Article published – Insurance items on the board’s agenda for 2021

The past 12 months have been unprecedented, with many organisations grappling with the pandemic and its impact to their business.  But it isn’t just Covid-19 that is on the agenda for many boards, there are a number of other emerging risks that should be top of mind, from an insurance perspective, including: the wider implications of the FCA business insurance test case; emerging cyber risks; Directors and Officers (D&O) cover; and distressed M&A. Continue reading

COVID-19: Governance: PRA and FCA confirm expectations for regulated firms under SMCR (UK)

The PRA and FCA have set out their expectations for UK-regulated firms under the Senior Managers and Certification Regime (“SMCR“) in the light of the COVID-19 outbreak.

A joint statement from the PRA and FCA applies to dual-regulated firms (the “Joint Statement“), while the FCA has published a separate statement for solo-regulated firms (the “FCA Statement“).

Some differences in expectations as between solo and dual-regulated firms are highlighted below.

Next steps

Firms should:

  • Ensure responsibility for the response to COVID-19 disruption is clearly allocated to one or more appropriate Senior Managers.
  • Document internally all decisions relating to the interim re-allocation of Senior Management Functions (“SMFs“) and Prescribed Responsibilities (“PRs“) as a result of temporary absences during this period. Firms should be prepared to share these internal documents with the regulators on request.
  • Communicate material temporary changes to the appropriate regulator promptly (this may not need to be by way of usual SMCR notification forms).
  • Keep contingency plans under review to ensure they remain up-to-date.
  • Take reasonable steps to complete any annual certifications that are due to expire while restrictions are in place.

Key expectations

Allocating responsibility for COVID-19 response

  • Firms are not required to allocate responsibility for their response to the disruption caused by COVID-19 to a single Senior Manager. No “one size fits all” approach is being mandated (with the exception of requiring the responsibility of identifying key workers to be allocated to SMF1 (Chief Executive Officer) – see the FCA and PRA statements for more information).
  • In the Joint Statement, the PRA also recommends that dual-regulated firms consider how they respond to unexpected changes to contingency plans, given the possibility of Senior Managers becoming temporarily absent. Solo-regulated firms should consider doing the same.

Temporary arrangements for SMFs and PRs

SMFs

  • Where a Senior Manager is unexpectedly absent due to illness (or other COVID-19 related circumstances), firms may choose to allocate SMFs to existing Senior Managers. In addition, under the existing ‘12-week rule’, firms may permit an unapproved individual to perform an SMF role where such arrangements are temporary.
  • For solo regulated firms, the FCA intends to issue a Modification by Consent to the 12-week rule to support firms using temporary arrangements for up to 36 weeks. This extended period is not currently available for dual-regulated firms (although this position remains under review).

PRs

  • The FCA and PRA expect PRs (for both solo and dual-regulated firms) to be allocated to existing approved Senior Managers wherever possible. Where this is not possible (for example due to other Senior Manager absences), the PR can be allocated to an unapproved individual performing an SMF’s role on an interim basis.
  • All temporary changes to SMFs or PRs throughout this period should be clearly documented on internal records, including in Statements of Responsibilities (SoRs) and Responsibilities Maps (where appropriate). These records will need to be available to the FCA and/or PRA on request.

Furloughing staff

  • Both statements confirm that furloughed Senior Managers will retain their approved status during their temporary absence and will not need to seek re-approval.
  • Certain ‘required’ functions (such as Compliance Oversight and MLRO) and/or ‘mandatory’ functions (such as the CEO, CFO and Chair of the Governing Body for Solvency II insurers) should only be furloughed “as a last resort”. Firms must arrange cover for those SMFs during the individual’s absence.
  • Firms have greater flexibility in furloughing Senior Managers whose functions are not mandatory. However, in the Joint Statement, dual regulated firms are cautioned to think carefully about the implications of furloughing non-mandatory SMFs (such as SMFs responsible for business continuity). Solo-regulated firms should also consider the implications of furloughing key senior staff.

Notification requirements during this period

All firms

All firms should update the FCA (and, where relevant, the PRA) by email or by telephone where:

  • unapproved individuals are acting as SMFs under the ‘12-week rule’; and/or
  • Senior Managers have been furloughed.

Firms are not required to submit Forms C, D or J in connection with these temporary absences.

Solo-regulated firms

  • Solo-regulated firms will not be required to submit an updated SoR for approved Senior Managers if a temporary change is made to their responsibilities. However, solo-regulated firms will still need to notify the FCA of the detail of any changes (by email or by telephone) that would normally be included in updated SoRs.

Dual-regulated firms

  • Dual-regulated firms are still required to update and submit SoRs if there are significant changes “as soon as reasonably practical”. It is acknowledged that this may take longer than usual due to current operational challenges.

No change to the obligation to certify staff as fit and proper

  • Dual-regulated firms should take reasonable steps to complete annual certifications due to expire during this period. What might constitute reasonable steps may be altered given the current situation, and certification policies and procedures may need to be adapted.
  • While not specifically addressed in the FCA Statement, in the absence of any new regulatory guidance, the FCA’s expectation appears to be that solo-regulated firms should also take reasonable steps to continue with annual certifications during this period.

Our blog post on the PRA and FCA’s guidance on key workers in financial services is available here, and our general briefing on COVID-19 – Key Issues for Employers is available here.

 

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621
Emma Reid
Emma Reid
Associate, London
+44 20 7466 2633

COVID-19: Webinar series: Legal perspectives for business

We are pleased to invite you to our weekly webinar series discussing the business challenges presented by the COVID-19 outbreak.

The third webinar, entitled, ‘People: the challenges being faced’, will be broadcast on 7 April 2020 and will focus on a number of the key issues currently being faced by UK employers, as well as the government support that may be available. The webinar will be chaired by James Palmer, Chair and Senior Partner of Herbert Smith Freehills, who will be joined by expert colleagues who will share their experience and views on these issues.

To register for upcoming webinars and to access earlier webinars in this series, please click here.

If you are unable to attend, once registered you will automatically be sent a link to the recording of the webinar as soon as it is ready.

COVID-19 Governance: Regulatory impact for insurers

The COVID-19 pandemic is creating significant health, social and economic challenges world-wide, forcing governments and businesses to assess the impact on their people, operations and governance.

Our latest “at a glance guide” considers some of the announcements made to date by EIOPA, the PRA and the FCA.  These cover a range of issues including actions that insurers should be taking to protect customers and employees, encouragement to firms to preserve capital and the extension of reporting deadlines.

Our COVID-19 crisis hub aims to help our clients navigate their way through the many legal and regulatory issues that COVID-19 creates for their businesses.

For regular insurance sector updates, please also subscribe to HSF Insurance Notes.

If you would like to discuss arrangements for support on any of the issues raised by COVID-19, please ask your regular Herbert Smith Freehills relationship contacts, or one of the following members of our insurance team.

Geoffrey Maddock
Geoffrey Maddock
Partner, London
+44 20 7466 2607
Barnaby Hinnigan
Barnaby Hinnigan
Partner, London
+44 20 7466 2816
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Grant Murtagh
Grant Murtagh
Of Counsel, London
+44 20 7466 2158

COVID 19 – PRA and FCA guidance on key workers in financial services

The UK Government has published guidance requesting that schools and other educational institutions provide limited care for children whose parents have roles that are critical to the COVID-19 response. This includes parents working in certain financial services roles, including in the insurance sector, that are essential to the functioning of the economy (referred to as “key financial workers” or “KFWs“).

The PRA and FCA have now published their own guidance, setting out the steps that firms should take.

Identifying KFWs

  • A KFW is any individual who fulfils a role which is necessary for the firm to continue to provide (i) essential daily financial services to consumers, or (ii) ensure the continued functioning of markets.  The guidance provides a list of example KFWs (PRA) (FCA).
  • KFWs could work for any categorisation of financial institution, including insurance companies and intermediaries
  • Firms are best placed to identify their KFWs; they should start by identifying the firm’s activities, services or operations which are essential to services in the real economy or financial stability and then identify the individuals essential to support those functions.
  • In the insurance sector, KFWs are likely to include individuals essential to the processing of claims and renewal of insurance policies.

Outsourced functions

  • When considering KFWs, firms should also identify any critical outsource partners that are essential to the continued provision of services, even if these are not financial services firms.

 Process

  • The PRA/FCA recommend that the individual designated as Chief Executive Officer under the Senior Managers and Certification Regime (SMF1) (or, if not applicable, an equivalent senior member of the management team) should be accountable for ensuring an adequate process so that only roles meeting the KFW definition are designated.
  • Firms should consider issuing letters to all individuals identified as KFWs as evidence of their status.

Our general briefing on COVID-19 – Key Issues for Employers is available here.

 

Clive Cunningham
Clive Cunningham
Partner, London
+44 20 7466 2278
Alison Matthews
Alison Matthews
Consultant, London
+44 20 7466 2765
Mark Staley
Mark Staley
Senior Associate, London
+44 20 7466 7621

Sporting Event Cancellation Insurance: Will it play ball or be kicked into touch?

By RICHARD LIDDELL QC4 NEW SQUARE AND SARAH MCNALLY, PARTNER,  HERBERT SMITH FREEHILLS

This article was first published by 4 New Square here.

Many events, including music, theatre, conferences and exhibitions have been cancelled or postponed in the wake of COVID-19 and more will follow.

Sporting events at grassroots and professional level have also been hit hard.  The most recent casualty are the Tokyo 2020 Olympic and Paralympic Games, which have been postponed until 2021, and is an event which has reportedly already cost the Japanese government at least £10 billion[1].  The IOC’s decision to postpone followed hot on the heels of Japan’s Prime Minister’s (Shinzo Abe) proposal to postpone for one year and Australia and Canada having confirmed that they would not be competing in Japan (with the chairman of the British Olympic Association saying that Great Britain was likely to follow suit).  Torsten Jeworrek of the German insurer Munich Re told Reuters in February that his firm had provided event cancellation insurance for the Tokyo games “in the hundreds of millions of euros”[2]. Swiss Re has recently said it has 15% global market share of event cancellation cover and would face a $250 million loss if the Olympics are cancelled[3].

Other high-profile events have also suffered: for example, the Grand National has been called off; the World Snooker Championship at the Crucible has just been postponed; Six Nations’ games have been postponed; many Grand Prix have been cancelled, including the Australian Grand Prix; UEFA Euro 2020 is postponed until 2021; and all football in England is currently suspended.  Although it is hoped that many events can be rescheduled and competitions (such as the Premier League) completed before the next season is due to begin, there must be a real risk that this will not be possible.

The cancellation or postponement of events will have an obvious and material economic impact, particularly for those businesses whose principal source of income derives from the successful running of these events.

The question is whether insurance will come to the rescue?  The answer is that it depends on the nature of any insurance cover obtained and on the applicable policy wordings.  For those businesses that hold event cancellation insurance, now is the time to consider with your brokers and/or legal team precisely what cover has been obtained, whether it could have a role to play and what steps need to be taken to improve the chances of the insurer confirming cover.  For insurers, careful consideration will of course need to be given to the policy wording and any extensions of cover and whether (for example) the notification conditions under the policy have been met.

In this short article, Sarah McNally[4] (a partner in Herbert Smith Freehills) and Richard Liddell QC[5] (a barrister at 4 New Square) address some of the issues that policyholders/insureds who took out sporting event cancellation insurance and insurers are likely to be grappling with and which may well end up being played out in the courts or in arbitration.  Although the focus in this article is on sporting events, the same or similar principles are likely to apply across the board for any cancelled or postponed event.

Event Cancellation Insurance

Event cancellation insurance differs from many other forms of insurance in that it is not a pre-requisite for cover that the business losses are consequent on some form of physical damage.  There have been many articles on the scope of business interruption cover in the context of COVID-19, but less has been said about event cancellation insurance.

However, given that last week an article estimated that the market could be exposed to around $8 billion of losses in relation to event cancellation alone, this form of insurance is likely to move towards centre stage.

Broadly speaking, and subject to various exclusions and limitations, an event cancellation policy is designed to cover the cancellation, postponement or curtailment of the event because of circumstances that are unavoidable and due to reasons beyond the insured’s control.

Where cover does apply there may be cover (up to the sum insured and subject to any deductibles) for irrecoverable costs and expenses and loss of net profit and/or additional expenses.  All of this will, in turn, give rise to complex issues of quantification not least given the likely web of contracts with suppliers and customers affected.  Early consideration of these issues is critical not least because the insured will almost inevitably be required to prove to the insurer’s satisfaction that the losses were suffered, including that the net profit would have been earned had the event taken place.

Policy Wording – overview

Event cancellation insurance is generally bespoke and each policyholder will need to examine the contents of their policy schedule and the particular policy wording to see what is covered and what is not, albeit we have seen a degree of commonality in various policies when it comes to conditions and exclusions.

For example:

  • it will likely be a pre-requisite to cover that the cancellation or postponement of the event was due to reasons “beyond the insured’s control” (or similar wording); and
  • many policies will expressly exclude any losses arising out of or resulting from certain communicable diseases such as swine flu or avian flu[6]. However, some policyholders may have write back cover for losses arising out of the cancellation or postponement of events resulting from communicable diseases (perhaps all, or perhaps only some, categories of communicable diseases)[7].   Whether and when it became a pandemic may also be relevant.

Certainly there is the potential for recovery – Chubb’s “Event Cancellation” factsheet sets out some “case studies”, one of which is that “a conference due to be held in Hong Kong had to be cancelled due to an outbreak of a communicable disease” – and Chubb “paid the irrecoverable costs and expenses incurred in rescheduling the event for another time”[8].  So it is all about the specific facts and policy wording negotiated.

We also note in passing that in the USA it is reported that event cancellation coverage may not exclude communicable disease in a standard event cancellation policy form[9].

Policy Wording – “beyond the insured’s control”

The timing and cause of the event’s cancellation or postponement are bound to feature prominently in analysing whether the insurance policy is likely to bite.

As noted above, event cancellation policies will likely require the event to have been unavoidably cancelled, abandoned or postponed. The wording may refer to the cancellation etc. being as “as a sole and direct result” of a cause “entirely beyond your [the policyholder’s] control”.

If the relevant government has prohibited such events or gatherings (and such prohibitions are increasing almost daily) then there should be no room for debate. If, however, a policyholder cancels or postpones a tournament or competition without being specifically required to do so by the relevant government because (for example) there were health and safety or liability concerns and/or players were signalling that they would not be participating, the insurer may argue that the cancellation or postponement was not unavoidable or beyond the insured’s control.  However, whether they would succeed in such an argument is certainly not clear cut in light of these extraordinary circumstances – by way of example only, without paramedic staff available it is hard to see how such events could practically and legally be run; further is a policyholder “able” to run an event if by doing so it is opened up to potential legal liability? The comments by the Chancellor in the Budget Select Committee last week indicated some acceptance that requiring people to stay at home is comparable to requiring premises to close  could be relevant here[10].

In the circumstances, policyholders and insurers will need carefully to consider the:

  • timing of the cancellation or postponement relative to dates when, for example, COVID-19 became notifiable and/or the UK government’s announcement on 16 March 2020 that everyone should avoid gatherings and crowded places.[11]
  • the cause of the cancellation or postponement (e.g. was it unavoidable because of the restrictive measures, guidance or governmental orders in place or because it could not be legally and safely continued).

It will be interesting in due course to see how insurers respond to claims under event cancellation insurance policies and how (if litigation ensues) the Court or Arbitrator will apply the words “beyond the Insured’s control” in practice.  Policyholders may be seeking some degree of commercial pragmatism and purposive construction given the purpose for which such polices are taken out. The UK’s government’s major shift in strategy in the last weeks and the escalation of restrictions imposed may support this approach.  Indeed, in light of recent emergency legislation giving the government wide-ranging powers to close premises and ban gatherings, many event organisers will now feel constrained to cancel or postpone a sporting event (on the basis it would be banned in any event if they tried to hold the event) and will say that this is unavoidable and beyond their control.

Anecdotally, in the context of a wedding cancellation policies, the Guardian has reported that claims made under these policies are being refused despite customers having paid for policies stating that cover will be provided if “the booked venue for the wedding or wedding reception being unable to hold your wedding due to an outbreak of infectious or contagious disease”[12].  One provider is reported in the press to have said that it would only consider a wedding venue “unable” to hold a wedding due to the virus if the company closes its doors, either through self-closure or due to government legal measures. This may signpost that for the period until the government required wedding venues to shut or made mass gatherings illegal, at least some insurers are likely to seek to decline cover for decisions made by couples to cancel their wedding events in light of COVID-19. Whether they will succeed remains to be seen. Even on this analysis, however, those arguments may have been overtaken by very recent events, including the UK government ordering a lockdown and cancellation of all weddings.

Insurers may well seek to deploy similar arguments when faced with a claim by a policyholder for losses arising from or resulting from a cancelled or postponed sporting event, although each claim will turn on its own facts and the scope of insurance cover.  Moreover, a policyholder is likely to hope that it will in any event have the sympathetic ear of the Court or Arbitration.  But watch this space.

Policy Wording – exclusions and write back

In addition to satisfying the insurer that the cancellation or postponement was unavoidable and beyond the policyholder’s control, the policyholder will need to consider whether it has to navigate through one or more exclusions and whether it has qualifying write back cover.

Like most event cancellation policies, sporting event cancellation policies will generally contain exclusions relating to communicable diseases, subject to write back cover.

For example, some wordings we have reviewed provide that the cancellation and abandonment insurance does not cover “losses arising out of, contributed to by, or resulting from “any communicable disease” which leads to, among other things, “any travel advisory or warning being issued by a national or international body or agency” and “any fear or thereat thereof (whether actual or perceived).”

In the absence of any write back extending cover to losses resulting from or relating to a communicable/notifiable disease, any claim made by a policyholder under the terms of this wide exclusion clause for losses caused by the cancellation or postponement of an event as a result of COVID-19 looks difficult, albeit the exclusion is not for any communicable disease but only for those where the criteria are met, so the criteria would need to be carefully reviewed.

Critically, there may well be write back cover, either generally or for specific communicable diseases, which would prevail over any general exclusion for communicable diseases and allow the policyholder to recover. From what we have seen so far, this is the heart of the cover which is likely to assist policyholders with claims relating to COVID-19.

Either way, some wordings refer more specifically to communicable diseases and a virus or other which is “related to” diseases such as avian flu or swine flu or similar. Whether or not COVID-19 is genetically related to any of those diseases will be a matter of expert evidence.  According to some online reports, COVID-19 is genetically related to the coronavirus responsible for the SARS outbreak in 2003 (albeit the viruses differ in various respects); and on 11 February 2020 the WHO announced “COVID-19” as the name of the disease caused by the virus SARS-CoV-2.

However, even if COVID-19 is genetically related to any of the named diseases, what any such term means as used in the policy may be a different question. Insurance policies are not scientific documents and, as a matter of English law, the objective intention of the parties, as reflected by the actual words used, will be what is critical. It may be argued, for example, that the policy, properly construed, was intended to exclude only known viruses related to bird flu or swine flu but not an unknown virus like COVID-19. The courts have confirmed recently that any construction of a policy which means that the policy has little practical application is unlikely to be one that a court will find persuasive, so that concept may also feature in any reasoning. [13] Whatever the rights or wrongs of these arguments, such concepts may be ripe for debates and disputes between the policyholder and insurer.

Other policy wordings that we have seen seek to exclude “[c]ircumstances arising through, or because of restrictions imposed by the local authorities, or regulatory bodies”.  This may well be invoked by insurers, but also batted back by policyholders as being inapplicable depending upon the reason for cancellation or postponement of the event.

It goes without saying that the policy schedule and policy wording will repay careful reading as the risk appetite of one insurer might well be very different to another insurer.

Going forward, it is extremely unlikely that a business will be able to buy specific cover (at least not at this stage) to protect against cancellations or postponements resulting from COVID-19.

Policy Wordings – notification conditions

While it is of course important to consider the nature of the cover, any write back (add-ons) and whether the policy schedule and applicable policy wording mean that cover will or will not be provided, it is vital not to overlook the conditions of the policy applicable to the claims process itself.

It will almost certainly be a condition of the policy and any liability provided by the insurers that they are immediately notified by the policyholder of any incident which could or is likely to result in a claim under the policy (the precise wording will differ depending upon the particular policy) and that notification of any claim be given within a usually short time-scale.

Careful consideration will need to be given, therefore, by policyholders and insurers alike that those conditions have been met.

Conclusion

The prime concern of policyholders holding event cancellation insurance will of course be the health of their employees, family and friends and the general sporting community. However, the financial health of the business will remain a significant concern.  Accordingly, the role that insurance has to play cannot be overlooked if the right return for premium paid is to be obtained.

Business with sporting event cancellation insurance will need to navigate a number of requirements to recover their losses arising from the cancellation or postponement of events.  However, given the scale of some of the losses that are likely to result from the cancellation or postponement of events, it is vital not to delay in considering the nature and extent of any insurance cover.  It is likely that such consideration will require the input from insurance brokers and/or your lawyers.

Insurers that have provided event cancellation insurance will doubtless be reviewing the terms of their policyholders’ policies to work out their potential exposures.

It would appear from press reports that the general view of the insurance industry (at least a few weeks ago) is that the COVID-19 virus was unlikely to result in a multitude of expensive pay-outs.  However, event cancellation insurance contracts are generally bespoke and some policyholders might well find that their event cancellation insurance policy is very much in play.

With so many major sporting events having already been cancelled or postponed and with more inevitably to follow, insurers are likely to be faced with substantial claims under event cancellation policies.  The scale of losses means that many policyholders are very unlikely to take no for an answer from insurers unless the position is absolutely clear; and insurers are unlikely to be swayed by arguments from policyholders that their refusal to provide cover is “just not cricket”.

We wish all the best to our readers.  Keep safe and well.

This article is for reference purposes only.  It does not constitute legal advice and should not be relied upon as such.  No warranty, express or implied, is given as to its accuracy and we do not accept any liability for error or omission. Specific legal advice about your specific circumstances should always be sought separately before taking any action.

© Herbert Smith Freehills 2020 and Richard Liddell QC

[1] https://www.bbc.co.uk/sport/olympics/52020134

[2] https://uk.reuters.com/article/uk-olympics-2020-coronavirus-insurance/insurers-could-lose-billions-if-coronavirus-prompts-olympics-cancellation-idUKKCN20M1YF

[3] https://www.law360.co.uk/insurance-uk/articles/1255345/swiss-re-faces-250m-loss-if-olympics-canceled?nl_pk=bf9e820e-ce4a-415d-9b76-f3a824f783a4&utm_source=newsletter&utm_medium=email&utm_campaign=insurance-uk

[4] Sarah is a partner who advises clients on contentious and non-contentious insurance matters: https://www.herbertsmithfreehills.com/our-people/sarah-mcnally

[5] Richard is a barrister who frequently advises on policy interpretation and coverage issues.  He is also recommended as a leading practitioner in the legal Directories for Sports law: https://www.4newsquare.com/barristers/richard-liddell/

[6] A communicable disease, like COVID-19, is an illness caused by viruses or bacteria that are spread from one person to another through contact with contaminated surfaces, bodily fluids, blood products, insect bites or through the air.

[7] Some policies may include an option where the insurer will “write-back” (i.e. add-back in) some cover for liability which would otherwise be excluded under the standard form of the insurance contract.

[8] https://www.chubb.com/uk/en/business/by-category/assets/event-cancellation-factsheet_lowres.pdf

[9] https://riskandinsurance.com/hospitality-and-retail-during-coronavirus/

[10] https://committees.parliament.uk/work/139/spring-budget-2020/publications/

[11] In Scotland, the First Minister announced on 12 March 2020 that, from 16 March, mass events should not take place and advised that organisers should cancel or postpone all mass events of 500 people or more (indoors or outdoors).  Restrictive measures have of course moved on since then.

[12] https://www.theguardian.com/money/2020/mar/21/coronavirus-insurance-cover-travel-weddings-income-rent   (21 March 2020).

[13] Zurich v Manchikalapati [2019] EWCA Civ 2163 (https://www.bailii.org/ew/cases/EWCA/Civ/2019/2163.pdf)

BUSINESS INTERRUPTION AND EVENT CANCELLATIONS DUE TO COVID-19 – WHAT ARE THE POSSIBLE INSURANCE IMPLICATIONS? (UPDATED 19 MARCH)

Summary

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.

Event cancellation

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.

Business Interruption

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.

Credit risk

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.

Political risk

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.

Liability

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.

Concluding thoughts

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.

 

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Paul Lewis
Paul Lewis
Partner, London
+44 20 7466 2138
Sarah McNally
Sarah McNally
Partner, London
+44 20 7466 2872
Juliana Rego
Juliana Rego
Paralegal, London
+44 20 7466 3173