring interpretation in the favour of the insured businesses, whereby the courts there have held that if an emergent condition has made a property uninhabitable or has deprived the insured the use of the property then such a condition would be construed as a physical loss or damage to the insured property.

Application and interpretation of Business Interruption Insurance in India

• Compared to the businesses in USA, the cover to the insured businesses have been granted only for the circumstances where the disease has in itself caused the situation of inhabitability of the insured premises, which has thereafter resulted in the business interruption and losses therefrom. In India, in addition to not having a similar interpretation for business interruption, the business interruption and losses in itself has not been caused from the Covid-19 disease per se, but by the consequent containment strategy of lockdowns and restriction in movements which ensued post outbreak of the virus. 
• Further, the Supreme Court of India in various decisions while interpreting the insurance contracts has held that only the terms of the insurance policy will govern the contract between the parties¹. The Court in one such case² while interpreting insurance contracts has stated that the court must interpret the words in which the contract is expressed by the parties because it is not for the court to make a new contract, however reasonable, if the parties have not made it themselves. 
• It can be deduced therefore that the operational losses which are suffered by a business will be only paid by an insurer when the provisions of the respective insurance policy expressly provides for that but not otherwise. 
• The consumer forums and courts in India, while adjudicating such a matter and owing to legal precedents, cannot rewrite or interpret the contents of an insurance contract to mean something which was not originally agreed or even intended upon. The court will simply apply the terms and conditions of the agreement on an ‘as is’ basis which was agreed to by the parties at the time of entering of the contract.

The multifarious challenges posed by Covid-19 are new and unique and as these are un-precedented circumstances, it is to be seen whether the Hon’ble Supreme Court gives an expansion of scope to the insurance contracts by providing an enabling interpretation in favour of the insured businesses or continues with the literal interpretation of such contracts which would go in the favour of the insurers.

[1] Shree Ambica Medical Stores and Ors. vs. The Surat People’s Co-operative Bank Limited and Ors. (2020) 

[2] General Assurance Society Ltd. v. Chandumull Jain (1966)