OVERVIEW
This article was first published in Insurance Day on 9 April.
Predictions about the likely economic effect of Covid-19 are changing rapidly. No one yet knows when global restrictions will be eased or their final effect on the business environment. Unsurprisingly, the scale of losses is still impossible to state definitively. Against this background, it is equally unsurprising that all insurance market participants are reviewing what cover is available. Inevitably, cover for business interruption is under specific scrutiny but many of the questions being asked in that context are also relevant to other forms of cover.
The essential message will inevitably be the same; look to the terms of the policy. Or, at least it will be if industry regulators do not seek to intervene; see further the article by Professor James Davey, and note the request by New York State Department of Financial Services that insurers authorised in that State provide details of the business interruption policies made. Nevertheless, in considering policy terms and any potential claims, a number of common themes are likely to emerge.
There is already a lively discussion as to whether or not contamination of property with Coronavirus can constitute physical damage. Indeed, there is already news of a case having been brought in New Orleans in which it is asserted that contamination by Covid-19 is sufficient to constitute damage. Previous case law on what constitutes a sufficient physical change to property to be damage is not always consistent but he presence of a contaminant on its own may be enough to amount to damage. Contamination by radiation has been held to be damage (Outokumpu Stainless Ltd v. AXA [2008]) as has a spill of hydrochloric acid even though there was no proof that any corrosive damage was done (The Orjula [1995]). The fact that specialist decontamination and repair was required was enough to justify a finding that damage had been done. Similarly in an Australian case, an electrical fuse was found to be property and found to have been damaged once it tripped because it required time and resources to repair or replace it (Mainstream Aquaculture Pty Ltd v. Calliden Insurance Ltd [2011]).
However, there are good reasons to think that even if contamination by infectious disease could constitute physical damage in principle, it will be very difficult to reach the relevant threshold with Covid-19. It will inevitably be a matter for expert and factual evidence, but some of the particular issues include:
- Establishing what property was in fact contaminated. It would seem likely that in the majority of cases, the trigger for measures taken to decontaminate property and for any allied closure of a business will be the presence of one or more people who is subsequently diagnosed as having Covid-19 or believed to be at risk of having contracted Covid-19. In either case, the question is how does one establish that the property was in fact contaminated rather than there being simply a fear of infection?
- What measures were in fact necessary or reasonable as a consequence of any contamination. There is still uncertainty about how long Covid-19 remains infectious These questions go to causation, but are also relevant to whether the necessary threshold for physical damage has been met.
Certain business interruption policies provide cover in respect of the consequences of infectious diseases. But, it would be rare for a policy to be written on terms which provided cover for losses caused by any infectious disease. Commonly, cover is provided in respect of a defined list of infectious diseases or in respect of notifiable infectious diseases. The former will not include Covid-19 in the list. So far as the latter is concerned, the case law would suggest that notification has to be compulsory as a matter of law to satisfy the requirement of being notifiable for BI cover (New World Harbourview Hotel Co. Ltd v. Ace Insurance Ltd [2012]). Covid-19 was made a notifiable disease in England on 05 March 2020 (Health Protection (Notification) Regulations 2010).
Even if the insured can establish that a relevant triggering event has occurred, causation is likely to prove another major hurdle to any recovery. If a policy covers losses arising from physical damage, this would not on the face of it cover losses arising only from government restrictions. In addition, the courts will be precise in applying the policy wording to the events which are said to have caused loss. In a case concerned losses suffered by a cruise line following the terrorist attacks on 11 September 2011, cover which responded on the happening of particular events which interfered with the line’s scheduled itinerary was held not to cover revenue lost due to passengers cancelling their cruises (IF P & C Insurance Ltd v. Silversea Cruises Ltd [2004]).
Further, if lost revenue is to be assessed by reference to the income that the insured might otherwise have made during the relevant period, questions may arise as to whether the losses claimed by an insured would have been occurred in any event due to other measures to prevent the spread of the virus. In a case concerning the effect of Hurricanes Katrina and Rita in New Orleans, the insured was able to show that it had suffered physical damage to its hotel. However, the court found there was no recoverable loss under a business interruption policy because during the relevant period there was such widespread damage to the surrounding area that no one would have visited the hotel even if it had been undamaged (Orient Express v. Assicurazioni [2010]). The case illustrates the type of causation difficulties likely to arise in relation to claims made in respect of Covid-19 especially for policies which require physical damage to be a cause of the loss. Those difficulties may be enhanced if there is a gradual relaxation of control measures or customer behaviours change as a result of lockdown.
Finally, policies often contain detailed provisions as to how losses are to be calculated or as to the supporting documents required. Even if such provisions are not present, any insured would be well-advised to be considering now what evidence it needs to preserve in order to show the income lost and how it was caused by the insured event. If that evidence is not available, recovery may well be denied (Ted Baker Plc v. AXA Insurance UK plc [2017]).
For further information on issues arising in the context of insurance cover and Covid-19, please see the insurance bulletins published by Quadrant Chambers.
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The impact of Covid-19 on the energy & natural resources sector - Chris Smith QC
