The following is an opinion article written by Philip Hammond, formerly of IAG, (pictured above). Philip now works as an insurance consultant.
As a result of the current pandemic event and an omission by some insurers to update their pandemic exclusions, human infectious disease clauses for Business Interruption (BI) policies will come under close scrutiny by the courts.
The BI policy normally covers only those premises owned or occupied by the insured listed in the policy individually or collectively. Traditional BI policies typically require physical loss or damage to such property to exist before a claim can be made. Over the years, however, cover has been extended to various perils which do not involve physical damage, such as (among other things) infectious or contagious disease.
The SARS virus was a wakeup call. It highlighted that, in the case of a pandemic, there is potential for significantly many, and perhaps even all BI policies, claiming simultaneously. You could also see multiple claims from the same policy if there are several waves of pandemic over the year of cover.
The anxiety felt following SARS, avian influenza and swine flu, and the anticipated proliferation of pandemic losses, meant that pandemic exclusions were applied from 2006 to all businesses, not just those most at risk.
More generally, in the context of infectious or contagious disease and its bearing on reinsurance recoveries, the real problem relates to determining the date of loss and defining a loss occurrence.
The wording of the exclusion for principally commercial insurances was determined in consultation with industry representatives. Unfortunately, the exclusion could be said to be rather clumsy because reliance is placed on the act of an external party to do something under a particular Act of Parliament. If that something doesn’t happen, then there is no protection against new outbreaks or strains.
What is surprising, perhaps, is that the virus exclusion simply didn’t contain a sweep-up provision relating to loss involving or directly or indirectly arising from an epidemic or pandemic or the threat, or perceived threat, of either of these. Using the form of words “directly or indirectly arising from” would mean that even a loose or remote connection between COVID-19 and loss would preclude indemnity.
To be sure, the key issue is that the pandemic exclusion is triggered provided the disease is listed under the relevant Act. COVID-19 was declared to be a listed human disease under the Biosecurity Act 2015 as from January 21, 2020.
In the midst of all this, some pandemic exclusions still refer to the Quarantine Act 1908 (as amended). The reality is that the Quarantine Act was repealed nearly five years ago and has been replaced by the aforesaid Biosecurity Act. In view of the contra proferentem rule, that is, the rule that an ambiguous term in a contract will be construed against the party who shaped the term in question, those insurers who neglected to update their pandemic exclusion may well bear the burden of any resulting confusion. Ultimately, this matter of ambiguity is for the courts.
As it is highly unlikely that the exclusion would achieve its desired outcome or intended purpose given the repeal of the Quarantine Act, then what does this mean in terms of any defences remaining under the policy terms?
The non-damage BI extension for infectious diseases can take various forms. One common form provides cover for BI arising from the occurrence of such disease at the insured premises. Such clauses may also be the subject of an event sub limit and possibly an aggregate limit. Accordingly, the presence of COVID-19 must be established at the insured’s defined premises to result in an indemnity. Such loss is likely to be limited in duration as demonstrated in a coronavirus cluster at an abattoir in Melbourne.
Another common format extends coverage for infectious diseases to outbreaks other than the insured premises, but within the vicinity of the insured premises, for example 20 kilometres. The problem which arises where cover is expressed in terms of vicinity/radius extensions is that outbreaks that were previously localised can now become global very rapidly.
A 20 kilometre radius has no intelligible meaning in the context of COVID-19. Ultimately it will turn on the question of causation. The cover afforded requires a causal connection between the insured risk identified – being the outbreak of the disease within a specified radius – and forced closures by government officials and/or the actual loss sustained. It is not sufficient to simply establish that the outbreak is present within that area described in the policy.
The infectious disease clause’s primary focus is to identify additional causes of coverage, rather than to enlarge the indemnity beyond that which is provided for elsewhere in the policy. In other words, the calculation of the loss will be in accordance with the various formulas, and the insured must prove a loss within the meaning of the terms and provisions of the policy.
The definition of the indemnity period merits close scrutiny. It is the period during which the results of the business shall be affected in consequence of the insured peril. But the actual indemnity period is a question of fact in each particular case. In the COVID-19 situation, for example, there are practical difficulties in defining the beginning and the ending of the occurrence. For example, it could be argued that the indemnity period commences in any one of the following instances: (i) with the occurrence of the outbreak; (ii) when the virus became a “listed human disease” under the Biosecurity Act; (iii) when trading results are upset; or (iv) forced closure.
In a similar thread, the principle of proximate cause might apply, resulting in the insured bearing the loss arising from the prolongation or aggravation of the interruption because of the widespread nature of COVID-19. Despite practical difficulties, the courts may decide to apportion those losses attributable to the outbreak within the specified radius and those attributable to the effects of the pandemic outside the said vicinity.
A critical point which is often lost is that many closures and restrictions directed by governments occur to stop the spread of COVID-19, not because of the presence of COVID-19. In this context, an interpretation which could be adopted is that losses resulting from quarantine orders or site access restrictions are not direct results of an outbreak as specified in a vicinity/radius extension.
The court will look at the whole complex of circumstances to determine what is the real, effective or dominant cause of the loss. In this respect, it will ask itself whether the loss may fairly be considered to be exclusively and solely occasioned by an outbreak within a specified radius, or whether such a local outbreak is concurrent with, or follows, other causes – one of which can more properly be described as the effective cause of the loss.
In essence, if the courts do not provide equitable relief of rectification to correct the mistake in referencing an outdated Act, matters such as causation, consideration of the effects of COVID-19 in the wider area and issues of aggregation in the context of reinsurance recoveries are likely to be highly relevant.
Hopefully, drawing from the insights above, it is reasonably clear that only loss arising as a consequence of a specifically defined insured peril that triggers the policy is covered. A critical issue is whether and to what extent the courts will take into account the broader and circuitous effects of the same peril beyond the vicinity/radius described in the policy.