COVID-19 has been affecting life and businesses around the globe. The developments over the last few days have been moving fast: the World Health Organisation declared the disease as pandemic, the US has restricted travel from certain countries and many countries are on either lockdown or self-isolation rules. A key and primary focus of businesses will of course be safeguarding their people. However the economic consequences of what is now a global issue cannot be ignored. Potential economic impacts include the financial losses from business downturn and closures, the actual cancellation or postponement of events, supply chain interruption, lack of production due to personnel staying at home, defaults on debts and contracts, and ultimate insolvency. While insurance policies are available to address the losses arising from some of these risks, whether the policies will respond to the losses resulted from the COVID-19 will much depend on the exact wording of the policy and categorisation of the insured event.
Will insurance play a role here? The answer is – possibly, depending of course on applicable law and wording, and insurers are beginning to report notifications. While a number of articles have been published summarizing the challenges facing any such insurance claims, our advice remains to clients to look carefully at the cover and the wording and not just assume there is no cover.
The key difficulty in seeking coverage for financial losses is that it is generally rare for a business to be able to insure against business losses that are not consequent on some form of physical damage (see below). However businesses do frequently take out event cancellation This is likely in general terms to cover the necessary cancellation, postponement or curtailment of the event for external matters out of an insured’s control. However, there will be various exclusions or limitations, including potentially an exclusion for communicable disease (unless this is added back by way of additional cover). In all events it will be necessary to look very carefully at the wording – the scope of the wording, and the scope and status of any governmental guidance, advisories or prohibitions may all be relevant to how the policy applies. The fact that COVID-19 is now a notifiable disease in Hong Kong, throughout the United Kingdom and other countries, and that prohibitions have been issued against gatherings of a particular size or nature by various governments may all be relevant to how any policy responds. Where cover does apply there may be cover for expenses and lost profit and, not surprisingly, complex issues of quantification of losses may arise given the web of possible contracts with suppliers and customers effected, discussed above, so early analysis is essential.
Irrespective of insurance, there may well be contractual issues that parties may need to face. An actual cancellation or postponement of an event, whether business, sporting or cultural may result in contractual issues with attendees as to refunds or losses as well as contractual issues with the myriad of suppliers and contributors to events, whether in catering, equipment hire, IT personnel, facilities – the list is a long one. All affected will be looking at their contracts and considering what protections they might have in place in relation to cancellations. Whilst some contracts will deal with the situation expressly, others might contain an implied allocation of risk. This may require consideration of whether a “force majeure” or contractual frustration clause is applicable, which will involve interpretation with regard to the context and objective purpose of the clause (see our briefing here on the potential impact of COVID-19 on contractual obligations). There may also be issues over whether any particular categories of losses are recoverable or whether some are too remote.
If events are changed to virtual or web based events then thought should also be given to making sure that the original liability coverage obtained is wide enough to encompass the change in event profile – a web based event will present different risks which will also need to be managed.
Supply chain disruption is a key risk of broader application. The reports of decreased output due to the impact of the disease within manufacturing regions may well have a knock on effect throughout the supply chain. The mere fact that a business cannot source the right raw materials or components from its own suppliers, or its personnel cannot attend work, and thus suffers a drop in revenue or contractual liability due to an inability to meet its own contract requirements, are unlikely to trigger a business interruption policy. Such policies are usually predicated on physical damage to the insured’s own premises, with possible enhancements (contingent cover) for matter such as interruption due to damage to a supplier’s premises. That is not the end of the issue, however. First, depending on the facts, whether the existence of COVID-19 at the insured site constitutes “physical damage” may need to be considered, and there is precedent in English law that contamination can suffice in certain circumstances, and that damage that is reversible may qualify. Second, in light of developments such as the recent lockdowns in Italy, Spain and France etc. closing many businesses, policies should be carefully reviewed for any extensions to cover where there has been enforced closure, denial of access or other interference due to the actions of a government or authority. Such provisions may or may not be predicated on the occurrence of particular types of disease. Any extensions for general trade disruption should also be considered.
If such pressures on the supply chain lead to widespread financial stress and default then credit risk insurance policies may be relevant. Credit risk policies will sometimes be obtained to protect traders from non-payment or failure to supply and they are usually broadly worded. However, these policies can be obtained year on year without being reviewed in any detail or claims arising, and when a possible claim does arise insureds sometimes undermine their cover by not being aware of the terms and conditions of the policy. Common pitfalls we see are insureds failing to make an effective and prompt notification, or looking to renegotiate the debt to extend the time or change the terms without insurer consent. If there is any question of a default by the debtor, the insured would be well advised carefully to review the policy and act accordingly.
Although it would have seemed far-fetched even a few days ago, given some of the prohibitions on movement and travel now being introduced and discussed, any political risk policies should also be reviewed and considered. Such facts could potentially engage covers for matters such as forced abandonment of assets or inability to export goods, although consideration would need to be given to specific exclusions for acts or prohibitions of a general nature.
There are press reports of some law suits, and in the event of any possible claims, liability policies, employer’s liability policies and D&O policies should be reviewed and all provisions met. As always, care should be taken to understand the policy and to carefully consider matters such as notification, preservation of evidence and ensuring clarity with insurers as to the key facts and background from the outset.
If widespread insolvencies do follow, then under Hong Kong law the provisions of the Third Parties (Rights against Insurers) Ordinance will be relevant. This allows a plaintiff creditor to bring a claim directly against a defendant’s liability insurers in the event of an insolvency event to the defendant. If it looks like this may be relevant then care should be taken to understand the Ordinance, which also allows information to be obtained by creditors from insurers on the insolvency of the insurer. A claim under the Ordinance depends on proving both the claim against the insolvent defendant and addressing any policy limitations or defences which may have existed between the defendant and its insurers, as the plaintiff is not put in a better position than the insured was in by operation of the statute.
COVID-19 presents a unique challenge for the global community that goes well beyond businesses. Ultimately, however, if insurance is to be any part of the solution to the economic challenges it must be considered now, and not just down the track. It cannot mitigate all the challenges in play but it may well help in relation to some, and that help may be of critical economic importance. Understanding with brokers and the legal team what cover has been obtained, how and when it may be triggered and the policy requirements so far as early engagement with insurers are concerned, are the first three key steps.