Recently, we have noticed the appearance of new rulings from various Courts of First Instance in cases related to the closing of small-medium businesses due to the COVID-19 pandemic. In those rulings the main facts are quite similar. Basically, the owner of an establishment or business requests the insurance company for corresponding compensation for loss of profits derived from the closure of business as a consequence of the measures duet to the state of alarm, as announced by the government through the RD 463/2020 of March 14, which implied the suspension of hotel and catering activities. It goes without saying that these decisions are far from creating a sufficient jurisprudential doctrine and do not allow us to foresee what will be the interpretation of the highest jurisdictional instances courts in this debated issue. However, this is a starting point that should not go unnoticed in the market.
The substantive matter.
The main issue at stake is whether, for the insurance coverage to exist, the loss of profits claimed is autonomous and independent from the damage coverage, or whether, on the contrary, it must be the consequence of a loss, such as a pandemic, whose material damage must necessarily be covered by the policy. Based on this argumentation, insurance companies argue that the claimed damages are not covered under this loss of profit guarantee. However, this debate has not yet been developed by most of the rulings issued by our Courts of First Instance.
One of the most recent cases is that of the judgment of the Court of First Instance of Lorca from a few days ago, which upheld the claim of an owner of a shop in the abovementioned city. The claimant due to the pandemic, had to close his business for 58 days as it was not an essential activity, which led to the consequent loss of income for his business. The insured (in this case the claimant), had contracted coverage for loss of profits, which he then claimed after the closing of his business. The Court of First Instance upheld his claim because it considered that this coverage refers in general to accidental events, which are independent of the insured’s will, and which, by preventing access to the insured establishment, forced its closure. The Court concluded that if an insurer intends to exclude from the insurance the coverage for business closure situations of viral pandemics, this should be clearly stated in the policy and the policyholder should have expressly agreed with it, since it is a limiting rights’ clause.
In another similar case upheld by Court of First Instance of Pamplona of 20 September this year, the consequences of the business interruption of a hotel and catering establishment were discussed. The insured had coverage for loss of profits, the entry into the coverage was conditioned by the fact that the claim had to be a direct consequence of a loss of damages covered by the subscribed guarantees. The ruling pointed out that the policy does not contemplate an independent insurance for loss of profits, but it is part of an insurance of a different nature, according to the terms covered in the second paragraph of article 63 of the Insurance Contract Law. The judgment therefore concludes that the loss of profit guaranteed under the policy is derived from the guarantees as established in the conditions of the policy, and the loss of profit produced by the declaration of the state of alarm cannot be included in the policy, since this risk is not covered.
Insurance coverage in the case of a viral pandemic.
The Court of First Instance No. 11 of Oviedo of November 19, 2020, examined a matter in which the policy included the coverage for losses derived from business interruption but not in the case in which the closing was due to the pandemic. As a matter of fact, the ruling established that there was no coverage under the policy, on the understanding that the clause related to the risk that the business could face only fulfills a delimiting and not a limiting function of the insured’s rights, based on the provisions of article 3 of the LCS and according to the already existing case law.
However, it is not only good news for insurance companies. For example, the judgment of the Provincial Court of Gerona of June 16, 2021, stated the business interruption due to the pandemic had to be covered. In that case the court did not analyze the coverage of the general conditions because these were not been sent to the insured and, therefore, the Court applied the particular conditions, where the coverage for business interruption was included. Hence, the Provincial Court declared that it is a covered risk, not subject to the fulfilment of any prior condition, which leads in our opinion to more uncertainty to the issue at stake.
Should the pandemic be considered as force majeure?
Finally, last July 21, the 14th Court of First Instance of Granada ruled on this issue, stating that these clauses are limiting insured´s right, entailing that a series of formal requirements at the time of underwriting the risk necessarily must be complied, pointing out furthermore that the pandemic cannot be classified as a case of force majeure, as it was foreseeable.
We cannot forget that each of these cases had very specific circumstances, wich make it difficult to draw a general conclusion, that all claims for loss of profits suffered as a consequence of businesses interruption derived from the pandemic should be covered by the insurers. But the wording of the policy itself in each specific case is a very relevant factor to take into account, and this is why we recommend that insurers undertake a detailed review of the policy to avoid future complications.
In many cases, the current situation of uncertainty leads insurers and policyholders to agree on out-of-court settlements. An example is the case of the claim for loss of profits suffered by the owner of a hairdressing establishment in San Javier (Murcia), which was examined by the Court of First Instance number 7, and which was resolved recently by means of an out-of-court settlement between the parties. “Time is money”, and this settlement is a clear proof of that.