Insurance Implications of SARS-CoV-2

Introduction

The effects of the Covid-19 virus are unprecedented. There is not an industry or for that matter many jurisdictions that have been spared. We are receiving an increasing number of enquiries and instructions to review insurance policies for clients in the UK, the United States and elsewhere, advising on what coverage clients may have in response to the detrimental financial effects they are experiencing at the hands of the Covid-19 virus.
Insurance is a key component in continuity planning for businesses and in difficult times such risk management strategies come under the microscope and are tested as are the insurances. Whether these strategies and policies are sufficient raises other pressures on risk managers, directors and boards who are required to make decisions under pressure set against a background of unprecedented Governmental intervention.
Below we discuss a number of issues we are seeing concerning insurance coverage in the light of the effects of the Covid-19 virus.

Overview

It is important to stress the need to review all insurance policies of all types to scan for coverage. It is also important not to assume that for example an insured has no cover for loss of revenue. Coverage will be determined by a combination of the following: the exact language of the terms, conditions and exclusions of the policy; statutory declarations from governments and authorities as to how insurance policies will respond; the proper law of the policy and the jurisdiction.

Business Interruption Insurance

Business Interruption Insurance is designed to compensate a policyholder for the financial effect of interruption or interference to the business, traditionally as a direct result of physical damage to insured property or other key external events, such as damage at a suppliers’ or customer’s premises or other non-damage triggers.

Triggers

Traditionally business interruption requires two triggers for cover: the interruption needs to be caused by physical damage; and the interruption must cause the loss. Following a review of those jurisdictions which have been affected by Covid-19, there appear to be two scenarios which have affected businesses: where property and premises are closed due to suspected cases of Covid-19 being present; and where a Government or State Authority orders the closure of certain businesses, as we have seen recently in England and in some of the States in the US (State Authorities in New York, New Jersey, Oregon, Connecticut, and Maryland have issued orders closing shopping malls, and the State Authorities in Pennsylvania have issued an order closing non-essential businesses). Some other countries have taken far more drastic measures to ensure social distancing with more draconian orders of lock down with a similar effect on businesses, in order to curb or reduce the transmission of the virus.

The requirement of physical damage to a policyholder’s premises is likely to be a significant issue when it comes to triggering coverage. Does the presence of Covid-19 on surfaces constitute physical damage? When considering Court decisions in England and Wales, the focus of the Courts has been on whether the presence of a virus has adversely changed the property and to what extent, for example does the change have to be at a molecular level (1)? The Court of Appeal has held that the test was whether there has been some alteration in the physical characteristics of the property “which render it less useful or less valuable (2). In the US, a New Jersey case (3) held that property can suffer physical damage without structural alteration. In that case, ammonia was held to be a dangerous gas rendering the property uninhabitable, the presence of it constituted a “direct physical loss”. There are other similar cases considering asbestos contamination and E.coli.

1 Tioxide v CGU [2005] EWCA Civ 928

2 Blue Circle v Ministry of Defence [1998] EWCA Civ 945

3 Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America, 2014 WL 667 5934, at *6 (D.N.J. Nov. 25, 2014)

Extensions of cover are available (and have been taken up by some) to cover contagious disease. The cover is written in various ways, for example, focussing on specific diseases at the policyholder’s premises or within a certain distance of the insured location. The trigger for some similar extensions is that the peril is a “notifiable disease”. This is a reference to the diseases listed under the Public Health (Control of Disease) Act 1984 and the Health Protection (Notification) Regulations 2010 here in the United Kingdom. There are also extensions of cover which trigger insurance as a result of loss caused by a State or Government Authority order. However, these generally require physical damage in order to trigger cover.

We have seen “Crisis Management” extensions to cover, which, whilst still focussed on State or Government Authority orders made as a result of physical damage, expressly confirm that the presence of a number of perils, including viruses, constitute physical damage for the purposes of coverage. Such wordings are extremely helpful for coverage, although still require evidence of the virus being present on the premises.

Other extensions of cover may well respond to the circumstances being faced, these include the likes of Increased Cost of Working / Additional Increased Cost of Working: providing cover for any additional expenditure reasonably and necessarily incurred by the insured for the sole purpose of avoiding or diminishing the loss in turnover or output experienced. In many cases we are seeing that retailers with an on-line presence in the marketplace are far more resilient. We have seen policyholders changing the way they reach their market through ramping up or creating on-line services as a means to diminish or mitigate their loss in turnover, similarly we have seen public houses and restaurants developing takeaway delivery services with a similar objective.

Other extensions to cover include Denial / Prevention of Access by a Public Authority, which provide cover for losses sustained by a policyholder being prevented from accessing their premises by an order of a Public Authority. In addition, there is cover for Loss of Attraction, intended to cover a loss of revenue as a result of a reduction in footfall. For example, shopping malls and hotels are being affected by virtue of Government and State orders to close all non-essential businesses.

Exclusions

Business Interruption Insurance policies are usually written on an “All Risk” basis. This is a form of insurance where the insuring clauses are generally broad, but the exclusions are used to limit the scope of the insurance. One exclusion to be aware of is the contamination exclusion. Such exclusions are usually focussed on particular perils of contamination. Sometimes however decontamination cover is purchased as a further extension of cover in the form of a buy back.

Causation issues

We highlight above the two triggers of: physical damage causing the business interruption and for the interruption to cause the loss. In many instances in policies there is an express requirement for triggering the business interruption cover for there to be a covered claim under the Property Damage section of the policy. A common tactic is for insurers to focus their efforts on arguing that there is no cover under the property damage section, for example, if the damage falls within the excess of that section or where an exclusion applies. It is for this reason that wordings which deem the presence of the virus as constituting property damage are so beneficial.

Calculation of Loss

There are many factors that affect the calculation of loss. Issues that can arise include the following:

Basis of indemnification. The policy sets out the basis on which the business interruption claim is to be calculated. This is often limited to the “loss of gross profit”, due to the reduction in turnover. However, depending upon the industry the insured is in, there may be an option of presenting a claim on a difference basis, such as a loss of production. The basis on which the claim is presented can significantly affect the resources and skill-sets required for the calculation of the loss, as well as the amount of the loss. Recently value policies have been used in the hotel sector to trigger a day rate payment as an alternative to calculating the indemnity.

Waiting Period. Business interruption policies often set a temporal excess, being a period of time that must elapse before a claim can be made. This can differ from policy to policy and can depend upon the type of business being covered, although is often set at 30 days.

Indemnity Period. The insurance will not provide an unlimited period of cover. Normally the indemnity provided will be limited to a particular length of time defined in the policy as the period beginning at the date of the occurrence of the damage and ending when the results of the business cease to be affected. This is usually limited to a maximum indemnity period. In some cases, the business interruption cover may be provided on a Time Element basis. Such covers can be problematic to construe and a number that we have reviewed for the purposes of advising on coverage in relation to Covid-19 limit the indemnity period to 60 days.

Other and Special Circumstances clause: This allows the parties to take into account other circumstances that may affect turnover or production and the calculation of the business interruption. Its aim is to ensure that the amount indemnified is as true as possible to the actual amount lost. One issue that we have seen is the Wide Area Damage argument, namely but for the damage (the presence of the virus) the insured would be trading in an environment where because of the virus there would have been no trade in any event. We have advised on a number of cases including for hotel chains and we have acted as experts on cases where such arguments have been run. Another issue is where one premises has closed but another premises of the policyholder which is unaffected by the virus increases its turnover and gross profit as a result of making up for the production loss at the first premises, in these circumstances, insurers may seek to argue that the policyholder has not suffered a loss as the production of the premises which has had to close has been made up by the other premises not affected.

Contingent Business Interruption or Supply Chain Risk Insurance

This is a Business Interruption Insurance where the insurance is triggered by property damaged at the premises of a supplier or customer. Covers can be extended to include supplier issues arising from the act of a local authority, government or regulating authority. However, such extensions can be limited to applying to named suppliers and also might be sub-limited. The same issues of what constitutes property damage at a supplier or customer’s premises will apply.

Comment

As with all coverage assessments, the assessment has to be made based upon the wording of the policy, the circumstances being experienced and the type of loss being suffered. Standard UK policies will be easier to analyse as to whether they respond or not as they are all pretty much the same form. Anything more bespoke to larger insureds/ multinationals (sometimes called manuscript policies) will need careful analysis. When focussing on larger insureds and multinationals there may be multiple policies that need to be reviewed, for example, a local policy and excess layer policies in addition to the master policy or a primary layer policy.

Trade Credit Insurance

We have over the years seen a significant increase in the amount of interest and take up of Trade Credit Insurance as a means to de-risk counterparty risk. The right Trade Credit Insurance policy has the ability to reduce a company’s risk and exposures and provides protection to a company or bank in respect of certain events which affect the ability of customers / counterparties to pay invoices or meet their financial commitments. Clearly the unprecedented restrictions imposed by Governments are having, despite Governmental support, a catastrophic effect on businesses world-wide. We are seeing businesses adopting strategies of delaying meeting their financial obligations in order to ensure they shore up their financial stability. This has a significant knock on effect.

Scope

Commonly trade credit policies provide cover for three main perils.
Protracted default of a customer / counterparty. This occurs on the non-payment of all or part of an undisputed invoice. The trigger for payment will usually occur on the expiry of what is called “the waiting period”, often around 90 days from the date an invoice falls due.

The insolvency of a customer / counterparty. Often these insurance policies specify the scenarios that constitute “insolvency” under the policy and which will trigger cover.
A political risk event. Trade credit policies will usually define the scenarios that come within the meaning of the political risk cover, but can include economic difficulties in the customer’s / counterparty’s country; currency shortages; administrative measures or new legislation in the customer’s / counterparty’s country which prevents payment.

Issues to consider

From our experience of advising on such policies, it is extremely easy to lose cover or have cover restricted. Those that might be relevant to businesses suffering losses as a result of the effect of Covid-19 on customers are the need to pay close attention to their reporting obligations under the policy which can be onerous, such as strict notice periods of overdue payments or as soon as there is knowledge that a counter party / customer might be in financial difficulty. Such policies contain obligations on policyholders to prevent and / or minimise loss.

Care should be taken when deciding what steps to take, for example the strategy of reissuing invoices or agreeing to accept lesser amounts and then attempting a claim under the policy for the remaining amount. This strategy can provide insurers with the argument that the reissuing of an invoice or accepting a lower amount is an acceptance by the policyholder of a price reduction and as a result there is no debt or loss to claim under the policy. Also, settlement agreements whereby a policyholder forgoes any rights. This could breach the terms requiring policyholders to maintain and preserving the insurers’ subrogation rights.

Event Cancellation insurance

Covid-19 has decimated the sports, entertainment and leisure industries. The knock-on effect on satellite businesses dependent upon the cancelled events has broadened the fall-out and loss.

A great deal turns on the wording of the insurance policy, however, event cancellation (or Contingency Insurance) policies are usually written to cover financial loss due to causes beyond the control of the policyholder, should such a cause result in the cancellation, postponement or abandonment of an event. Often the wordings will include “communicable disease” exclusions however there is the option of purchasing such extensions to cover. We have also seen All Risks Event Cancellation policies that do not exclude a virus unless the discharge of that virus was unlawful. We are aware of cases where policyholders may not have purchased such extensions, favouring to cover specific perils that, at the time, might have appeared more prevalent, such as cancellation of an event due to a terrorist event or threat. Some policies might be written on a specified perils basis, for example specific listed diseases.

Issues that arise in dealing with such claims include the quantification of the loss and mitigation of loss – where an event was cancelled, could it have been postponed instead? If an event is cancelled based upon guidance or concern as opposed to at the direction of a State or Government Authority does that matter for the purposes of causation? Is there a clear distinction between cancellation and postponement in the policy and what effect might there be on cover? In some cases, policyholders postponing an event until further notice to appear to be mitigating their loss but is that true mitigation, when there is no new date for the event in question or is that tantamount to a cancellation?

If the policyholder is the organiser of an event, the legal and loss position can be difficult. It is likely that they will have a number of contractual obligations with third parties, be it broadcasters, advertisers, players or sports men and women or performers, not to mention service providers such as caterers. The coverage issues arising from the cancellation of a large event can be extremely complex.

Directors’ and Officers’ Insurance

Directors’ and Officers’ Insurance covers directors and officers of a company against third party claims by indemnifying legal costs and damages. The cover also indemnifies legal costs for legal representation in investigations and prosecutions. Such cover can be vital to directors in circumstances where a company might not be legally permitted to indemnify directors for the costs of legal representation.

We are in unprecedented times. It is in such times that company risk management and business continuity procedures are truly tested where they might not have been before. It is at times like these that a poorly run company from a risk management perspective can be less resilient, leaving liquidators, creditors and investors with questions over how the company has been run which inevitably focusses on directors or board mismanagement. Regulators will expect businesses to have tested contingency plans to deal with major events and business continuity. Failure to have such operational resilience is an area where future claims may focus. It is at times such as these that directors may need to call upon Directors’ and Officers’ Insurance to support them in claims they might face from shareholders or the company itself or for indemnifying the cost of legal representation in regulator investigations.

Current policies do not contain specific exclusions for Covid-19, but policies commonly have some form of bodily injury exclusion that may be relevant to coverage and policy response.

Directors can find themselves involved in claims by employees for failing to take appropriate measures to protect the employees from harm.

Professional Indemnity / Errors and Omissions Insurance

Professional indemnity or Errors and Omissions Insurance policies are intended to cover claims resulting from allegations relating to a company’s professional services
It is at times like this that businesses rely upon their advisers (such as lawyers, insurance brokers and accountants) to guide them. Where individuals and entities have suffered a financial loss, they will scrutinise the actions of their advisers to assess whether any negligence has occurred. As a result, in hard economic times, there is often an increase in claims against advisers.

Environmental Insurance

While Environmental Insurance will not provide coverage for bodily injury or business interruption, such policies may provide coverage for clean-up and disinfection costs.

Notification Requirements

A key focus for all insurance policies, is the notification of a loss, claim or circumstance. This is an important obligation to get right if a policyholder wants to ensure they maximise their cover under their policies. Some policies might set strict time limits to notify insurers once a policyholder becomes aware of damage, loss or claim. It may be that the policyholder is aware of circumstances that should be notified and if the policy requires the policyholder to notify in these circumstances, it is particularly important to get this right where the policy is shortly to expire, as the renewing policy might exclude prior known circumstances. Blanket notifications might also need to be made, these can be particularly difficult to draft and there is judicial precedent guidance from which it is possible to know the constituent parts which should be notified to maximise cover for blanket notifications. When notifying, policyholders should consider the aggregation language of the policy. If such language is broad, a policyholder might be able to restrict the number of excesses or deductibles they are required to pay under the policy.

Late Payment

Insurers will be receiving a significant volume of insurance claims. As a result, it may take longer for insurers to process and handle the sheer number of claims. Where a policyholder suffers other losses as a result of an insurer’s unreasonable delay in paying a claim, there is the prospect of further causes of action against the insurer by virtue of section 13A of the Insurance Act 2015, which implies a term into the insurance policy requiring the payment of claims in a reasonable time. Such pressure on insurers may therefore generate claims beyond the scope of the insurance policies or can be used as leverage to speed up the payment of insurance claims.