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. 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.
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?
Let us consider Business Interruption
What might be covered?
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. 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.
What are the difficulties?
The first challenge to establishing a BI claim is the trigger for coverage. In a property policy, BI cover will usually only be triggered where covered property damage has occurred. 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. In some cases, express Infectious Disease cover may be provided. 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.
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.
Some policies provide cover for losses caused by any ‘notifiable’ 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. 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. First, losses suffered before the date on which the disease became notifiable were not covered. The decision of a competent authority to make the disease notifiable did not act retrospectively. 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. To the extent that the business’s 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.
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. The wording of any policy will therefore need to be checked carefully to establish which date acts as an effective trigger for BI cover. 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.
Even where broad coverage for notifiable diseases is provided, policies frequently include an express list of excluded diseases. 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 ‘or any mutant variant thereof.’ We have already seen some suggestion that losses from COVID-19 are excluded as a mutant variant of ‘SARS or atypical pneumonia’ (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.
Conversely, some policies provide cover for a specified list of infectious diseases, rather than any notifiable disease. 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 ‘variant’ language is used, as in the case of excluded diseases.
Even where cover for BI losses is established, there will inevitably then be disputes over causation and measurement of loss. 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. 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.
We can therefore anticipate ‘wide area damage’ type arguments being raised by insurers, relying on the principle in the Orient Express 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.
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.
My thanks to Aaron Le Marquer: Fenchurch Law