The scale of the COVID-19 crisis made it obvious that the pandemic, and the public health measures it prompted from governments, would have major implications for the insurance world. Responding to an unprecedented disruption in trading, firms naturally turned to their business interruption (BI) policies for protection. Given the number of claims and the distinctiveness of the COVID-19 circumstances, it was unsurprising that many of these claims demanded referral to the courts for resolution.
In this article, we briefly summarise the status of COVID-19 BI cases around the world.
In the United Kingdom, the industry and courts moved quickly to clarify how typical BI policies would respond to COVID-19. In the last edition of Cover to Cover, we discussedFinancial Conduct Authority v Arch Insurance (UK) Ltd in which the Supreme Court of England and Wales, hearing the case under the“leap-frog” appeal procedure straight from the High Court, made a number of significant findings in relation to key issues affecting the interpretation and application of BI policies to COVID-19, including disease and prevention of access clauses, causation, trends clauses and overruling theOrient-Expressdecision.
FCA v Arch, as envisaged, appears to have significantly quelled COVID-19 BI disputes in the United Kingdom. Following the Supreme Court’s decision, the FCA wrote to affected insurers clarifying its effect and urging insurers to settle claims expeditiously and to resolve any legal proceedings as quickly and cost-effectively as possible. It is also publishing a regularly updated set of COVID-19 BI claims data (obtained from insurers). The data indicates thatFCA v Archis having the intended effect. As at the end of June 2021, it recorded that over 40,000 claims had been accepted by insurers with over GBP500 million paid out for settled claims and a further GBP300 million in interim payments made for unsettled claims.
The FCA’s letter acknowledged thatFCA v Archwould not be a complete answer to any COVID-19 BI uncertainty. It is not unexpected, then, that other cases have subsequently reached the UK courts. InRockcliffe Hall Ltd v Travelers Insurance Company Ltd, the High Court granted the insurer’s application for summary judgment in an insured’s BI claim where the relevant policy contained a closed list of diseases for which cover was available, which did not include COVID-19. The FCA also conceded that BI policies covering loss as a consequence of only physical damage were unlikely to respond to COVID-19 economic losses. However, given that most BI policies are structured in this way and the fact thatFCA v Archdid not address such policies, it would not be surprising if insureds tried their luck in legal proceedings in the future.
Like the United Kingdom, the insurance industry in Australia has sensibly sought to resolve COVID-19 BI issues through test cases. In the first test case,HDI Global Specialty SE v Wonkana No. 3 Pty Ltd, the New South Wales Supreme Court found that references to the repealed Australian Quarantine Act 1908 (Cth)—the “quarantinable diseases” listed in which were commonly excluded in BI policies—could not be construed to include the Biosecurity Act 2015, which had replaced the Quarantine Act. The High Court of Australia recently refused the insurers’ application for special leave to appeal this decision.
The second test case is more general in nature. The Insurance Council of Australia (the body representing insurers) has identified nine representative claims to be heard together, which are collectively expected to raise many of the same issues as inFCA v Arch. By the time this goes to print, this test case ought to have been heard by the Federal Court, and any appeal to the full Federal Court is due to be heard, expeditiously, in November 2021.
Separately, the Federal Court recently dismissed Star Entertainment Group’s claim under its BI policy. Since COVID-19 does not cause physical damage, the casino operator could only claim under an extension for “loss resulting from or caused by any lawfully constituted authority in connection with or for the purpose of retarding any conflagration or other catastrophe”. The Court held that the term “other catastrophe”, in context, was limited to insured perils capable of causing physical damage (as covered by the policy).
The COVID-19 BI litigation scene in the USA has been, perhaps predictably, lively. Cases have reached the courts involving claims by hotel chains, movie theatres, spas, restaurants and even the Philadelphia Eagles NFL team.
The most significant—the first to make it to the Court of Appeals — featured an Iowa-based dental surgeon claiming for lost income as a result of the state’s suspension of non-emergency procedures between March and May 2020. InOral Surgeons, P.C. v The Cincinnati Insurance Company, the insurer had declined cover on the basis that the policy required the financial loss to have been caused by“direct loss to property”, with “loss” defined as “accidental physical loss or accidental physical damage”. The Court of Appeal for the Eighth Circuit resoundingly rejected the insured’s suggestion that “physical loss” could include “lost operations or inability to use the business”. It was clear that some kind of physical alteration to the property for the policy was required and, in this case, none was pleaded.
Perhaps reflecting the balkanized nature of the US judicial system, not every court has taken such a strict view of what constitutes physical loss or damage. InSchleicher and Stebbins Hotels LLC v Starr Surplus Lines Insurance Co, the Superior Court for the State of New Hampshire accepted the insured’s argument that their had been a “distinct and demonstrable alteration” to the insured’s hotels, following precedent extending the definition of physical loss beyond tangible changes to property in certain cases. Even though the COVID-19 virus could not be seen or touched, it was known to survive on certain surfaces and was widespread in the geographic locations of the hotels, thereby constituting, in the Court’s view, physical damage to the insured’s property.
The New Zealand courts have not issued any decisions regarding COVID-19 and insurance (save for issuing a restraining order protecting a broker from an insured who was dissatisfied that his income protection policy did not respond). While some claims have been paid, we suspect the lack of jurisprudence reflects the more restrictive nature of most New Zealand BI policies, together with the relatively minor impact of COVID-19 on New Zealand and the extensive support provided by the Government. If a case were to arise, the courts are likely to take guidance from the experience in other common law countries.
Looking forward – insuring the new normal
While courts around the world remain occupied, to varying degrees, with the task of determining how existing BI policies ought to respond to COVID-19, governments have shifted their attention to the task of reopening economies. While the COVID-19 risk remains, this project necessarily includes working with the industry to empower insurers to provide cover so that firms — especially those in high-risk sectors — are emboldened to resume trading activity with adequate protection against the risks of future disruption.
The UK Government recently unveiled its “Live Events Reinsurance Scheme”, which will provide up to GBP750 million in reinsurance for insurers writing policies covering live event organisers against the risk of event cancellation from the possible reimposition of COVID-19 restrictions. While full details have not yet been released, the scheme broadly resembles the Pool Re public-private partnership established in 1993 to provide terrorism reinsurance in response to a series of IRA bombings and that remains in place today. One notable difference is that Pool Re protects against third party damage whereas this scheme effectively amounts to the Government providing reinsurance for losses suffered as a result of its own action (namely, COVID-19 restrictions). It is unclear what effect, if any, will materialise from the Government having hands on both sides of the (re)insurance equation.
To date, New Zealand’s successful implementation of an elimination strategy has largely enabled live events to go ahead while much of the rest of the world remained in lockdown; since March 2020, we have hosted full-capacity All Blacks games, concerts and festivals. Consequently, the need for an equivalent reinsurance scheme has not been so pronounced. However, as the Government unfurls the road to reopening and with a growing acceptance that the COVID-19 threat (especially the Delta variant) will linger, New Zealand may need to consider something along the lines of the UK model to create a suitable apparatus for sharing business risks associated with live events and other activities similarly vulnerable to COVID-19.