The sting in COVID-19’s liability tail

The sting in COVID-19’s liability tail

Insurance law experts warn the coronavirus is likely to leave insurers with a nasty ‘tail dependency’ problem

By Miranda Maxwell

COVID-19 has impacted every industry and state in Australia, and as a result many business continuity plans have been activated.

There has been unprecedented government intervention – new legislation, emergency orders and directives – and the stock market has fallen sharply. Many industries have been hit hard, including transport, tourism, events, hospitality, sports, real estate, retail and education.

This extreme upheaval, resulting in employee redundancy or stand-downs and disruption to the manufacturing supply chain, will create unique developments across different insurance product classes in Australia.

The Insurance Council of Australia has published some general guidelines regarding the likelihood of COVID-19 triggering cover for Business Interruption and Travel in particular.

Law firms’ insurance specialists have set up teams to help their insurer clients respond to the virus.

“The scale of impact, and its consequences on supplementary business, should not be under-estimated,” Wotton + Kearney says.

“There may be a ‘tail dependency’ as seen following other catastrophic events, such as the terrorist attacks of 9/11.”

The significant falls on the sharemarket and potential declines in residential and commercial property prices may have implications for valuers and stockbrokers, fund managers and financial planners.

Wotton + Kearney gives a stark example of unforeseen exposure: the regulator warning all real estate agents across Australia in writing that they were not licensed to advise tenants about options to access superannuation under government relief schemes.

That “highlights the likelihood of new risks emerging for all service providers,” it says.

The firm says businesses, particularly those that open their doors to the general public, may find themselves targets of claims that their negligence led to the exposure and infection of clients.

Lawyers say this might include:

• Exposure resulting in bodily injury or property damage

• Negligence related to visitors to locations such as offices, day care centres, retail shops, hotels and places of worship

• Product liability related to air filtration and recirculation (think aeroplanes and hospitals)

• Personal injury involving occurrences such as wrongful eviction or imprisonment

• Constitutional claims involving the quarantine or restriction of infected or exposed persons

• Negligence or other liability suits against a company or organisation that fails to implement a pandemic contingency plan.

The target of such claims might not only be the business but also its general liability insurance and its coverage for bodily injury.

Policy exclusions may exist in many cases for claims arising from a pandemic, virus (particularly post-SARS) or bacteria.

And some claims are likely to see a reduction. Some insurers are providing credits to their motor insurance customers as a result of them not driving during lockdowns, and New Zealand’s Tower Insurance has reported lower motor claims are comfortably offsetting the cost of its car insurance premium refund program. With empty shopping centres and many retail businesses closed and extra precautions taken around workplace health and safety, there is likely to be a reduction in claims involving “slip and trips”.

“The evidence will take time to appear given the longtail nature of the claims,” Wotton + Kearney says.

Insolvency will result in senior management conduct being heavily scrutinised by their directors, and it is possible there will be claims alleging a failure to adequately prepare a company for a major economic disruption, contingency planning or effective management of supply chain and labour force risks.

D&O warning: Wotton + Kearney Partner Cain Jackson

This could result in higher Directors’ & Officers’ (D&O) insurance claims.

“Poor management practices and conduct before the coronavirus pandemic may be exposed by the financial strains now imposed on companies,” Cain Jackson, Partner and Financial Lines Practice Leader at Wotton + Kearney, said.

“There are a litany of issues which now have to be addressed by company boards which would have been difficult to envisage prior to COVID-19.”

Mr Jackson predicts a spike in insolvency-based D&O claims once government measures to prop up businesses run their course.

“It is hard to see corporations not being heavily impacted and corporate failures prompting a review of the conduct of directors and officers,” Mr Jackson says.

“That scrutiny will lead to claims. The level will be determined by the severity of the economic fallout from COVID-19.

“The risks associated with any statements to third parties, particularly in respect of future financial performance warrant extreme caution.”

Exclusions in D&O policies for absolute bodily injury may also be tested by claims arising out of the pandemic, though safe harbour provisions enacted as part of the Coronavirus Economic Response Package Omnibus Act 2020 will afford some protection from insolvent trading claims.

Workers’ compensation policies generally extend insurance benefits to employees for injuries “arising out of or in the course of employment”, and employees have been advised to keep stringent records revealing whether the claimed injury is truly work-related, the nature of the injury, the injured employee’s activity, and the time and location of the incident.

Errors and Omissions insurance, which covers bodily injury arising out of medical care, generally excludes exposure to a contagious disease, though claims that a healthcare professional acted or failed to act in a manner that led to a patient contracting a coronavirus bodily injury may be upheld.

Employment Practices Liability insurers are having to reassess the quantum exposures of existing claims.

Dismissal claim compensation usually centres on “future economic loss.” Due to the impact of coronavirus, the usual assumption of long-term employment can no longer be maintained, and so claims for future economic loss will need to be heavily discounted and reduced by applicants, the courts and the Fair Work Commission, Wotton + Kearney says.

It does not expect the increase in redundancies to lead to a large spike in unfair dismissal claims.

“Ironically, an Employment Practices insurer may be exposed to higher risks of claims from employees who continue to work or be employed,” it says. “Where an employer purports to unilaterally reduce hours or remuneration without the employee’s consent, they will be in breach of contract.”

The Fair Work Act is cause for debate about whether employers can rely on a “stand-down” to deal with a general economic downturn.

The terms of construction contracts will also require careful review to assess whether the parties are entitled to rely on any force majeure clause if they are unable to perform their contractual obligations as a result of the coronavirus stand-down.

“If such a clause is incorrectly relied on, contractors risk being found in breach of contract for non-performance, or perhaps for having repudiated the contract,” Wotton + Kearney says.

Other contractual issues are delay and liquidated damages stemming from the unavailability of materials from affected countries or of trades or consultants, which will put extension of time contracts under the magnifying glass.

While business interruption (BI) losses are typically only triggered by damage to property, the Contagious Disease Memorandum allows cover in the case of a closure order by a public authority following an outbreak of a contagious disease at the insured’s premises.

Policies that include a Contagious Disease Memorandum that is referenced to the amended Quarantine Act are likely to see coverage disputes.

More immediately, COVID-19 related cyber claims are poised to spike right away due to remote working, targeting of key organisations, and phishing scams.

It is, says Wotton + Kearney, “potentially the largest ever cyber-security threat to face businesses and consumers”.