As the spread of COVID-19 gathers pace, there is increasing concern over not just the potential public health impact, but the financial consequences anticipated by businesses within all sectors.\u00a0 Containment measures implemented by public authorities will hopefully manage the spread of the disease effectively and minimise the physical impact on public health, but may themselves lead to substantial economic losses across the economy.<\/p>\n
Most businesses will have comprehensive insurance programs in place, but where should policyholders look for coverage of anticipated losses associated with the spread of the Coronavirus?<\/p>\n
The first in this two-part series looks at the two primary policies which may respond to economic losses caused directly or indirectly by the COVID-19 virus \u2013 Business Interruption and Event Cancellation.<\/p>\n
BUSINESS INTERRUPTION<\/strong><\/p>\n What might be covered?<\/em><\/p>\n Business Interruption cover for loss of profits and increased costs of working was traditionally attached to property insurance only, but can now be found in a variety of commercial policies.\u00a0 This will be a primary focus for businesses facing a reduction in income and increase in costs as they try to cope with containment measures in the first instance and, in the event of the escalation of a pandemic, potentially severe supply chain disruption and the mass absence of employees and customers.<\/p>\n What are the difficulties?<\/em><\/p>\n Coverage Trigger<\/strong><\/p>\n The first challenge to establishing a BI claim is the trigger for coverage.\u00a0 In a property policy, BI cover will usually only be triggered where covered property damage has occurred.\u00a0 That is unlikely to be relevant in the present circumstances, so policyholders will need to examine any extensions available, or the existence of standalone contingent BI cover. \u00a0In some cases, express Infectious Disease cover may be provided.\u00a0 If not, other extensions, for example suppliers and customers, denial of access and loss of attraction covers may all be relevant, but the availability of cover will be entirely dependent on an analysis of the factual cause of the loss in the context of the specific wording.<\/p>\n Those policyholders with an express Infectious Disease cover or extension might appear to be well-protected, but the scope of cover tends to be very tightly drafted and may not extend to novel pathogens such as the coronavirus.<\/p>\n Notifiable Diseases<\/strong><\/p>\n Some policies provide cover for losses caused by any \u2018notifiable\u2019 disease, which may give rise to difficulties in the case of a novel disease that does not become notifiable until some way in to the period of loss.\u00a0\u00a0 A decision of the Hong Kong Court of Appeal in the aftermath of the SARS pandemic established that such a clause had the result of reducing the amount of loss covered in two ways.\u00a0 First, losses suffered before the date on which the disease became notifiable were not covered.\u00a0 The decision of a competent authority to make the disease notifiable did not act retrospectively.\u00a0 Secondly, the starting point for establishing the amount of profit lost was the period after the advent of the disease, but before the disease became notifiable, not the period before the first incidence of the disease.\u00a0 To the extent that the business\u2019s profitability has already suffered before the disease becomes notifiable, this will therefore affect the amount the business is able to claim as loss of profit going forward.<\/p>\n COVID-19 became notifiable in Scotland on 22 February 2020, and in Northern Ireland on 29 February 2020, whilst in England the authorities only took the decision to make it notifiable on 5 March 2020.\u00a0 The wording of any policy will therefore need to be checked carefully to establish which date acts as an effective trigger for BI cover.\u00a0 If multiple triggers apply, calculating the amount of covered loss will be complex and no doubt contentious, given the staggered approach in different regions of the country.<\/p>\n Excluded Diseases<\/strong><\/p>\n Even where broad coverage for notifiable diseases is provided, policies frequently include an express list of excluded diseases.\u00a0 Whilst this is unlikely to include any reference to Coronavirus or COVID-19 specifically (unless issued very recently), it may include catch-all language such as \u2018or any mutant variant thereof.\u2019\u00a0 We have already seen some suggestion that losses from COVID-19 are excluded as a mutant variant of \u2018SARS or atypical pneumonia\u2019 (which was itself a form of coronavirus) and the medical definition or categorization of the disease will no doubt give rise to disputes over coverage.<\/p>\n Specified Diseases<\/strong><\/p>\n Conversely, some policies provide cover for a specified list of infectious diseases, rather than any notifiable disease.\u00a0 Such policies are unlikely to provide coverage from Coronavirus losses, unless it can be established, as a matter of scientific or medical fact, that the COVID-19 virus does fall within the list of defined diseases where \u2018variant\u2019 language is used, as in the case of excluded diseases.<\/p>\n Causation<\/strong><\/p>\n Even where cover for BI losses is established, there will inevitably then be disputes over causation and measurement of loss.\u00a0 Where a business elects to implement or follow certain measures for the protection of its employees or customers, the position will be different from that where it is following mandatory orders from a public authority.\u00a0 Even where a business is forced to close or scale down its operations, there will be arguments over to what extent the losses are caused by the immediate effects on the business, rather than the effects on the wider marketplace and the absence of customers.<\/p>\n We can therefore anticipate \u2018wide area damage\u2019 type arguments being raised by insurers, relying on the principle in the Orient Express<\/em> case, where a hotel in New Orleans was prevented from recovering its lost profits following Hurricane Katrina, on the basis that damage to the wider area meant that even if the hotel had been able to continue operating, it would have had no custom anyway.<\/p>\n The insuring clause, formula and any trends clause will need to be examined very carefully in order to understand whether such principles have any application to a claim for BI losses in the aftermath of a COVID-19 outbreak.<\/p>\n EVENT CANCELLATION<\/strong><\/p>\n What might be covered?<\/em><\/p>\n Where business interruption cover is unavailable, or inadequate to meet losses suffered, policyholders in certain industries may be able to turn to event cancellation policies to protect them for some of the same losses.\u00a0 These policies cover losses caused directly by the cancellation of a specific event as a result of one of a list of specified perils (or alternatively by any cause not expressly excluded), and where triggered are intended to compensate the business for its lost profits and increased costs as the result of the cancellation.<\/p>\n Event cancellation policies provide coverage for a wide variety of losses suffered by the organiser of the event following cancellation.\u00a0 Cover is not provided for the losses of attendees of cancelled events, who will need to rely on the terms and conditions of the relevant ticketing, travel and accommodation providers, as well as any applicable statutory provisions, to recover their lost costs as a result of the cancellation.<\/p>\n What are the difficulties?<\/em><\/p>\n Trigger<\/strong><\/p>\n The terms of cover provided in event cancellation policies are highly bespoke and there is no standard approach.\u00a0 Some event cancellation policies may simply not provide \u2013 or may exclude – cover for cancellation caused by infectious disease.\u00a0 For those that do, the cover may only extend to an outbreak on the insured premises or within a specified radius, and may exclude pandemic circumstances.\u00a0 The reverse can also be true, in that an exclusion may only preclude cover of cancellations due to local outbreaks.\u00a0 As ever, the policy wording is determinative.<\/p>\n Mandatory or voluntary cancellation<\/strong><\/p>\n The decision to cancel an event is not taken lightly.\u00a0 Even so, insurers may argue that cancellation of an event was not \u2018necessary\u2019 or \u2018unavoidable\u2019 (depending on the specific policy wording in question) in the absence of any direction or recommendation from a competent authority. \u00a0Similarly, coverage is unlikely to be provided if a decision is taken to cancel simply because of low ticket sales caused by COVID-19 concerns.<\/p>\n