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, COVID-19 has now been categorised by various governments (including those of the United Kingdom) as a notifiable disease, 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, 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.
Will insurance therefore play a role here? The answer is – possibly, but it depends of course on applicable policy wordings. While a number of articles have been published summarizing the challenges in any such insurance claims, our advice remains to look carefully at the cover. This week an article estimated that the market could be exposed to around $8 billion of losses in relation to event cancellation alone.
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. However some businesses may hold event cancellation insurance. 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. This cover will be subject to various exclusions or limitations, including potentially for certain communicable diseases, 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 it is now a notifiable disease in many countries, that prohibitions or warnings have been issued against gatherings of a particular size or nature by various governments and that it has been declared a “pandemic” 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 may arise (see the web of possible contracts with suppliers and customers affected, below) and early analysis is essential.
Of course, irrespective of insurance, there may well be contractual issues 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 need to be managed.
Supply chain disruption is a key risk of broader application. The reports of decreased output due to the impact 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. As noted above, 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, whether the existence of COVID-19 at the insured site constitutes “physical damage” may need to be considered, and there is precedent in England that contamination can suffice in certain circumstances, and that damage that is reversible may qualify. Second, in light of the recent lockdowns and restrictions imposed by authorities, 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 authorities. 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 the cover they have procured 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 to carefully 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 adhered to. 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.
This is 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.