Covid-19 coverage: insurance implications of the lockdown
Businesses and individuals will be considering recoverability for Covid-19 losses under a number of different types of insurance policies, including business interruption, event cancellation, health, worker compensation, and travel insurance. Policyholders should check the scope of their relevant insurance policies and/or discuss with their insurance brokers to determine whether any losses arising out of or in connection with Covid-19 fall within the scope of coverage.
Cover for Covid-19 under business interruption (BI) policies
When, on 16 March, the government recommended that individuals “do what [they] can to limit …social contact” and “avoid pubs, clubs, theatres and other such social venues”, much commentary focused on a concern that such an approach would hamper businesses’ ability to recover under its insurance policies for the resultant loss of income, on the basis that such closures were not then required by law. However, this overlooked that even the government-mandated closure of non-essential business which followed on 23 March would not be covered as standard in many BI policies. In most BI policies, the impact of infectious diseases would also not fall under standard scopes of cover, which typically respond only in respect of loss caused by “physical damage” to the business premises. As such, many businesses will find that their policy will not cover losses caused by Covid-19 as these cannot be said to have resulted from any physical damage to the premises.
Some businesses may have purchased an extension to their BI cover which they may look to in the present circumstances, most notably:
- an “infectious diseases” extension, extending the definition of “damage” to cover for loss caused by infectious diseases provided they fall within the scope of cover (which is often determined by reference to whether a disease is on the list of “notifiable diseases” published by the government from time to time); or
- a “denial of access” extension, providing cover for loss caused by the access to the premises being hindered or prevented for certain reasons.
The policy wording must be checked carefully to determine the extent of this additional cover and whether it would engage in the current circumstances. Covid-19 was added to the list of “Notifiable Diseases” in England and Wales under the Health Protection (Notification) Regulations 2010 on 5 March 2020 (and SARS-COV-2 was added to the list of notifiable causative agents), bringing England & Wales in line with Scotland and Northern Ireland’s earlier inclusion of the virus on their corresponding lists. This may therefore engage cover under some BI policies with an “infectious diseases” extension (if strictly referring to any disease categorised as a “Notifiable Disease”). However, other policies will only provide cover in respect of a predetermined list of diseases – which is unlikely to include Covid-19 – or will have a different definition of “infectious disease” which must be considered carefully.
Where Covid-19 falls within the definition of “infectious disease” in the policy, some policies will nonetheless require the loss (or the government-mandated closure occasioning the loss) to have been caused by an outbreak of that disease in or in the vicinity of the relevant premises. Therefore, on a strict reading of the policy wording, some businesses who have purchased an “Infectious Diseases” extension may face a challenge recovering under that extension where their premises closed in response to government guidance and/or as a result of social distancing, rather than as a result of any actual contamination in or around the premises.
In respect of a “denial of access” extension, policyholders will need to consider whether the policy wording is sufficiently broad to cover the loss of access caused by the lockdown; some policies may, again, be limited to loss of access caused by physical damage, not cover loss of access caused by infectious diseases, and/or only respond in respect of a loss of access caused by an outbreak in the immediate vicinity, rather than a nationwide government-mandated closure of premises as a more general precautionary measure not motivated by a specific event occurring at the premises.
In each case, the likelihood of cover will turn on the minutae of the relevant policy wording (as well as the relative bargaining power of the insurer and insured in challenging interpretations of that wording). Policyholders may in some cases find that their policy does not readily envisage the current exceptional circumstances, making it difficult to determine the extent (if any) to which the policy wording can be said to cover their loss. Where there is a genuine ambiguity in the wording of an insurance contract, the “contra proferentem” rule of contract construction provides that the wording will be construed against the party responsible for drafting such wording.
Cover for Covid-19 under “all-risks” policies
Some policyholders may be considering their cover under an “all risks” policy (for example, construction all risks policies are a feature of the suite of insurance products purchased in respect of some development projects to cover losses caused by damage, delay and public liability during the course of a construction project). All risk policies cover any loss in relation to the subject matter of the policy which has been accidentally caused, except for any loss resulting from causes which are expressly excluded by the wording of the policy. As such, the policyholder only needs to show that a loss is accidental (and not excluded), and is not required to show the exact nature of the accidental cause falls within a list of specific risks covered by the policy. Many all risks policies will, however specifically exclude loss resulting from communicable diseases or “contaminants”. Policyholders may also face the issues of causation and quantification of loss outlined below.
Extent of cover
Where losses do fall within the scope of policies, determining the extent of coverage and quantifying loss may be challenging for both insured and insurer, particularly at this early and fast-developing stage. Often polices do not provide cover for pure loss of profit (with cover, where it applies, being more focused on the costs of remedying physical damage or the provision of alternative premises or facilities). This may limit the loss which can be recovered under the policy. Any cover provided under extensions to BI policies may also be subject to “sub-limits” which restrict the amount recoverable to a lower amount that the limit on the overall policy.
It is a fundamental principle in insurance law that an insurer is only liable for losses “proximately caused” by an insured peril (a risk that is insured against under the relevant insurance contract) - unless the wording of the policy implies a different test of causation. A burden of proof therefore falls on policyholders to demonstrate a chain of causation leading naturally from an insured peril to their loss in order to recover that loss under the policy. This may pose a challenge for policyholders in the current climate when a number of effects caused by Covid-19 and the economic climate may operate simultaneously to cause loss, only some of which are insured perils.
Determining the proximate cause is a question of fact, and must therefore be assessed on a case-by-case basis. However, case law has established the general principle that the “proximate cause” need not be the first, last or sole cause, of the loss; rather it must be the “dominant” cause of the loss – such that the loss can be said to have been a necessary consequence of an insured peril or to have lead naturally and in the ordinary course from the insured peril, rather than from a subsequent, independent cause. Case law also provides that where there are two or more proximate causes of a loss, it is sufficient if one of those causes is an insured peril (Miss Jay Jay) provided one of the causes is not specifically excluded by the policy (Winspear v Accident Insurance Association). However, if the insured peril merely ‘gives occasion’ for the operation of a subsequent, independent cause which is not an insured peril, then the insured peril may not be a proximate cause.
For example, a business which has suffered a loss in rental income from tenants of commercial premises would be required to demonstrate that a loss of access and/or infectious disease (in each case, of a kind which engages cover under the relevant policy) which proximately caused this loss. The argument could be problematic, for example, if the tenant was already insolvent at the time of the government action and would not have paid the rent regardless of the loss of access. Tenants and owners of commercial premises may also encounter challenges in showing that a loss of retail income was caused by a loss of access to the premises, rather than being something which would of resulted from the observance of social distancing whether or not the premises was closed. By analogy, in the Orient Express Hotels Ltd v Assicurazioni Generali SPA case (which applied a “but for” test of causation as required by the policy wording), it was found that a policyholder could not claim in respect of the loss of income caused by physical damage to their New Orleans hotel following Hurricane Katrina, because that damage could not be said to have caused their loss when in any case the area had been evacuated, (though, in light of the evacuation, they were able to claim under their prevention of access extension, which was subject to a lower limit of cover).
Policyholders will need to consider the wording of the policy carefully and should keep detailed records and documentation relating to the cause and effect of any disruption, and any efforts to mitigate it, in order to substantiate any potential claim. Early engagement is recommended with the relevant insurance broker to ensure the correct steps are being taken.
Insurance policy renewals
Where businesses do not currently have cover, it is unlikely that cover for future Covid-19 losses could now be arranged; as Covid-19 is a known risk, insurers are likely to be reluctant to provide coverage in respect of this risk for the foreseeable future, and to the extent such risk has already given rise to a potential claim for an uninsured business, such claim may not be covered.
In respect of renewals of insurance policies or any new insurance policies being sought, policyholders should remember their obligation to make a fair presentation of the risk to their insurers. The FCA has stated that, in light of the exceptional circumstances, insurers should ensure they treat customers fairly and “if firms are changing their policies to exclude coronavirus, we expect them to make it very clear, in a prominent position, to those consumers whose policy is due to renew, that their policy has changed, and of the exclusion - both before renewal”. The FCA has suggested that, where a firm may be relying on renewal for continuity of cover, it may not be “treating customers fairly” to refuse to renew a product, even where it is has otherwise be suspended. Whilst this has not been supported by specific additional regulations, it engages the insurers’ broad regulatory requirement to treat its customers fairly, which may assist some businesses facing a loss of cover on renewal. As the FCA has also noted, consumer policyholders will have additional protections under the Consumer Rights Act 2015 in relation to the fairness and transparency of mid-term adjustments to consumer insurance policies.
Whilst it is unusual in most standard business insurances, it may be relevant for policyholders (and businesses more generally) to consider whether “force majeure” clauses in their contracts could be engaged as a result of Covid-19. These clauses can provide exemptions or excuse non-performance by counterparties. Insurers themselves, for example, may find relevant provisions in their reinsurance contracts. Much will turn upon the detail of such clauses; it is unlikely that Covid-19 has been specifically envisaged by the contract, so the breadth of the clause will determine whether a pandemic such as Covid-19 is within its scope. Such clauses often require the affected party to demonstrate not only that a force majeure event has occurred, but also that its impact has prevented performance of the contract (and, sometimes, that such impact could not have been reasonably mitigated).
Government and regulatory intervention
The far-reaching economic effects of Covid-19 have the potential to increase the number of claims being pursued under various insurance policies, with policyholders keen to ensure they can engage cover to assist with business continuity at a challenging time, but insurers keen to avoid being required to meet an unanticipated number of claims. In addition to the FCA’s guidance regarding the need for insurers to take a flexible approach and treat customers fairly in the exceptional circumstances, the Prime Minister and Chancellor made statements on 17 March suggesting that the government is considering proposals to assist with recoverability under certain insurance policies (in particular, it seems, where the scope of cover is intended to include pandemics).
However, these pronouncements have not, as of yet, resulted in any provisions which require insurers to pay claims where these do not fall within the scope of the policy wording. Indeed, the FCA released a “Dear CEO” letter on 15 April stating that, based on its conversations with the insurance industry, the policies held by most small and medium-sized enterprises (SMEs) “have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic” and that “while this may be disappointing for the policyholder we see no reasonably grounds to intervene in such circumstances”.
In its letter, the FCA does acknowledge that some policies will oblige the insurer to pay out, and that in those circumstances “it is important that claims are assessed and settled quickly”. It recommends that, where insurers accept that they are obliged to pay part of a claim, but dispute that they are required to pay the whole claim, they should make an interim payment pending determination of the correct amount. As such, policyholders will need to carefully consider the scope of their policy wording and/or discuss with their insurance brokers the extent of their coverage, in line with the considerations outlined above. In an uncertain and fast developing situation, both insurers and policyholders will need to monitor the changing situation and the impact of further government intervention, to determine how it impacts upon their insurance contracts and business.