Business Interruption Insurance Cover For Covid-19 – The Current State Of Play

Business interruption policies (for example Industrial Special Risks policies) generally cover damage to business premises, and loss of profit and/or additional expense consequent upon that physical loss. They generally respond where earthquakes, floods, fires or building collapses damage property. However, many policies also extend to cover other incidents which do not strictly result in damage to property, and may respond to damage caused as a result of COVID-19 because they do not contain a pandemic exclusion or the terms of that exclusion do not apply.

Australian test case and ASIC Guidance

On 13 August 2020, the Insurance Council of Australia and the Australian Financial Complaints Authority commenced the test case HDI Global Specialty SE v Wonkana No 3 Pty Limited trading as Austin Tourist Park in the NSW Court of Appeal. The case has now been heard urgently, and judgment in the near future should clarify whether certain infectious diseases exclusion clauses in many Australian business policies which refer to the now repealed Quarantine Act 1908 (Cth), encompass the currently applicable Biosecurity Act 2015 (Cth) and, if so, the timing of the application of the exclusion.

The insurers’ position is that reference in policy exclusions to "quarantinable disease" under the Quarantine Act 1908 should be read as meaning the same as a "listed human disease" under the Biosecurity Act 2015, so that any claim for business interruption for COVID-19- based reasons should be rejected. The contrary view is that the Court should construe the exclusion clauses strictly and in favour of the insured, and in particular that the repealed Act can no longer be relied on by insurers to assert an exclusion based on the concept of “listed human disease” in the currently applicable Act.

On 16 October 2020 ASIC wrote to insurers, Lloyd’s coverholders and brokers about how they should handle business interruption insurance claims arising from the COVID-19 pandemic.

ASIC has been monitoring the progress of the Australian test case and UK developments summarised briefly below, and reviewed 392 policy wordings issued by general insurers to Australian small businesses. A number contain exclusions for losses arising from pandemics, but ASIC’s view is that some policy wordings may respond to losses arising from COVID-19, including cover under ‘infectious disease’, ‘prevention of access’ or ‘closure by authority’ coverage clauses.

ASIC’s view is accordingly that general insurers, Lloyd’s coverholders and, where appropriate, brokers, should take the following approach when handling claims brought by Australian small businesses relating to business interruption losses arising from COVID-19.

• All policies. They should ensure that information provided to policyholders about policy coverage before claims are lodged is clear, accurate, balanced and does not mislead or deceive, and helps Australian small businesses make informed decisions about whether they should lodge claims.
• Policies that do not contain a pandemic exclusion or contain a limited exclusion. 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. Claims on these policies should be assessed and, where appropriate, paid promptly. If there are reasonable grounds to pay part of a claim but not to pay the full claim, an interim payment should be made.
• Policies with a pandemic exclusion that refers to either the Quarantine Act or the Biosecurity Act. They should have a plan for responding to the outcome of the test case, including how to communicate with policyholders if the Court finds in their favour. Insurers should also provide appropriate information to insurance brokers to pass on to small business policyholders.

Recent UK cases and implications

On 15 September 2020, a specially convened bench of the High Court of Justice handed down judgment in The Financial Conduct Authority v Arch & Others [2020] EWHC 2488 (Comm). The Court considered a range of policy wordings from eight insurers to decide whether they could respond to business interruption loss arising out of the COVID-19 pandemic and the advice of and restrictions imposed by the UK government in consequence, in circumstances where there has been no physical damage to the insured premises. In brief summary:

• The Court largely agreed with the Regulator’s arguments, so that many insureds under those policies may be entitled to cover, subject to appeal and the particular policy terms and circumstances of each case.
• Two insurers were successful on coverage not extending, in particular Zurich because the Zurich policy wordings were “Prevention of Access” clauses which only responded to loss consequent on action by the police or other competent local, civil or military authority following a danger or disturbance in the vicinity of the insured’s premises whereby access thereto was prevented, not to measures taken on a nationwide basis in response to the COVID-19 pandemic.
• The composite nature of the insured peril under the policies which were found to respond to claims meant that the insured’s loss was required to be computed on the assumption that each of the inter-connected elements of the composite insured peril had not happened. Insurers under those policies were therefore not generally entitled to reduce policyholder’s claims by reference to the wider impact of the Covid-19 pandemic (e.g. the public’s disinclination to frequent shops, pubs and other businesses).

On 15 October 2020, a single judge in the Commercial Court of the High Court of Justice delivered judgment in TKC London Limited v Allianz Insurance Plc [2020] EWHC 2710 (Comm). TKC’s London café business was required to close as a result of nationwide lockdown restrictions. TKC was insured by Allianz under a standard form business interruption policy written on an “all risks” basis. The principal issue was whether TKC could claim on the basis that the enforced closure and loss of use of the café constituted an insured “loss of property”.

The Court decided that it did not, as the policy did not respond to mere temporary loss of use, and was only triggered by the physical loss of property. It was also impossible for the claim to satisfy the standard form material damage provision contained in the basis of settlement provisions of the policy, and subsidiary claims based on the deterioration of stock during lockdown and the loss of use of TKC’s premises licence were also dismissed.

The Court’s judgment suggests that even in a case of “all risks” cover:

• Conventional principles of contract interpretation will not be varied in response to COVID-19.
• Property damage-based business interruption wordings will not normally respond to COVID-19 losses.

The UK cases are not binding on Australian courts, although they can be persuasive. It may be that once the current Australian test case determines the questions raised regarding the Quarantine Act 1908 and the Biosecurity Act 2015, Australian insureds will seek to run a second test case addressing the Australian position in relation to whether various other classes of policy wordings provide cover, as occurred in the UK FCA test case.