Understandably, businesses worldwide are looking for financial support to offset losses flowing from the restrictions governments have placed on how we can conduct business as part of global and local responses to control the spread of COVID-19.
One of the first places many may think to look is to their business interruption (BI) policy. Despite the seemingly fitting nature of the phrase “business interruption” to the current situation, BI insurance is unlikely to provide cover for COVID-19 related losses. BI policies typically provide cover for financial loss directly arising from physical damage to or loss of insured property. They are often sold as an adjunct to material damage cover or other property insurance.
While some policies may respond to the closure of a business by an authority, this is usually only in limited circumstances, for example due the escape of hazardous substances, drain defects or narrowly defined infectious diseases such as Legionnaires’ disease.
Most BI policies sold in New Zealand exclude losses caused by any animal or human disease notifiable under the Heath Act 1956 (Health Act) and the Biosecurity Act 1993.
Following the industry’s experience with SARS in the early 2000s, pandemics and notifiable / communicable diseases are considered fundamentally uninsurable due to the uncertainty of the risk and therefore the difficulty in pricing it.
In New Zealand COVID-19 became publicly notifiable under the Health Act on 30 January 2020. As such, any loss arising from business closure or other interruption due to COVID-19 is excluded from standard New Zealand BI policies.
No doubt because of the clear exclusion of human disease notifiable under the Health Act, the exclusion of losses flowing from COVID-19 has not been the subject of challenge in New Zealand.
Some insurers in the United Kingdom, however, appear to be in a more ambiguous position due to broader policy language. Several are facing class action lawsuits from insureds claiming that policies and extensions provide cover for COVID-19 losses. There has also been intervention by regulators seeking to clarify contractual ambiguity.
In the United States, the possibility has been raised of federal and state mandated payment of COVID-19 related claims (despite COVID-19 exclusions).
United Kingdom: Class Actions and Government Pressure
In the United Kingdom, businesses denied cover for COVID-19 losses have banded together to form action groups (some already have backing from litigation funders) and plan to bring proceedings against insurance providers including Hiscox, QBE, RSA and Ecclesiastical.
The basis of the threatened court action appears to centre on both the ambiguous extensions to certain BI policies and unclear infectious disease policy exclusions. One such extension for example provides cover for notifiable disease or contagion within a 25 mile radius of an insured building. Certain Hiscox policies cover damage caused by human infection or contagious disease, but there is no “occurrence” under the policy wording unless there is an incident within a one mile radius of the insured premises. Business interruption resulting from general government measures in response to a pandemic alone does not trigger the policy. Hiscox maintains this distinction is an important one and that it will not cover loss resulting from government mandated business closure in the absence of physical damage to the insured property. The law firm representing the Hiscox Action Group, however, considers the policy wording is broad and on a plain reading, can be interpreted to cover businesses interrupted by the lockdown.
As most notifiable disease extensions only cover specific diseases named in cover, cover for COVID-19 related losses is unlikely. The Association of British Insurers (ABI) has indicated, however, that where (a) the infectious diseases extension does not specify which diseases are covered, and (b) COVID-19 is present at the premises and (c) all policy conditions are met, there may be cover.
There may also be cover where an insured has purchased a ‘non-damage, denial of access’ extension. ABI has commented that while such extensions are rarely purchased, if a business is forced to close due to the presence of COVID-19 at the premises and the infectious disease cover is unspecified (or includes COVID-19) a claim under the ‘non-damage denial of access’ extension could be triggered. Precautionary business closure in the absence of COVID-19 contamination at the premises does not trigger cover under this extension.
In addition to the threatened class action claims, United Kingdom insurers are coming under increasing pressure from regulatory bodies and MPs to pay out pandemic-related claims.
The United Kingdom Financial Conduct Authority (FCA) has announced it will be seeking a declaratory judgment from the court on an urgent basis to resolve uncertainty regarding cover afforded by common policy wordings. In addition, the FCA is writing to insurers to clarify whether they intend to decline BI claims. While acknowledging that the majority of BI policies do not cover the current emergency, the FCA believes there are a number of policies where cover is clear and these claims should be settled as soon as possible.
Reinsurance to the Rescue?
Representatives of out-of-pocket insureds are calling on the government to provide backup cover to insurers in the form of capital from the Pool Reinsurance (Pool Re) pot of £6.6 billion. Seen as a way of breaking the deadlock between insurers and insureds, the Pool Re fund was formed to support insurers paying out large terrorism claims and to ensure that cover of this kind remained in the market.
As United Kingdom insurers could be waiting years for the outcome of any class action litigation and it remains to be seen what (if anything) regulatory intervention will achieve, the position in the United Kingdom is set to remain uncertain for some time.
United States: Changing the Law to Rewrite Insurance Contracts
Insurers in the United States are arguably facing the greatest uncertainty: the threat of lawsuits from disgruntled insureds, state legislators proposing to pass legislation to retroactively expand BI insurance to cover virus-related losses and calls from the President to pay out claims.
The response of insurers where policies do not have express virus exclusions has been to deny cover on the basis that BI cover is not triggered in the absence of physical damage.
Like New Zealand and United Kingdom policy wordings, many United States policies provide cover for government mandated closure albeit limited to closure due to damage to a nearby structure or the escape of fumes or drainage defects. United States insurers are insisting that ‘civil authority coverage’ (commonly referred to as ‘prevention of access’ or ‘non-damage denial of access’ in New Zealand and the United Kingdom) requires a causal connection between physical damage to property and government mandated closure to trigger cover. Further, similar to the impact of SARS on the strengthening of infectious disease exclusions, 9/11 and Hurricane Sandy resulted in tightened policy language making cover for government ordered closure contingent on physical damage to the insured premises.
Some insureds are arguing that contamination by the virus and government restrictions on business operation amount to physical damage. The key argument being pursued by insureds is that COVID-19 causes “physical damage” to the property as the virus remains on hard surfaces for close to a month, therefore triggering the insuring clause. It remains to be seen whether such arguments have any force.
Intervention at a State Level
Despite infectious disease policy exclusions and the absence of “physical damage” to insured premises, State legislators in New York, New Jersey, Ohio, Louisiana, Pennsylvania, South Carolina and Massachusetts have introduced bills retroactively requiring insurers to cover BI claims in connection with the COVID-19 pandemic. If passed into law, insurers will be obligated to provide BI cover to small businesses (businesses with 100 or fewer fulltime employees in New Jersey and Ohio and businesses with up to fulltime employees in Massachusetts) for the period of the state of emergency (backdated to the date each state declared a ‘state of emergency’).
Some state bills provide for reimbursement of insurers at a state level. In addition, the federal government is proposing that state legislation will be backstopped by the federal Pandemic Risk Insurance Act of 2020 (PRIA). If enacted, the PRIA would create a shared public and private compensation reinsurance programme for BI losses resulting from a pandemic. The PRIA would be triggered once private insurers’ losses exceed $250 million, with aggregate losses capped at $500 billion for a year. In exchange for the access to the reinsurance programme or “federal backstop”, insurers would be required to make BI cover available to all eligible businesses. The PRIA is intended to encourage private insurers to cover losses that are potentially extensive and uncertain and so difficult to price by providing certainty as to maximum financial exposure.
Possible Consequences of Intervention
Absent effective governmental reinsurance, the Chief Executive of American Property Casualty Insurance Association estimates it would cost the industry US$110 billion – US$290 billion per month to cover small businesses (100 or fewer employees) for COVID-19 BI losses and US$900 billion a month if cover was extended to businesses with up to 500 employees. The amount private insurers could be required to pay out exceeds the industry’s US$800 billion monthly surplus capital and is far larger than the US$6 billion per month in premiums collected for property lines.
Interestingly, commentators have noted that insurance broker Marsh launched a rather prophetic BI product that covered loss resulting from infectious-disease outbreak. However, the product was not taken up, with insureds preferring the more limited (and cheaper) BI product that excludes pandemics. Despite having offered a product which would have gone toward covering COVID-19 related losses, insurers could be forced to cover losses for which no premium was received if the proposed state and federal legislation is passed.
The proposed state and federal PRIA legislation could be viewed as undermining freedom of contract and the ability of the insurance industry to deem certain risks uninsurable. It is almost certain that, if enacted, such legislation will be challenged by insurers as being unconstitutional. Commentators have suggested likely challenges will be raised under:
- The Fifth Amendment ‘Takings Clause’ (private property shall not be taken for public use without just compensation – i.e. the insurance industry should not be forced to bear public burdens which should be borne by the public as a whole);
- The ‘Contracts Clause’ contained in Article 1 Section 10 (the freedom of parties to form contracts without undue government intervention); and
- The ‘Due Process Clause’ contained in the Fourteenth Amendment (i.e. that it is arbitrary and irrational for insurers to be required to pay for the economic disruption to small businesses).
As in the United Kingdom, the situation in the United States is very much a ‘watch this space’ scenario. However, given the speed at which state and federal level legislative proposals are being rolled out, it might be that we will not need to watch for long before the receiving the next instalment respect of the United States.
Challenge to Coverage in New Zealand?
Ultimately, insurers in the United Kingdom and the United States face a conundrum: public backlash and reputational damage that may ensue from a decision to decline cover but paying out may risk the industry’s solvency and undermine contractual certainty and the writing of risk. If insurers do pay out on claims they would have otherwise excluded, this cost is likely to be passed to insureds in the form of increased premiums. On the other hand, if insurers refuse to pay, businesses that would otherwise have purchased BI protection may no longer do so either because they are no longer able to operate, or because BI cover is seen as an unnecessary business cost due to a perception that coverage will not be made available when a business needs it the most.
It seems unlikely that New Zealand insurers will see the stream of BI claims and potential litigation that is hitting insurers in the United Kingdom and United States. As the United Kingdom and United States governments are offering similar support in the way of subsidies and loans to businesses as are available in New Zealand, the reason New Zealand insurers do not appear to be facing the same criticism is presumably due to clearer policy language and pandemic-related exclusions. It remains to be seen whether despite the apparent clarity in many New Zealand BI policies, any policy wordings will face challenge. If its losses are substantial, an insured with more ambiguous wording might be emboldened by the actions in the United Kingdom and United States to test coverage. As is the case in the United Kingdom and the United States, the availability of BI cover in New Zealand in any individual case will turn on the wording of the specific policy.
 https://www.barrons.com/articles/how-to-fix-the-glaring-problems-with-business-interruption-insurance-51588347185 and https://www.insurancebusinessmag.com/us/risk-management/news/marsh-launches-product-to-insure-against-pandemics-100967.aspx?mod=article_inline.