COVID-19: Navigating business insurance issues
Originally Published by Scott Kennedy on Wednesday, April 22, 2020 8:58:36 AM
COVID-19 has interrupted life in Australia as we know it. In the context of insurance, COVID-19 was declared to be an 'insurance catastrophe' by the Insurance Council of Australia on 11 March 2020, with the consequences of the catastrophe being unknown.
The purpose of this article is to look at a number of the practical issues we have encountered in business insurance and provide suggestions for the steps insurers and insureds can take to best prepare themselves for the continuing changes as a result of COVID-19.
There is significant commentary which identifies the presence of exclusions in business interruption cover for quarantinable disease.1 Such exclusions will apply for direct losses which arise from Government Restrictions implemented for COVID-19. However, there are a number of issues which we are seeing in the face of COVID-19, including:
We look at each of these issues, in the face of the evolving changes from COVID-19.
Most business and property policies impose an obligation on an insured to notify its insurer of any change in circumstance which may alter its risk, with the obligation continuing throughout the period of insurance. Undoubtedly, COVID-19 imposes risks on all businesses, and most of these risks will continue to evolve with time.
The question is: what obligations does an insured have to notify an insurer of these continually evolving changes to its business?
The simple answer is, it probably doesn't. In most wordings, the duty of disclosure is limited to circumstances which are not common knowledge, or something which an insurer should know about. Therefore, unless the risk arises outside the known Government Restrictions and is unique to the insured's own business, the Government Restrictions for COVID-19 are unlikely to impact on an insured's duty of disclosure.
Relevantly, the duty of disclosure applies to circumstances which may affect an insurers' decision to provide cover, and the terms of that cover. In circumstances where the restrictions are operating across Australia, and are intended to be temporary measures, we consider it is unlikely that COVID-19 will alter the long-term assessment of cover available under business policies.
It is common for first party property insurance to contain an exclusion for damage or theft to property during an extended period of non-occupation (i.e. 60 days). The logic behind the exclusion is the risk of damage or theft will increase where a premise is unoccupied, and therefore, an endorsement of cover is required for this increased risk.
So, what happens where a property is temporarily closed as a result of Government Restrictions and does this constitute being unoccupied for the purpose of an exclusion?
'Unoccupied premises' is not usually defined in insurance policies. In considering the application of such an exclusion, the New South Wales Court of Appeal has confirmed the meaning of 'occupy' varies according to the context in which it is used, and bona fide occupancy was "a question of fact and degree" dependent on the circumstances in question.2
On a strict reading, the temporary closure of a business as a result of the Government Restrictions does not constitute non-occupation of premises, as the premises remain occupied, but are not open for business. Further, a number of insurers have implemented steps to protect insureds, including no increases to premiums for closed premises, which override a non-occupation exclusion.
It is almost inevitable that ongoing Government Restrictions will impact on the timing of repairs or reinstatement for existing property claims.
So, what is the insurance position where the repairs or reinstatement are delayed (and therefore, time and costs are increased), as an indirect result of COVID-19?
Insurers need to undertake an assessment on the proximate cause of the loss. If the loss results from a Government Restriction (i.e. forced closure of the building contractor), then it will be necessary to consider the application of any exclusions for disease. However, if the cause of the loss is more remote (i.e.- delays in obtaining materials and delivery times as a result of increased pressure on the workforce during the COVID-19 period), exclusions for disease may not apply.
Most policies impose an obligation for repairs or reinstatement to be 'commenced and carried out with reasonable dispatch', with the insurer entitled to reduce its liability for costs which result from delays. However, 'reasonable' is likely to be construed in the context of the current COVID-19 environment, and close consideration will need to be given to what is 'reasonable' in these circumstances.
Ordinarily, business interruption cover is triggered by an insured event of loss or damage, and cover is only available for the losses which result from the insured damage. Further, as has widely been reported, most business interruption policies contain exclusions for losses which result from disease.
But what happens where the interruption is more remote (i.e. delays or difficulties in sourcing stock or materials due to COVID-19), and who incurs these losses?
As a starting point, it is necessary to consider the proximate cause of the loss to determine whether it will, or wont, trigger any exclusions for disease. For direct losses (i.e. business closure by Government Restrictions), close consideration will be required of any applicable exclusions. However, for more remote losses (delays in processing orders), a more complex analysis may be required.
The law recognises that where there is more than one cause of loss, systems are required to apportion the loss across the different causes.3 This is important for more remote losses where exclusions may only be triggered in part, but other parts of the claim may be covered.
Insurers should be working with adjusters to ensure systems are in place (where possible) to apportion losses between the direct and indirect consequences of COVID-19.
All business policies contain an indemnity period for business interruption (usually between 12 and 36 months). So, what is the flow on effect of delaying repairs or reinstatement, and the subsequent interruption (which is not excluded) continuing outside the indemnity period?
Of all the issues addressed in this article, this is by far the most difficult to determine. Australia (along with the rest of the world) is facing unprecedented restrictions, and there are no applicable terms and conditions in the policies which can be considered.
It is our view this is a discretionary issue for insurers. Indemnity periods are set, as part of the risk calculation, and the premium is applied on this basis. Further, we are not aware of circumstances where the indemnity period has been amended by agreement, following a notified loss. The costs for insurers to do so, across a portfolio of claim, will be substantial.
1 COVID-19 is a quarantinable disease pursuant to the Biosecurity Act 2015.
2 McGeown v NSW Land and Housing Corp [2015] NSWCA 23.
3 PMB Australia Ltd v MMI General Insurance Limited [2000] QSC 329.
The purpose of this article is to look at a number of the practical issues we have encountered in business insurance and provide suggestions for the steps insurers and insureds can take to best prepare themselves for the continuing changes as a result of COVID-19.
Business Insurance
There is significant commentary which identifies the presence of exclusions in business interruption cover for quarantinable disease.1 Such exclusions will apply for direct losses which arise from Government Restrictions implemented for COVID-19. However, there are a number of issues which we are seeing in the face of COVID-19, including:
- Notification of risk for the developing COVID-19 changes
- Property insurance for unoccupied premises
- Managing existing claims- delays in repairs or reinstatement following damage to property
- Indirect Business Interruption losses
- Calculation of the indemnity period.
We look at each of these issues, in the face of the evolving changes from COVID-19.
Changes in risk
Most business and property policies impose an obligation on an insured to notify its insurer of any change in circumstance which may alter its risk, with the obligation continuing throughout the period of insurance. Undoubtedly, COVID-19 imposes risks on all businesses, and most of these risks will continue to evolve with time.
The question is: what obligations does an insured have to notify an insurer of these continually evolving changes to its business?
The simple answer is, it probably doesn't. In most wordings, the duty of disclosure is limited to circumstances which are not common knowledge, or something which an insurer should know about. Therefore, unless the risk arises outside the known Government Restrictions and is unique to the insured's own business, the Government Restrictions for COVID-19 are unlikely to impact on an insured's duty of disclosure.
Relevantly, the duty of disclosure applies to circumstances which may affect an insurers' decision to provide cover, and the terms of that cover. In circumstances where the restrictions are operating across Australia, and are intended to be temporary measures, we consider it is unlikely that COVID-19 will alter the long-term assessment of cover available under business policies.
Unoccupied premises
It is common for first party property insurance to contain an exclusion for damage or theft to property during an extended period of non-occupation (i.e. 60 days). The logic behind the exclusion is the risk of damage or theft will increase where a premise is unoccupied, and therefore, an endorsement of cover is required for this increased risk.
So, what happens where a property is temporarily closed as a result of Government Restrictions and does this constitute being unoccupied for the purpose of an exclusion?
'Unoccupied premises' is not usually defined in insurance policies. In considering the application of such an exclusion, the New South Wales Court of Appeal has confirmed the meaning of 'occupy' varies according to the context in which it is used, and bona fide occupancy was "a question of fact and degree" dependent on the circumstances in question.2
On a strict reading, the temporary closure of a business as a result of the Government Restrictions does not constitute non-occupation of premises, as the premises remain occupied, but are not open for business. Further, a number of insurers have implemented steps to protect insureds, including no increases to premiums for closed premises, which override a non-occupation exclusion.
Delays in repairs or reinstatement
It is almost inevitable that ongoing Government Restrictions will impact on the timing of repairs or reinstatement for existing property claims.
So, what is the insurance position where the repairs or reinstatement are delayed (and therefore, time and costs are increased), as an indirect result of COVID-19?
Insurers need to undertake an assessment on the proximate cause of the loss. If the loss results from a Government Restriction (i.e. forced closure of the building contractor), then it will be necessary to consider the application of any exclusions for disease. However, if the cause of the loss is more remote (i.e.- delays in obtaining materials and delivery times as a result of increased pressure on the workforce during the COVID-19 period), exclusions for disease may not apply.
Most policies impose an obligation for repairs or reinstatement to be 'commenced and carried out with reasonable dispatch', with the insurer entitled to reduce its liability for costs which result from delays. However, 'reasonable' is likely to be construed in the context of the current COVID-19 environment, and close consideration will need to be given to what is 'reasonable' in these circumstances.
Indirect Business Interruption losses
Ordinarily, business interruption cover is triggered by an insured event of loss or damage, and cover is only available for the losses which result from the insured damage. Further, as has widely been reported, most business interruption policies contain exclusions for losses which result from disease.
But what happens where the interruption is more remote (i.e. delays or difficulties in sourcing stock or materials due to COVID-19), and who incurs these losses?
As a starting point, it is necessary to consider the proximate cause of the loss to determine whether it will, or wont, trigger any exclusions for disease. For direct losses (i.e. business closure by Government Restrictions), close consideration will be required of any applicable exclusions. However, for more remote losses (delays in processing orders), a more complex analysis may be required.
The law recognises that where there is more than one cause of loss, systems are required to apportion the loss across the different causes.3 This is important for more remote losses where exclusions may only be triggered in part, but other parts of the claim may be covered.
Insurers should be working with adjusters to ensure systems are in place (where possible) to apportion losses between the direct and indirect consequences of COVID-19.
Calculation of the indemnity period
All business policies contain an indemnity period for business interruption (usually between 12 and 36 months). So, what is the flow on effect of delaying repairs or reinstatement, and the subsequent interruption (which is not excluded) continuing outside the indemnity period?
Of all the issues addressed in this article, this is by far the most difficult to determine. Australia (along with the rest of the world) is facing unprecedented restrictions, and there are no applicable terms and conditions in the policies which can be considered.
It is our view this is a discretionary issue for insurers. Indemnity periods are set, as part of the risk calculation, and the premium is applied on this basis. Further, we are not aware of circumstances where the indemnity period has been amended by agreement, following a notified loss. The costs for insurers to do so, across a portfolio of claim, will be substantial.
1 COVID-19 is a quarantinable disease pursuant to the Biosecurity Act 2015.
2 McGeown v NSW Land and Housing Corp [2015] NSWCA 23.
3 PMB Australia Ltd v MMI General Insurance Limited [2000] QSC 329.