A messy business

A messy business

Business interruption coverage amid the COVID-19 crisis has sparked furious rows at home and abroad

By John Deex and Wendy Pugh

It may seem obvious to those within the industry that insurers cannot cover pandemic-related business interruption (BI) claims.

You can’t just go paying claims when you haven’t collected premiums – and this has been the case since reinsurers began excluding pandemics following the SARS and MERS outbreaks some 15 years ago.

It would seem to make sense too.

Insurance works best when the many pay premiums to cover claims by the few. If everyone is claiming, then the system falls over.

Even with large-scale natural catastrophes, where there will be many thousands of claims, events are restricted to one geographic area. Reinsurers can diversify their risk.

“Logically you can see why [insurers] wouldn’t want to pay for something that in the worst case scenario is going to affect every business,” claims manager Sedgwick told Insurance News back at the beginning of the crisis.

What is more, BI cover just wasn’t intended to cover this scenario. BI almost always responds when there is physical property damage at the insured’s premises.

An infectious diseases extension is available, but even this is designed to cover localised outbreaks of illnesses such as Legionnaire’s disease.

Pandemics are excluded – or so we thought.

Unfortunately industry “logic” has not extended to those whose livelihoods have been taken away, and as ever with insurance contracts, it comes down to precise wording.

The show must not go on: a sign outside the closed Pavilion Theatre in the Norfolk coastal town of Cromer, UK

No pandemic insurance issue has caused more anger in the US and Britain than the realisation that most BI policies won’t help restaurants, pubs and shops left deserted after virus-triggered lock-downs.

And Australia, which initially looked to have avoided any major controversy, has its own problems thanks to outdated policy wordings. More on that later.

Class actions are being prepared on both sides of the Atlantic and UK trade groups representing 50,000 pubs and 2000 brewers say that “with one or two exceptions the collective failure of insurers to step up and meet their obligations has been deeply disappointing”.

US state and federal legislators have proposed legislation that would void exclusions, President Donald Trump has spoken on the issue, while the New Yorkbased Insurance Information Institute has condemned a campaign led by “the world’s richest chefs and a celebrity attorney”.

Frustrations over lack of cover have risked becoming a major threat, with the institute having to spell out to legislators that the industry won’t survive if it has to pay the type of claims never factored into premium calculations.

“The Federal Government is the only entity with the financial resources to help businesses during a widespread global pandemic,” Institute CEO Sean Kevelighan told a virtual forum hosted by a House of Representatives subcommittee.

“Make no mistake; retroactive business interruption payouts would bankrupt insurers.”

Business interruption is offered as an “add-on” to general property policies to cover lost income and expenses when premises are closed due to physical damage caused by events such as fires or hurricanes, Mr Kevelighan has stressed.

The Association of British Insurers notes that a minority of customers buy add-on cover that includes specific infectious diseases that could affect their workplace, such as norovirus, but these are limited in scope.

“They are not designed to cover an unspecified global, viral pandemic that is not present on the premises,” Director General Huw Jones says. “Nor were these policies sold to customers as being cover against this type of incident.”

The UK Financial Conduct Authority says most property-focused business interruption insurance is not likely to respond to the COVID-19 emergency, but it is launching a test High Court case to examine the wordings of policies that could be argued to include cover.

The eight insurers involved in preparing the case are Arch Insurance, Argenta Syndicate Management, Ecclesiastical Insurance Office, Hiscox Insurance, MS Amlin, QBE, Royal & SunAlliance Insurance and Zurich.

While battles continue over existing policies, discussions are also underway on solutions to better protect businesses in the case of future pandemics.

London-based insurance leader Stephen Catlin and executives from Aon, Guy Carpenter, Willis Re and other companies have formed a steering group to examine ways for the UK insurance industry to respond to future outbreaks.

The group, chaired by Mr Catlin as Convex CEO will work closely with terrorism reinsurer Pool Re in making recommendations.

In the US, legislation to create a Pandemic Risk Reinsurance Program, involving private insurers and the Government, has been introduced into the Congress.

The proposal, which would provide a Government backstop similar to arrangements under the Terrorism Risk Insurance Act (TRIA), has received support from broking giant Marsh & McLennan and the Risk and Insurance Management Society (RIMS).

“Our view is that it is not correct to interpret the exclusion as applying to COVID-19. For one thing, the Quarantine Act was repealed nearly five years ago.”

But the National Association of Mutual Insurance Companies, the American Property Casualty Insurance Association (APCIA) and the Independent Insurance Agents and Brokers of America favour an alternative federal plan to help businesses.

The groups argue a TRIA-like program, with an industry financial role, does not square with the fundamental notion that pandemics are not insurable risks.

“We need a sustainable solution that provides simplicity, certainty, and immediate relief to impacted businesses,” (APCIA) President David Sampson says.

Here in Australia, many hoped for a more “sensible” reaction.

But it has emerged that many policy exclusions still refer to “quarantinable diseases” under the Quarantine Act 1908, which was repealed and replaced by the Biosecurity Act 2015.

As a result, some law firms are advising clients with denied claims that they should continue to fight for a payout, believing the issue could be heading for a very expensive and drawn-out court battle.

Clayton Utz believes policies which have broad infectious diseases cover, with exclusions that refer only to the Quarantine Act, should respond.

“Where the policies simply require that the outbreak occur within a specified radius of the premises, the insurance policy should respond, as it is likely that the business will be able to establish that the outbreak is present within that area,” Partner Mark Waller says.

Special counsel Chris Erfurt explains further.

“Our view is that it is not correct to interpret the exclusion as applying to COVID-19,” he says.

“For one thing, the Quarantine Act was repealed nearly five years ago, so it does not apply to COVID-19.”

Some policies refer to the Quarantine Act “as amended” or “and subsequent amendments”, but the firm says this gives no protection.

“While some of the subject matter the repealed Act covered is now contained in the Biosecurity Act 2015, that Act is not a ‘subsequent amendment’ to the Quarantine Act,” Mr Erfurt says.

“In any event, a listed human disease under that Act – which does include COVID-19 – does not fit within the description ‘quarantinable disease’ under the exclusion, as that is a distinct concept under the repealed legislation.”

The Insurance Council of Australia (ICA) and its members argue that the “the intention of stated exclusions was clear”, regardless of which Act is referred to.

Insurance News understands ICA sought legal advice, which advised that precedent in similar cases suggests the exclusions will hold up.

Overall, however, there is a resignation that this matter will end up in court – probably the High Court – and there are no guarantees which way it will go.

If Australian insurers were forced to pay out all business interruption claims, it has been estimated that this could result in claims of $30 billion for just a threemonth period.

The Quarantine Act issue would not account for the whole of this figure – far from it. But it is believed to be a significant problem, with most IAG and Allianz policies, and some QBE polices, affected.

Mr Waller has little faith in ICA’s legal advice, and says insurers would be better to pay out the claims and avoid litigation.

He says the “intention” of one party is not legally relevant.

“[The customer] did not have that intention,” he said. “Legally, what one party asserts to be their intention does not matter.”

He says that “at best for insurers” the wording is ambiguous, which would lead to them not being able to rely on the exclusion.

Clayton Utz is not the only law firm with opinions on the matter, and others have expressed differing views.

An article on Piper Alderman’s website says that as the Biosecurity Act replaces the Quarantine Act, “an argument that an exclusion referring to the Quarantine Act does not apply is not likely to succeed”.

Mills Oakley agrees that “the insurer’s intention to exclude cover for such notifia- ble diseases is clear to the insured, and the effect of the exclusion is the same, regard- less of the Act referred to”.

However it adds that a risk remains that “these exclusion clauses may be successfully challenged by insureds”.

Colin Biggers & Paisley lines up with Clayton Utz, saying “it is unlikely that exclu- sions, which only refer to the Quarantine Act 1908, will operate to exclude cover for COVID-19 as the Biosecurity Act 2015 is un- likely to qualify as amending legislation”.

The first determination on the issue could come from the Australian Financial Complaints Authority (AFCA), rather than a court.

This is a concern to insurers, as AFCA rulings are binding on them but not con- sumers, and it has an increasing propensity to land on the side of “fairness”.

AFCA declined to offer a view on the issue when contacted by Insurance News, saying only that it has three current complaints relating to business interruption and COVID-19, and investigations are ongoing.

Whichever way this goes, it’s not good for insurers. It could be time-consuming, expensive, and damaging to the industry’s reputation.

Ultimately – both here and overseas – it will be up to courts to decide the outcome.

The repercussions could be incredibly damaging, and the industry will be hoping that its “logic” prevails.