COVID-19 has already had a significant economic impact, which is likely to increase as Wuhan- and Italy-style lockdowns of large regions are implemented in other areas across the globe. While much has been said about large-scale flexible working, this will clearly not be possible for all businesses, and economic losses caused by disruptions including closure of premises, denial of access, supply-chain failures and utility supply issues are inevitable.
Businesses are likely to have varying levels of insurance in place – which ones are potentially responsive to losses caused by COVID-19 and related containment measures?
Business Interruption cover is a normal part of the insurance package taken out by businesses – it is typically part of a property insurance package, but can also be found as part of other commercial policies. “BI Insurance” covers the policyholder for lost revenue, mitigation costs and increased costs of working occasioned by the “coverage trigger”. “Standard” BI cover is triggered by physical damage to premises, however extensions to BI coverage can be purchased, meaning that BI insurance will also respond to “contingent” coverage triggers.
Contingent triggers that may be relevant in the context of the COVID-19 outbreak include:
- Denial of Access to premises caused by the actions of government, local authorities, police or other regulators – this could extend to imposition of Italy-style “red zones” which affect premises used by the policyholder or its suppliers;
- Failure of Utilities – while large-scale shutdowns of utilities such as electricity and water supplies seem unlikely in industrialised regions, the possibility that policyholders or suppliers in less developed areas could be affected by disruptions caused by worker absence or quarantining cannot be ruled out
- Loss of Attraction – certain insurance policies may respond to occurrences in surrounding areas (for example, implementation of a quarantine zone) which result in a reduction of business turnover
- Notifiable Disease – coverage can be available for closure or restrictions placed on insured premises as a result of notifiable disease. The key question here is at what point the disease becomes “notifiable”, and the duration of the period in which lost revenue can be claimed. In the case of COVID 19, different parts of the UK declared the disease as “notifiable” on 22 February 2020 (Scotland), 29 February 2020 (Northern Ireland) and 5 March 2020 (England and Wales). Conflicting “trigger dates” may give rise to insurance issues with significant consequences for the amount which can be claimed.
Whether insurance responds to a particular policy trigger, or whether a particular type of loss is covered is entirely dependent on the policy wording. Some types of insurance may respond to disruption suffered at insured premises only, whereas others may cover supply chain or contingent site disruption. Policyholders will therefore need to carefully review or seek advice on their BI insurance position.
Disruption to business can mean that legal obligations to customers are not met, which can result in third party claims. While parts of the losses caused to businesses as the result of failure to makes sales or provide services may by covered under a BI policy, to the extent that business failings lead to legal claims against policyholders, third party liability insurance may respond.
Liability claims are of particular concern to business responsible for people (whether employees or customers) being put in close proximity. Businesses will need to consider the possibility of personal injury claims arising due to businesses holding events during a pandemic, or of employers’ liability claims arising due to companies failing to provide safe working environments for employees. Policyholders should review their insurance arrangements as part of their implementation of robust plans to minimise risk.
Companies are inevitably taking action to respond to the COVID-19 outbreak. If a company were to get something wrong which resulted in claims by employees or third parties and/or regulatory enforcement action, executives may find themselves needing to rely on Directors and Officers’ liability insurance to ensure they are protected.
Finally, product manufacturers face a number of risks in the context of pandemics, and exposure is not only limited to the manufacturers of in-demand preventative products like hand sanitiser and face masks. Product liability claims against manufacturers accused of spreading a disease (for example through ducting and air conditioning systems) may also materialise in due course.
Specific insurance – Credit and Event Cancellation
Large-scale economic slow-down will lead to a number of companies encountering solvency issues and defaulting on debts. Creditors should therefore consider whether they have credit insurance in place which could mitigate the losses caused by debtor defaults. Typically, credit insurance policies have a fairly narrow range of exclusions, setting out circumstances in which insurers will not pay for losses stemming from a debtor default – an exclusion for losses arising from pandemics would be atypical, but policyholders should nonetheless check their wordings carefully.
Contingency planning for the outbreak of COVID-19 has seen a number of events cancelled, from concerts and sporting events, to political campaign launches and law firm conferences. Late cancellation can give rise to significant losses, which may be covered under specific event cancellation insurance.
What to do?
Clearly, whether an insurance policy will respond to losses will depend on the policy wording, and will need to be considered in the context of government guidance and measures being taken to prevent or contain COVID-19. Each company’s position will be different, and all companies should be undertaking reviews of their insurance position as part of contingency planning, to determine what cover is available, and ensure that potential claims are being notified promptly. Those reviews should be taking place now.
For assistance with consideration of insurance issues arising from this significant global event. Contact your usual Hogan Lovells contact, or a member of the Global Insurance Team.