20 April 2020 — The COVID-19 outbreak has severely affected almost all companies in Bulgaria. While some have been directly impacted by coronavirus infection (e.g., employees becoming sick), the majority have been affected by the measures imposed by the Bulgarian government against the pandemic that have interrupted their business operations. To cover financial losses from such business interruption, many companies intend to bring insurance claims under their property insurance policies. A business interruption claim based on a pandemic, however, is quite unique on the Bulgarian market and will trigger unexpected practical aspects that should be carefully considered by both policyholders and insurers.

Business interruption claims under property insurance

Property insurance is designed to compensate the policyholder for physical damage or loss to the insured property caused by an insured risk, e.g., fire, lightning, explosion, pollution, etc. If the insured risk occurs, the insurance policy entitles the policyholder to receive compensation from the insurer for the full replacement value of the insured property if it is destroyed or irreparably damaged, or the costs to repair it if it is partially damaged. Some property insurance policies may also contain business interruption coverage. In such case, if the insured risk occurs and the business activity of the policyholder at the insured property (e.g., production plant, shop, workshop, office, restaurant, cafe, commercial centre, etc.) is interrupted, the policyholder could be entitled to claim compensation for lost income and incurred expenses (e.g., preservation costs) for the period of interruption.

Possibilities for insurance coverage for COVID-19 business interruption

Many companies in Bulgaria have been forced to close down their business operations temporarily as a result of the COVID-19 outbreak and containment measures imposed by the Bulgarian government. The extent to which the financial losses caused by this business interruption can be compensated by property insurance depends on the specific language of each property insurance policy and on the unique nature of the reasons for such interruption. The following aspects related to the nature of the business interruption should be specifically considered:

  • Physical damage or loss to insured property

The policyholder under a property insurance policy with business interruption coverage will normally be entitled to compensation only if there is physical loss or damage to the insured property caused by the insured risk. At first glance, infection with the COVID-19 virus does not appear to cause any physical damage to property as it only infects people. However, it could be argued that infected customers, vendors or employees may contaminate surfaces within the business properties of the policyholder (e.g., office premises, shops, workshops, cafes, restaurants, etc.), which could render these properties generally unusable or, at least, unfit for business use for days. 

It remains unclear whether the courts will accept such contamination to be regarded as a physical damage or loss to property as required by the insurance policy, but given the unexpectedly severe economic impact of COVID-19, a non-traditional ruling cannot not be excluded.

  • Denial of access to or prevention of use of insured property

As the COVID-19 outbreak is currently quite slow in Bulgaria, it could be more relevant for the policyholder to claim insurance compensation if his access to the insured property is denied or its use is prevented by the public authorities as part of the containment measures. Public authorities can deny access to (i) the insured property (e.g., shop, customer office, hotel, etc.) or (ii) the building where the insured property is located (e.g., office building, commercial centre, residential building, etc.). At present, the Bulgarian authorities have suspended visits to certain types of properties such as leisure and playground halls, discotheques, bars, restaurants, fastfood restaurants, coffee shops and large commercial centres (except for grocery stores, pharmacies, bank offices, insurance offices and suppliers of payment services), but stricter restrictions for access and use can be expected if the pandemic in Bulgaria spreads further.

If a policyholder is denied access to or prevented from using its insured property (including as a result of acts of public authorities), its business activities are deemed to be interrupted. Certain property insurance policies specifically provide that where the denial of access to or the inability to use the insured property is caused by an insured risk, the policyholder is deemed to have sustained damages to the insured property even though there is no actual physical loss or damage to such property. However, it should be carefully assessed on a case-by-case basis whether access to the insured property has in fact been denied or if use of the property has become impossible. It remains unclear whether the suspension of visits to certain premises (e.g. shops in a commercial centre) currently imposed by the government can be regarded as denial of access or prevention of use of these premises, as only customer visit are suspended, but retailers can still access and use the premises, e.g., for online sales.

  • Supply chain interruption

In certain cases, the business of the policyholder can be interrupted if its vendors or service suppliers (e.g., electricity suppliers, suppliers of other utility services, transportation services suppliers, warehouse services suppliers, etc.) suffer physical loss or damages to their properties. Certain property insurance policies can provide compensation to the policyholder for financial losses arising in this situation if the physical loss or damages to the properties of vendors or suppliers are caused by a covered risk. To that end, these policies usually state that the physical loss or damage to the properties of the vendors or suppliers that interrupt the business activity of the policyholder at the insured property shall be deemed to be damages to the insured property itself. However, in the context of the COVID-19 outbreak, this require analysis whether the coronavirus infection caused physical loss or damages to the properties of the policyholder’s vendors or suppliers, which, as outlined above, would face certain challenges.

Specific terms and conditions of the insurance policies

In addition to the nature of the business interruption, the following specific terms and conditions of insurance policies will be relevant to determine if the financial losses incurred as a result of the interruption are coverable under the respective insurance policy:

  • Scope of insurance coverage (e.g., named risks vs all risks);
  • Exclusions (in particular potential exclusions for viruses, pandemics, contamination, etc.) 
  • Notification requirements for the policyholder;
  • Conduct required from the policyholder (e.g., observation of all sanitary and hygiene requirements; keeping of accounting records and documents evidencing revenues and expenses; undertaking measures to mitigate damages; provision of information and explanation to the insurer on the nature and causes of the business interruption; etc.).

In any case, each situation is different. The question whether and to what extent coronavirus losses are coverable by property insurance will depend not only on the terms and conditions of the specific policies, but also on all relevant facts and circumstances, including the nature of the interruption and the actual conduct of the policyholders and the insurers prior to, during and after the occurrence of business interruption. This will require each party to develop a strategy how it will approach the situation and to adhere rigorously to such strategy.

For further questions and assistance on the above topic, please contact Atanas Mihaylov, Managing Associate at Kinstellar Bulgaria, at [email protected]