The worldwide spread of coronavirus, now named COVID-19, will give rise to insurance claims in many traditional lines of insurance. On 11 March 2020, the World Health Organisation (WHO) officially labelled COVID-19 as a pandemic. Insurance policy exclusions for “pandemic” are likely to be triggered by insurers and reinsurers in many traditional lines of insurance.
The impact on COVID-19 losses will affect travel, life, health and event cancellation insurance the most. As reviewed below, there will also be a steep increase in claims under business interruption, public liability, product liability, employer’s liability, asset management, directors and officers, professional liability, errors and omissions, and marine insurance.
Travel insurance and life and health insurance
The usual cover for these types of insurance comprises travel cancellation expenses and emergency medical or hospital expenses. Most of these policies contain an “epidemic or pandemic” exclusion which applies if there is a statement by an official government or similar organisation such as the WHO that a virus has reached or is likely to reach “epidemic or pandemic” proportions.
Since the WHO’s announcement on 11 March 2020 that the coronavirus outbreak may be characterised as a pandemic, travel insurance policies which contain a “pandemic” exclusion are likely to deny all claims relating to coronavirus. Further, there may be policies which exclude coverage not only if there is an express travel ban to any region or country which has been issued by an official government body but also if there is a government body’s advice or warning “against non-essential travel” to a certain region or country.
For instance, it is unlikely that holiday or even most business travel will be considered as essential travel. Some policies may even exclude coverage if there is any mass media indication or informal warnings relating to a potential infectious disease hazard in foreign countries. Therefore, the threshold in certain policies for the application of certain exclusions may be very low.
Although life and health insurance policies usually provide coverage for the risk of ordinary diseases, there may be some policies which exclude coverage of claims relating to epidemic or pandemic outbreaks or even certain named diseases.
Event cancellation insurance
The usual coverage for loss of revenue due to an event cancellation contains a broad exclusion of any event cancellation claims arising out of “communicable disease” outbreaks which is broader than “epidemic or pandemic” exclusions. A communicable disease exclusion will usually be broad enough to apply to any government advice or warning against non-essential travel to an area due to a communicable disease which results in the cancellation of any event by organisers.
However, the policy language must be reviewed in detail as certain exclusions may require an actual government body “action” or the exclusion may be restricted to certain types of diseases. By contrast, even if an extension of coverage for communicable disease is included, there will be doubt as to whether coverage will apply to precautionary cancellations by organisers where the event could legally take place but is cancelled as a precaution in view of government warnings.
Business interruption insurance
Coverage for loss of profits in business interruption insurance requires physical loss or physical damage to property which causes an interruption. Personal injury, such as the coronavirus infection, will not amount to physical damage to property (see here for more information).
Standard (and contingent) business interruption insurance policies will usually provide an extension of coverage for “Civil Authorities Actions” which deny access to the insured premises. However, close attention to the terms of this extension will be necessary to determine whether advisory warnings by authorities may satisfy the threshold of what amounts to a civil authority action.
Precautionary measures by the insured without a triggering civil authority action are unlikely to be covered under the extension. Some business interruption policies may contain an extension of coverage for losses arising out of “Notifiable Infectious Diseases”. Under the Health Protection (Notification) Regulations 2010, on 22 February 2020 in Scotland and on 3 March 2020 in England and Wales, coronavirus was listed as a notifiable infectious disease, which will trigger this extension if any losses arise.
Public liability, product liability and employer’s liability insurance
This type of coverage relates to third party claims by members of the public, customers or employees against business operators due to damage to property or personal injury suffered as a result of the insureds’ business activities.
Ordinarily, a virus infection suffered by these third parties are unlikely to have been caused by the insureds’ business activities. However, subject to any specific exclusion of claims arising out of communicable diseases or epidemic or pandemic, coverage will usually be provided if insured businesses failed to take reasonable measures to adequately protect, respectively, members of the public, customers or employees against exposure to coronavirus.
For instance, in the context of employment activities, since the coronavirus is not a listed Occupational Disease under the Employee’s Compensation Ordinance (ECO), coverage will only arise if the infection has been contracted in the course of the employee’s employment. However, following the pattern of the SARS virus being listed in 2004, after COVID-19 is listed as an Occupational Disease under the ECO, health industry employees will not need to prove they have been infected in the course of employment.
Further, employer’s liability insurance coverage will usually respond only if an employer fails to take adequate measures to protect its workforce. The adequacy of the measures to be taken by an employer will depend on its knowledge of risk to its workforce. For example, more stringent measures must be adopted after the employer becomes aware that an employee has returned from an area which has been subject to warnings from a government body or if the employer is aware that its employee has tested positive for the virus.
Financial institutions, management, and directors and officers insurance
Financial institutions insurance may cover investment managers for third party claims due to their failure to either value assets or fail to divest problematic assets adequately in view of the changing markets owing to the coronavirus outbreak. Directors and officers insurance will usually provide coverage against claims from employees, regulators, clients, investors or shareholders due to senior managers’ failure to ensure adequate regulatory compliance, business continuity monitoring or protection of employees relating to the spread of coronavirus. However, some of these policies may contain exclusions for communicable diseases and epidemic or pandemic.
Compliance obligations imposed on regulated firms in the financial industry will include implementing contingency plans to deal with major events such as the coronavirus outbreak. For instance, on 4 March 2020, the Financial Conduct Authority (FCA) published a “Statement on Covid-19 (coronavirus)” reiterating its expectation that regulated firms must “take all reasonable steps to meet their regulatory obligations”, which may include giving staff access to the compliance support “from backup sites or with staff working from home”.
Professional liability insurance and errors and omissions (E&O) insurance
Professional advisors must implement contingency planning measures to deal with the coronavirus outbreak so that potential disruption to its activities are properly managed by adequate measures to safeguard employees and customers. It is unlikely that a potential increase in claims may be easily attributable directly to the coronavirus infection.
However, absence of key personnel resulting in errors and negligence claims may be excluded if it is shown that the insured has acted recklessly – for example, by not implementing any type of contingency planning measures. Subject to the policy terms, E&O policies covering healthcare professionals will often cover claims for communicable diseases affecting patients who have contracted these from its healthcare staff. Any exclusions relating to failure to take reasonable measures to prevent spread of disease will be relevant to coverage disputes.
Marine insurance policies
The coronavirus outbreak is likely to affect the marine industry as a whole for a long time in future. Marine hull insurance, cargo insurance, protection and indemnity insurance, charterer’s legal liability insurance and loss of hire insurance will experience a particular increase in claims due to the effects of the outbreak.
Repair costs insurance claims increase due to higher costs of spare parts, supply chain disruption and staff shortages will result in higher loss ratios for hull insurers. An increase in marine accidents due to crew shortages and absence of key logistics personnel will also result in higher hull policy claims.
Cancellation of voyages and delays in shipping operations such as loading and discharge due to staff shortages, infected ports and ships will result in an increase in demurrage claims, cargo claims, loss of hire claims, charterers liability claims, and crew members’ as well as non-employees’ personal injury claims.
The marine industry is bracing itself for the long-term impact of the virus outbreak on claims. Any applicable policy exclusions relating to force majeure, epidemic or pandemic, communicable disease and civil authority actions will have to be examined in great detail.