Client Update - COVID-19 Business Interruption Losses
7 October 2020
Businesses in Australia and around the world are facing massive disruption from COVID-19. One area of increasing focus is the adverse impact COVID-19 is having on business revenues and the role Business Interruption Insurance cover (BI) may have to play.
Aon is closely monitoring the situation in Australia, United Kingdom and in other countries where courts have become involved in the consideration of this complex topic.
Aon is committed to our clients and providing the most relevant and timely information and updates on this key issue.
Please see below our current market update on business interruption insurance losses.
Aon remains committed to its clients through the COVID-19 pandemic
A question that continues is whether Australian BI coverage responds to virus connected losses.
Business Interruption (BI) Cover
Property policies typically cover losses from physical damage to insured property from a covered peril. In the absence of physical damage, BI losses are generally not covered.
However, there are some policies which provide BI cover from non-damage causes, arising from:
- closure or evacuation due to infectious, contagious or notifiable diseases within a specified radius of the insured premises (Disease Clause);
- prevention or hindrance of access to or use of insured premises as a consequence of government action or restrictions attempting to avoid or diminish risk to life or damage to property within a specified radius of insured premises (Prevention of Access) (POA Clause);
- actions taken by a civil authority during a conflagration or other catastrophe for the purpose of retarding such catastrophe; or
- a hybrid of the above clauses.
Non-damage BI causes can vary and the above are only examples of cover commonly found in Australian policies. These clauses may also:
- be included alone or in combination; and
- be subject to:
- a general exclusion for avian influenza or declared or notifiable human diseases (as mentioned below); and/or
- a sublimit of liability.
In about 2006, insurers introduced general exclusions for losses relating to quarantinable or notifiable human diseases following the SARS virus so that many non-damage BI Clauses in Australian policies exclude losses arising from:
- a quarantinable disease under the Quarantine Act 1908 (Cth) and subsequent amendments; or
- listed human disease under the Biosecurity Act 2015 (Cth).
On 21 January 2020
, human coronavirus with pandemic potential was declared a Listed Human Disease under the Biosecurity Act
FCA Test Case Judgment and Appeal
On 9 June 2020
, the UK Financial Conduct Authority (FCA
) commenced test case proceedings in the UK High Court (FCA Test Case
) to resolve questions relating to 21 sample wordings commonly used in the London market for small to medium sized UK enterprises (SME
). While the focus of the test case was on SME UK wordings, the judgment has potentially broader application to other segment wordings.
On 15 September 2020
, the UK High Court handed down its judgment in the FCA Test Case [FCA v Arch Insurance (UK Ltd and others  EWHC 2448 (Comm
)]. The judgment is complex with policyholders prevailing on many points and insurers prevailing on others. A link to the judgment can be found on the FCA’s website: https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-judgment.pdf
The UK High Court’s decision can be divided into three groups:
- Disease Clauses;
- POA Clauses; and
- Hybrid Clauses.
The Court also made findings on the issue of the application of trends clauses and causation.
In summary, the Court found:
- Most, but not all, of the Disease Clauses, which cover BI in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises, provided cover. Cover under these wordings were found to be not limited to losses resulting from local outbreaks of COVID-19. It is relevant that in Australia, Disease Clauses are typically written back to exclude declared or notifiable diseases;
- Some of the POA clauses, which broadly cover BI losses due to a prevention or hindrance of access to insured premises as a consequence of government action, provided cover. However, these clauses were interpreted more narrowly than the Disease Clauses and whether cover was available depended on the wording of the clause and the specific circumstances of the alleged claim and loss, including how the specific insured business was affected by government orders or action; and
- In relation to causation and trends clauses, in respect of certain of the sample wordings, the pandemic’s impact and the relevant UK government orders were found to be a single cause of the covered loss.
The UK High Court did not make any findings of fact as to where COVID-19 had occurred. Whether a particular insured can discharge the burden of proving that the disease occurred in a certain area still needs to be determined on a case by case basis in respect of these UK claims, even if the judgment is upheld on appeal. Additionally, where cover is ultimately confirmed, each insured will still need to prove its BI loss within the terms, conditions and limits of the relevant policy.
Certain Insurers and the FCA have indicated that they will appeal aspects of the judgment.
On 5 October 2020
, the UK High Court allowed a fast track process for appeal applications with leapfrog applications being granted to go to the UK Supreme Court without first heading to the Court of Appeal. The date for hearing of the appeals is yet to be set.
Potential guidance for Australian Insureds
The UK judgment will not be binding in Australia but, subject to any appeal, the UK Courts’ interpretation may provide some guidance to Australian insureds and their insurers in considering whether an insured’s particular circumstances and claim may fall for cover under a BI non-damage extension. Whether a BI claim is ultimately covered under an Australian policy will depend on the specific policy wording and the circumstances of the claim itself (together with any relevant Australian legal principles or legislation which may apply), noting that Australian BI wordings typically contain exclusions or carve outs of cover for notifiable and quarantinable diseases.
Australian Test Case
On 13 August 2020
, a test case to consider the application of an infectious disease exclusion was filed in the Supreme Court of New South Wales. The test case is supported by the Insurance Council of Australia (ICA
) and the Australian Financial Complaints Authority (AFCA
The test case will examine whether a Quarantine Act
exclusion can be relied upon as a result of COVID-19 being declared a listed human disease under the Biosecurity Act 2015 (Cth).
The Quarantine Act
was repealed in June 2016 and effectively replaced by the Biosecurity Act
AFCA has agreed to follow the reasoning of any final judgment in the test case when determining other complaints before it in respect of BI claims with a similar infectious disease exclusion.
On 4 September 2020
, the NSW Supreme Court approved a joint leapfrog application, with the Test Case referred directly to the NSW Court of Appeal and for hearing commencing on 2 October 2020
Aon is also aware of at least one other (separate) set of legal proceedings which is currently before the Federal Court where an insurer’s declinature of a BI COVID-19 related claim is being challenged.
Conclusion and next steps
Aon is closely monitoring the situation in Australia, United Kingdom and in other jurisdictions where courts have become involved in the consideration of this important and complex topic. We will advise clients on an ongoing basis of any relevant developments.
With regard specific notified claims, Aon’s focus will continue to be on providing appropriate support to our clients as defined in our terms of business agreements and will advocate on behalf of clients in relation to any valid notified insurance claim.
If you have notified a BI claim which relates to COVID-19 please reach out to your assigned Aon claim’s contact to discuss any specific questions you may have. Aon clients can also contact a member of their Aon account team for a broader discussion on business interruption or any other aspect of your insurance cover at any time.
: This Alert is not intended to be taken as personal advice and should not be relied upon as such. It is not intended to be comprehensive, nor does it, or should it be construed as constituting legal advice. You should seek independent legal or other professional advice before acting or relying on any of the content of this information. Aon will not be responsible for any loss, damage, cost or expense you or anyone else incurs in reliance on or use of any information contained in this Alert.
© 2020 Aon Risk Services Australia Limited ABN 17 000 434 720 AFSL No. 241141 (Aon