Here in New Zealand we have been incredibly fortunate to have had almost unparalleled liberties over the last 12 months. Thus far, the impact of COVID-19 has been comparatively minor for many businesses, hospitality and tourism being among the obvious exceptions.
Overseas, rolling business restrictions and lockdowns have caused enormous business losses. Government support has mitigated these losses somewhat, but business owners are also looking to their business interruption insurers to foot the bill.
Business Interruption Insurance
Business Interruption (BI) insurance covers loss of revenue or profit experienced by a business following physical loss or damage to its insured property. Usually, BI insurance is placed with the material damage (MD) insurance that covers business assets.
Physical loss or damage to the insured business assets is most often the trigger for both policies to respond. While the MD policy pays to repair or replace the damaged property, the BI insurance covers financial losses due to the resultant interruption or interference with business operations.
COVID-19 itself does not cause physical loss or damage to tangible property. There is no physical damage "trigger" for BI policies to respond to a government lockdown. However, most BI policies include extensions that don't require physical damage, including:
- Prevention of Access
- Acts of Public Authorities
Many of these extension clauses include closure due to illness within a certain vicinity of the insured premises. Usually these extensions have sub-limits of 10% of the BI sum insured and stand down periods. However, broad disease exclusions are also ubiquitous in New Zealand. These generally exclude claims:
- In connection with a notifiable infectious disease under the Health Act 1956 or the Biosecurity Act 1993
- Arising from epidemics or pandemics
'Novel coronavirus capable of causing severe respiratory illness became a notifiable disease under the Health Act 1956 on 30 January 2020 and 'COVID-19' was added on 11 March 2020. COVID-19 was declared a pandemic by the WHO on 11 March 2020.
In New Zealand, insurers' position is that disease exclusions trump the "prevention of access" and "acts of public authorities" extensions. We are not aware of any local test cases at this stage, but if we have more level 3 and 4 lockdowns, what's happening overseas may be portentous.
Recently the NSW Court of Appeal delivered its decision in test case HDI Global Specialty SE v Wonkana No 3 Pty Ltd  NSWCA 296. The Court found in favour of the insured businesses, ruling that insurers could not rely on a disease exclusion to deny claims business interruption losses due to COVID-19.
The plaintiff's policy provided cover for business interruption caused by outbreaks of infectious diseases within a 20-kilometre radius of the insured's premises. It also excluded claims arising from "diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments".
Before inception of the policy, the Quarantine Act 1908 (Cth)
had been repealed and replaced by the Biosecurity Act 2015 (Cth).
The Biosecurity Act does not refer to "quarantinable
diseases" it refers to "listed human diseases."
COVID-19 was a "listed human disease".
The insurers sought declarations that the repealed Quarantine Act should be read as the Biosecurity Act and that this was necessary to avoid commercial absurdity, where reference to the Quarantine Act was so obviously wrong. The insurers argued the Biosecurity Act was a "subsequent amendment."
Court declined to make the declarations sought. A High Court appeal seems likely.
Earlier this month the Insurance Council of Australia announced a new test case involving five insurers, nine claims and 20 points of law. It will determine the meaning of policy wordings in relation to the definition of a disease, proximity of an outbreak to the business and prevention of access to premises due to a government mandate, as well as policies with a hybrid of these types of wordings. Insurancenews.com.au warns that clarity on the issues may not be provided until the end of next year, but insurers have indicated they will be bound by the Court's findings.
In January 2021, the Supreme Court handed down its decision in its test case; Financial Conduct Authority v Arch Insurance (UK) Ltd & Ors  UKSC 1. The FCA (on behalf of a group of SMEs) and eight insurers bought the case to resolve issues of general importance; to clarify whether a variety of insurance policy wordings cover business interruption losses resulting from COVID-19 and the UK public authorities' public health measures in response.
The Supreme Court found that that each individual case of COVID-19 amounts to an effective proximate cause of the Government restrictions and was sufficient to trigger coverage under the disease clauses, which provide cover for losses arising from disease within a certain radius.
Further, "prevention of access" extensions do not require legal or physical hinderance. An instruction from a public authority, expressed in mandatory and clear terms is enough to trigger the extension.
The Court also found that total cessation of business activities is not required. The inability to perform a discrete business activity or prevention of access to discrete parts of the business premises is enough. So arguably, a restaurant could still claim for business losses during level 3 restrictions on in-house dining, despite continuing its takeaway trade.
The decision has watered down the "but for" test for causation. The Supreme Court commented that the but for test is sometimes inadequate and that there may be situations "where a series of events all cause a result although none of them was individually either necessary or sufficient to cause the result by itself."
Importantly, the much-criticised Orient Express was overruled as wrongly decided. Orient Express Hotel's business was severely impacted by both the physical damage to the hotel and the devastating impact of Hurricanes Katrina and Rita in New Orleans, which included a mandatory evacuation. In Orient, the Supreme Court found that insurers could apply the "but for" test of causation and but for the damage to the hotel it would still have incurred consequential business losses due to depopulation of New Orleans. Only losses resulting from the physical damage to the hotel could be considered. In FCA, the Supreme Court found that when adjusting claims, the correct approach is to exclude the circumstances that had the same underlying cause as the relevant damage i.e. the hurricane. This finding may have local ramifications. Following the Canterbury earthquakes, insurers relied on Orient Express when applying trends clauses, often significantly reducing claims on the ground that the insured business was located in the CBD "red zone" so would have suffered the losses claimed in any event.
Similarly, FCA provides some clarity around the application of trends clauses, which enable business interruption loss to be quantified by reference to how the business would have performed, had the insured peril not occurred. The Court found these should only utilise circumstances unconnected with the insured peril. When quantifying an COVID-19 BI claim, the fact the business performance would have been affected by wider consequences of the COVID-19 pandemic is not part of the assessment.
Interestingly, it was also found that the disease exclusion did not trump the insuring disease clause:
The reasonable reader would naturally assume that, if the intention had been to put a further substantive limit on the risk of business interruption specifically insured by the extension for infectious diseases in addition to the geographical and temporal limits stated in the extension itself, this would have been done transparently as part of the wording of the extension and not buried away in the middle of a general exclusion of contamination and pollution risks at the back of the policy.
The question of whether the sub-limited extensions can be "stacked" remains to be answered. Certainly, following the Canterbury earthquakes, insurers' views were that they could not.
The October 2020 edition of The National Law Review reported that at that date there had been 1250 cases filed across the US seeking coverage under commercial insurance policies for COVID-19 related business interruption losses. Over a third of these cases had been filed by restaurants and bars and just under a third were class actions. The article says:
To put this into perspective, the typical "large" hurricane will result in 100 or less business interruption cases being filed within the first year. Superstorm Sandy in 2012 resulted in approximately 150 business interruption cases being filed within the first year. Based on the amount of litigation COVID-19 is creating, it is the equivalent of a major hurricane making landfall every month.
Where the courts have ruled, the nationwide trend is in favour of insurers with nearly 75% of cases resulting in dismissals of the policyholder's claims. This may explain the legislative changes afoot. In at least 10 states, including California, Louisiana, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and South Carolina bills have been introduced that, if passed into law, would require insurers to cover business interruption claims resulting from COVID-19 with retroactive effect to early March 2020 and irrespective of disease related policy exclusions or conditions which would otherwise preclude cover.
While the effects of COVID-19 continue to buffet us the rollout of a vaccine may mean "normal life" is on the horizon. It remains to be seen whether we will see claims against BI Insurers in New Zealand and if we do, what the government will do , if anything, in light of the billions of dollars spent on COVID-19 economic response measures to date.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.