Putting business interruption cover to the test

Vol: 43 Issue: 4 | Dec 2021

In the United Kingdom, the High Court judgement for the Financial Conduct Authority’s business test case found that most, but not all, of the disease clauses in a representative sample of standard-form BI policies from eight insurers did provide cover for policyholders. 

A subsequent appeal was heard by the UK’s Supreme Court in November and judgement was reserved, as expected. The judges indicated a verdict could be handed down before Christmas.

Across Asia, previous experience with the severe acute respiratory syndrome (SARS) pandemic in 2003 informed insurers’ approaches to COVID-19.

In Australia, meanwhile, at the time of writing, three legal cases related to BI cover and the pandemic are going through the courts.

AUSTRALIA: THE ICA TEST CASE

One is a test case involving two separate small business claims that were lodged with the Australian Financial Complaints Authority (AFCA) as part of its insurance dispute resolution service.

The case — led and funded by the Insurance Council of Australia (ICA) — relates to policies issued by Hollard and HDI Global Specialty that provide cover for BI losses arising from infectious diseases, but which exclude diseases notified under the Quarantine Act 1908 and subsequent amendments. 

The New South Wales Court of Appeal heard the test case on 2 October and recently made a determination.

‘COVID-19 was notified under the Biosecurity Act 2015, which replaced the Quarantine Act. Most policies have been updated to refer to the Biosecurity Act, but some still refer to the Quarantine Act and subsequent amendments,’ says Mark Darwin, a partner at law firm Herbert Smith Freehills.

‘The key issue in the ICA test case is whether policies that still refer to the Quarantine Act, which was repealed and replaced — not amended — should be interpreted as an intention to include its replacement legislation, namely the Biosecurity Act.’

In a 5–0 decision, the NSW Court of Appeal held the exclusion in the infectious diseases extension for ‘quarantinable diseases notified under the Quarantine Act and subsequent amendments’ did not exclude listed human diseases under the Biosecurity Act. The ICA has confirmed it will appeal the decision in the High Court.

Darwin is uncertain how far-reaching the test case’s outcome will be for Australian and New Zealand policyholders, regardless of who wins or loses.

‘The success of local authorities’ actions to limit the spread of COVID-19 in this part of the world means that unlike in the UK, perhaps with the exception of Victoria, few premises were infected with the disease or had the disease within the vicinity of the business,’ he says.

‘Obviously, a lot depends on the individual policy wording and circumstances, but many policyholders may not even get to first base on triggering a claim under the disease extension, meaning arguments about the scope of the exclusion to the disease extension could be largely irrelevant.

‘In Australia and New Zealand, most of the BI losses arose following the actions taken by authorities restricting gatherings and movement of the population to prevent or minimise the spread of the disease.’

MORE CASES BEFORE THE COURTS

The relevance of the actions by authorities will be scrutinised in casino operator Star Entertainment Group’s claim — the second test case.

It deals with BI cover for losses caused by actions taken by authorities, under a claim made pursuant to the civil authorities extension. 

It involves a claim by The Star Sydney, which was required to close its casino complex under health regulations legislated as part of the national cabinet’s agreed response to the threats presented by COVID-19.

The Star’s policy contains the following civil authorities extension: ‘The word “Damage” under Section 2 of this Policy is extended to include loss resulting from or caused by any lawfully constituted authority in connection with or for the purpose of retarding any conflation or other catastrophe.’

Darwin notes The Star’s policy contains the infectious disease extension, although it excludes diseases notifiable under the Biosecurity Act and The Star’s policy has been updated — meaning the Quarantine Act point is not relevant.

‘The Star’s insurers, led by Chubb, have denied the claim, alleging that the meaning of damage under the policy refers to physical damage, that COVID-19 is not a catastrophe and that the policy’s intent isn’t to cover pandemics, as exhibited by the exclusion of diseases notifiable under the Biosecurity Act in the infectious diseases extension,’ says Darwin. 

‘They essentially say “why would we give cover under one extension when we exclude it under another”. Note that a similar argument was rejected in the UK FCA test case.’

The Star case — in the Federal Court before Chief Justice James Allsop — is presently progressing through the interlocutory stages. A directions hearing is expected to set a hearing date for early in 2021.

The other Australian test case — also in the Federal Court — is an action filed against Vero Insurance by the owner of the Vanilla Lounge restaurant, located in the Melbourne suburb of Oakleigh. 

This case raises the same issues as the ICA / AFCA test case, but there is a dispute about which policy wording applies. It also addresses a number of other factors surrounding BI losses, including the impact of COVID-19 on consumer behaviour and the action taken by state and local governments.

WHO STANDS TO WIN?

Mark Waller, the Clayton Utz partner who acted for the insured policyholders in the ICA / AFCA test case, says: ‘The outcome of the test case is likely to have more relevance to medium to small businesses, a large sector of the economy that has been very hard hit by COVID-19.’

Waller’s colleague Chris Erfurt, special counsel at Clayton Utz, also worked on the test case. 

He says: ‘In my experience, the cover provided to larger insureds was generally based on the Mark IV or Mark V ISR [Industrial Special Risks] policy form and was heavily negotiated between the insured’s broker and the insurer. 

The extent of any cover for COVID-19 BI losses will depend on the breadth of the extensions of cover negotiated by the broker for disease, prevention of access extension or civil authority action. 

‘In the case of medium to small businesses, their policies were often standard form policies that were not negotiated by brokers, and many of those policies contain cover for BI due to the outbreak of infectious diseases within a specified radius of the insured’s premises and the exclusion in many of those policies refers to the Quarantine Act and not the Biosecurity Act.’

A DIFFERENT EXPERIENCE

Across the ditch, the situation is quite benign compared with Australia. So far there has only been one large BI claim in New Zealand, involving about 700 childcare centres closed in the nationwide lockdown by the government.

‘As is common for these sorts of extensions, there is apparently a small sublimit for each centre, which will cap the total size of the claim,’ says Darwin.

There are no test cases in New Zealand and the Australian tests cases are unlikely to affect Kiwi policies.

In Asia, the approach to BI insurance is quite different to the situation in other parts of the world, due to cultural differences and lessons learned during the first SARS outbreak.

Willis Towers Watson head of claims for Asia, Neil Thomas, says his broking group started logging COVID-19 claims very early on in the pandemic. 

‘It’s no surprise we have thousands of claims across the globe. But of those, only 26 were from Asia, so a very tiny number, and the figure also included some travel claims. 

Whereas if you look at Australia, the numbers are much higher — more than 10 times higher. Once you get to Europe and the United States, the numbers escalate exponentially.’

The main reason claims across Asia are so limited is because after SARS, the wording in Asian policies as they relate to BI and pandemics became far more restrictive than in policies issued by European, US and Australian insurers. But that’s not the only reason the Asian experience is quite different.

‘SARS played a part. But Asian societies are inherently conservative, so I suspect there’s a measure of watching and waiting to see what happens among the business community,’ says Thomas. ‘Also, of those 26 claims, the ones that involve BI were made by multinational corporations from America or Europe.’

Further, Thomas notes that the insurance buying pattern is different in Asia.

‘Asian small businesses are less likely to buy BI insurance versus businesses in Europe and the US, where restaurants, dental surgeons and all sorts of smaller businesses buy BI insurance, often through schemes,’ he says.

Thomas says the legal case that defined SARS involved a Hong Kong hotel. ‘It had cover for an infectious disease outbreak within 25 kilometres of the premises for a notifiable disease, and the decision was in favour of the hotel. 

A point of contention was the date from which the claim applied, which was determined to be the date on which the disease became notifiable. As a result, most policies were subsequently changed so the outbreak needed to occur on the premises for the policy to pay out.’

By contrast, he notes that in Europe and the US, many policies still include a vicinity clause and may pay out if an outbreak occurs within a certain distance from the policyholder’s operations — a distance selected by the insured party.

In the Hong Kong hotel case, Thomas says that one of the insurer’s arguments revolved around relying on that radius and proving there was a SARS outbreak within it. 

‘The judge said it’s impossible to know where the outbreak was, but if the country was locked down as a result of the epidemic, the insurer had to pay the claim,’ he says. 

‘Nevertheless, in Asia, policy wording has moved from requiring an outbreak in the vicinity to an outbreak on the premises. That’s hard to prove. People are unlikely to be diagnosed on the premises.’

Thomas adds that after SARS, Asian policies also tended to exclude certain diseases like SARS and bird flu. In the case of COVID-19, he says insurers are arguing it is a variant of a previous virus. Although this may be a matter of technical medical evidence, insurers are using it as a defence.

It’s too early to tell how BI claims will play out in Australia, New Zealand and, to a lesser extent, across Asia, especially as the ICA is pursuing a High Court appeal. But whatever happens, it’s almost certain it will fundamentally change this type of cover for policyholders in the future.

ADVICE FROM ASIC

Insurers should have a plan for responding to the outcome of the business interruption (BI) insurance test case that was heard by the NSW Court of Appeal in October.

That was the word from the Australian Securities and Investments Commission (ASIC) in a letter to general insurers, Lloyd’s coverholders and brokers on 16 October 2020.

ASIC’s acting chair Karen Chester said the plan should include how to communicate with policyholders. ‘General insurers should also provide appropriate information to insurance brokers to pass on to small business policyholders,’ she added.

Chester said the test case examined exclusions for losses arising from a pandemic where the ‘disease’ has been designated under the now repealed Quarantine Act 1908 (Cth) or the current Biosecurity Act 2015 (Cth).

Most BI insurance policies sold to small businesses in Australia contained such exclusions, she said.

But regardless of legal outcomes, Chester said some policies may respond to losses arising from COVID-19 because they:

• do not include a pandemic exclusion; or
• contain a pandemic exclusion that applies only to ‘infectious disease’ coverage clauses and not to other coverage clauses in the policy such as ‘prevention of access’ or ‘closure by authority’ coverage clauses.

‘As with all insurance claims, claims on these policies should be assessed and, where appropriate, paid in a timely manner to ensure that financial pressures on small businesses are not exacerbated by slow payments,’ said Chester.

‘If there are reasonable grounds to pay part of a claim but not to pay the full claim, we encourage general insurers and Lloyd’s coverholders to make an interim payment.’