Business closure due to COVID-19 could be covered by business interruption insurance

In its ruling of 29 April 2020 (Case No. 11 O 66/20), the Regional Court of Mannheim decided that damages resulting from a business closure initiated by the hotel operator himself could be covered by business interruption insurance.

In the underlying case, the hotel operator had taken out a business interruption insurance. The insurance covered the case that the competent authority closes the insured business on the basis of the Infection Protection Act (IfSG) due to notifiable diseases or pathogens. By "notifiable diseases and pathogens" the General Conditions of Insurance understood the diseases and pathogens named in §§ 6 and 7 IfSG.

The hotel operator had closed the business on the basis of his own decision without an official order having been issued against his business. After the accommodation of tourists had been prohibited by a general ruling and business travel had collapsed, the continuation of the business was no longer economically viable.  

The court came to the conclusion that the hotel operator had a claim against the insurance company under the business interruption insurance as an insured, de facto closure of the business has occurred. Although no official order has been issued against the hotel operator, the general rulings issued to combat the COVID-19 pandemic, which prohibit overnight stays for tourist purposes, as well as the fact that business trips are no longer taking place because more and more people are working from their home offices, trade fairs and major events are being cancelled and numerous businesses have been closed, act de facto like an official closure in individual cases. In the view of the court, the insurance conditions must therefore be interpreted to the effect that such indirect effects of official decisions are also covered by the insurance.

"The Chamber does not ignore the fact that the wording speaks of an officially ordered closure of the business and that the provisions of B. and H. by means of a statutory order prohibiting only tourist overnight stays, which in principle permits the continued operation of hotels for business travellers. It is undisputed that bookings of business trips in the plaintiff's hotels are currently still possible. Nevertheless, the current situation is such that this restriction of hotel operations has the effect of a de facto closure. This is due to the fact that business trips only account for a part of the overnight stays anyway and this area is admissibly restricted by the effects of the spread of the corona virus because employees were sent to the home office, trade fairs and handling were cancelled and numerous businesses were also closed. The effects of this official order therefore have implications such as the closure of a hotel in a specific individual case for disinfection or to contain a disease outbreak in that hotel alone. The sense and purpose of the regulation to cushion interruptions of operations by official measures due to the IfSG argues in favour of subsuming such de facto closures under this clause. (…)

An official order based on the Infection Protection Act is sufficient. There are no restrictions in the wording to the effect that it would have to be a specific administrative act in the individual case or that the danger would have to originate in the company itself in any case. “

In a second step, the court comes to the conclusion that the CORONA virus is "a notifiable disease and pathogen" in the sense of §§ 6 and 7 IfSG, although it is not explicitly mentioned in the IfSG. The court justifies its view by stating that the reference in the General Terms and Conditions of Insurance is a so-called dynamic reference, i.e. for the purposes of the scope of insurance it is based on the current legal status of the Infection Protection Act. §§ 6 para. 1 no. 5 and 7 para. 2 IfSG contain a general clause which, in conjunction with the CORONA statutory orders issued, means that the CORONA virus is to be regarded as a notifiable disease and pathogen within the meaning of §§ 6, 7 IfSG.

As a result, however, the Regional Court of Mannheim did not grant the hotel operator's application for reasons of civil procedure law. The judgement was issued in a so-called summary judgment. The plaintiff hotel operator demanded from the insurance company by way of a temporary injunction early payment from the business interruption insurance. As a matter of principle, courts only grant such early payment by way of a temporary injunction in the most exceptional case under the following conditions:

1. The applicant must be in a situation of existential distress which renders the payment sought so urgent that it cannot wait until an enforceable judgment on the merits is issued.  

2. The applicant must have a high degree of probability, which borders on certainty, of winning the main proceedings.

3. The applicant's interest in payment must by far outweigh the interest of the defendant, taking into account the interests of both parties.

The court was already not convinced of the asserted claim. The hotel operator apparently did not properly substantiate its potential damage. In the opinion of the court, the claimed damage exceeded the amount the hotel operator would need to avert the current existential emergency. If a benefit is already to be awarded in interim relief, then this benefit cannot be paid in full, but only to the extent necessary for survival. Ultimately, however, the decisive factor is that when weighing up the interests of the hotel operator and the insurance company, the interests of the insurance company prevail to be obliged to pay only after a legally binding conviction on the merits is issued. Further the court argued that even if a verdict in a summary proceedings was issued in favour of the applicant hotel operator, it was still not certain that the payment would be sufficient for the survival of the hotel operator, especially since it is not to be expected that the hotel operations would immediately resume as before the outbreak of COVID-19 after the restrictions have been lifted.

Conclusion

The court's concept of an officially ordered "de facto business closure" is very interesting. According to this concept, this includes not only targeted direct closures of a hotel, but also orders which have an indirect effect on hotel operations, just as a direct, targeted closure order in individual cases.

The reasons with which the court ultimately denied the claim are also interesting. The insurance company's obligation to pay benefits is rejected by the fact that this may not be sufficient to eliminate the hotel operator's existential distress. Between the lines, the court ultimately says that the insurer cannot reasonably be expected to make premature payments if the survival of the hotel operator is not assured and the operator may become insolvent after all. Should it actually turn out in the course of time that the hotel operator becomes insolvent, the insurance company may still be confronted with a claim from the business interruption insurance, however, such claim would not be asserted by the hotel operator anymore, but by the insolvency administrator.

However, before all insure holders file claims with their insurance companies, they should first check the scope of their respective business interruption/closure insurance. This can vary greatly and for example can range from specific coverage for certain natural hazards (e.g. fire or tap water damage) to unspecific force majeure events. In the latter case, the question will then arise as to whether a pandemic constitutes a force majeure event.