Business interruption (BI) insurance has been one of the main areas of contention between insureds, insurers and regulators throughout the COVID-19 crisis.
Regulators in various jurisdictions (including Australia) are attempting to resolve the ongoing uncertainty surrounding policy triggers and coverage terms by seeking clarity from the courts through test cases.
Property policies mainly cover losses from physical damage to the insured property from a covered peril. In the absence of physical damage from a covered peril, contingent business interruption / lost income would generally not be covered.
Having said that, policies can include coverage for disease within a certain radius of the property and/or action by governmental (or similar) authority that limits/prevents access to the insured’s premises. Most policies in Australia include some form of ‘pandemic exclusion’.
In Australia, the ICA and AFCA announced at the end of July that they will be filing a test case to clarify the application of infectious diseases cover, primarily the applicability of references to the repealed Quarantine Act 1908. The potential for a second test case around prevention of access extensions has also been mentioned recently.
In the UK, the Financial Conduct Authority (FCA) has brought a test case relating to some of these non-damage BI policy extensions. Some of the issues contested at the recently concluded hearings were:
- Causation – what caused the losses – was it the incidence of the COVID-19 disease, government action, loss of public confidence, the economic downturn, or a combination thereof.
- “Occurrence” in the “vicinity” of the premises - in the case of policies with disease clauses, what is needed to prove the prevalence of COVID-19 within a certain radius of the properties. The interpretation of “vicinity”, particularly where it is undefined in the policy, is also being debated.
- Exclusions - whether policies should respond when they do not explicitly contain pandemic or COVID-19 exclusions.
- The application of “Trends clauses”, which typically adjust the amount payable to the insured by taking into account the wider circumstances of the business before and after the loss. This leads back to the issue of causation, the covered peril(s) under the policy and how to determine the baseline against which the insured’s loss should be measured.
The FCA has also raised the issue of government support received by businesses and how this should be considered within the context of calculating the amount payable under the BI insurance coverage.
The case will ultimately turn on the interpretation of the specific policy wordings. The court judgment is expected in mid-September.
Whilst the issues being considered in the Australian test case are somewhat different to the UK test case, the outcome of the UK test case is likely to be monitored with some interest.
The issue of causation was the centre of focus in a recent South African court case where the debate centred on whether it was the lockdown or the pandemic that led to business interruption.
Some South African insurers have proceeded to make interim relief payments to affected policyholders whilst awaiting the interpretation of policy wordings being clarified through court cases.
In the US, efforts in some states to retroactively require insurance carriers to cover business interruption losses caused by the COVID-19 pandemic seem to have stalled in legislative committees. In recent weeks, a few US state courts have ruled that COVID-19 does not constitute physical damage.
The whole debate around BI has highlighted the importance of clear communication in policy wordings and posed challenges to the insurance industry and policymakers around coverage for systemic events, such as COVID-19.
At the time of writing this article, the BI test case proceedings have been listed for a Directions Hearing in the NSW Supreme Court on 28 August. The test case concerns two separate small business claims with HDI Global and Hollard (as second plaintiff), originally lodged with AFCA: HDI Global Specialty SE v Wonkana No 3 Pty Limited trading as Austin Tourist Park.
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