The following is an editorial by Alicja Grzadkowska, senior news editor at Insurance Business. To reach out to Alicja, email her at [email protected]
A second wave of lockdowns is sweeping across the globe as confirmed cases of the coronavirus spike again – but this time, the business interruption (BI) insurance landscape is slightly clearer.
Parts of Asia have already seen this ‘second wave’, with some countries implementing lockdown measures back in the late summer, while South Australia announced a six-day lockdown yesterday. In Europe, France, the UK, Germany, Italy, and Spain, to name just a few, have all implemented stricter measures in recent weeks in an attempt to halt the spread of COVID-19, while the United States is following suit as cases surpassed 11 million on November 15; in turn, states are starting to enact restrictions aimed at slowing the virus’s spread. The country’s neighbours to the north are also in trouble, as several provinces in Canada have seen a leap in cases and are considering stricter measures.
In all regions, lockdowns have typically brought closures to many non-essential businesses and will do so again this time around. As businesses re-shutter their windows, they’re at least more aware of how business interruption coverage will respond to this situation, based on the BI-related developments we’ve seen in recent months as cases have wound their way through the courts, though there have been key differences in how disputes have been adjudicated.
One of the most notable decisions has been in the UK, with the High Court’s business interruption test case, which was decided in favour of insurers in some cases and against them in others, depending on the wordings of policies. Broadly, however, it was announced that the majority of businesses that held BI insurance and were forced to close due to the COVID-19 pandemic were in fact entitled to be compensated by insurers. Indeed, subject to the limits of the policy, this compensation should return them to the position they would have been in had the pandemic never happened.
Nonetheless, there are still more decisions to come, as appeal hearings have started taking place this week and have involved the appellants Arch Insurance (UK) Ltd, Argenta Syndicate Management Ltd, MS Amlin Underwriting Ltd, Hiscox Insurance Company Ltd, QBE UK Ltd, and Royal & Sun Alliance Insurance Plc (RSA), while the Hiscox Action Group remains an intervener.
On the other hand, in North America, BI coverage decisions have so far generally swung in favour of insurers. Recently, Travelers won yet another business interruption lawsuit – this time in the state of Mississippi, in a case involving a hamburger restaurant. In that case, the judge ruled that the threshold requirement for the lost business income in Real Hospitality’s “all risk” property policy with Travelers necessitated either tangible damage or the “permanent dispossession” of the property, and Real Hospitality did not allege that it permanently lost its restaurant, or that the burger joint suffered physical damage. Rather, the company focused in its argument on local and state COVID-19 shutdown orders that prevented it from offering dine-in services, thus leading to business losses.
With more than 1,000 similar lawsuits awaiting a decision on their coverage, insureds haven’t only faced losses in courtrooms across the US. Two restaurant owners in Durham, NC triumphed in a business interruption insurance lawsuit against their insurer in late October – though it was only the first victory of its kind. In opposition to the Travelers case and other lawsuits, the successful argument centred on the fact that North Carolina’s shutdown order during the COVID-19 pandemic should be covered by BI policies, indicating the variety in verdicts that may come down in the coming months.
On the other side of the globe, the New South Wales Court of Appeal in Australia just this week rejected the insurance industry's stance that policies do not cover COVID-19 related losses, and insurers are now facing a wave of pandemic-related business interruption claims. The Insurance Council of Australia (ICA) and Australian Financial Complaints Authority (AFCA) decided to launch the case to address any misgivings about policy wordings in pandemic exclusions. The NSW court determined, however, that COVID-19 is not a disease “declared to be a quarantinable disease under the Quarantine Act 1908 and subsequent amendments” – notable because some policies in the country has exclusions that referred to the repealed act, which was later replaced by the Biosecurity Act of 2015. Before the verdict came down, experts predicted that Australian insurers could be on the hook for more than AU$1 billion if enough businesses challenge policies and precedents are subsequently established.
Nonetheless, business interruption coverage will likely not apply in most circumstances. In Canada, the country’s Insurance Bureau noted that, “Generally, commercial insurance policies and traditional business interruption policies do not offer coverage for business interruption or supply chain disruption due to a pandemic such as COVID-19,” though it added, “Some organisations may have purchased specialised contingent business interruption coverage, stand-alone business interruption coverage and supply chain disruption coverage which may be triggered as a result of the World Health Organisation’s declaration of a pandemic.”
As the second wave of lockdowns picks up speed, insurers may see more business interruption claims, though many will likely be denied again, and this time, with more certainty. They also have less to fear when it comes to the impacts on their bottom lines – the Q3 results season showed the resilience of many firms, as well as the positive impacts of a harder market that led to increased prices and a correction in the marketplace – and even growth in certain lines of business for some.
That doesn’t mean insurers have nothing to be concerned about as 2021 approaches. The arrival date of the COVID-19 vaccine will have significant implications for the return to a semblance of economic normalcy, and political shifts, such as that of Joe Biden becoming president in the US, could mean stricter lockdowns and more losses than previously seen in that country, in addition to any related impact on the stock market and insurers’ investments.
Meanwhile, the work of brokers and agents may only get more challenging. With carriers pulling back in many lines of business and across several industries, finding appropriate and affordable coverage will only get more difficult in the months to come, requiring added effort from insurance advisors to find risk transfer solutions for their insureds.
All in all, though the worst may be behind the insurance industry, many hard days are likely still to come.