Coronavirus: key insurance considerations

As a result of the continued global rise in confirmed cases of Covid-19 (Coronavirus) and consequent travel and quarantine restrictions, understandably concerned individuals and businesses are assessing their risk of injury and loss arising from the outbreak, including the recoverability of losses under available insurance cover. For the insurance sector it is highly likely that increases in claims will be seen across multiple business lines and, as with the SARS epidemic of 2002/2003, it is probable that life, health and travel insurance will see the highest losses.

Claims will undoubtedly be seen more widely, however, and areas where they are likely to be triggered include sporting event, concert and festival cancellations, employers’ and public liability exposures and business and supply chain interruption.

In all cases it will be important to check policy wordings carefully as cover for particular losses will depend on the precise terms of the insurance. Key considerations include:

• Direct trigger of loss? Insurance covers losses ‘proximately caused’ by an insured peril. In general terms this means that a claim will be covered if the risk insured against is the direct or dominant trigger of the loss. Where coronavirus falls within the description of insured perils under a policy and the virus is the dominant cause of loss or injury suffered, it is likely that it will be covered subject to any relevant exclusions or policy conditions. Obvious examples of insurance cover where coronavirus could be the direct cause of loss are life and health policies.
• Exclusions Policies may contain exclusions for epidemics or pandemics which could exclude losses arising from coronavirus. At the time of writing coronavirus has not been officially classed as a pandemic but could amount to an epidemic (defined by the Oxford English Dictionary as a widespread outbreak of an infectious disease). Travel cover (including under key man insurance) may also exclude cancellation claims where an ‘appropriate authority’s’ advice at the time travel was booked was against travel to that particular destination, region or country or where circumstances could reasonably have been foreseen as giving rise to a claim at the time of booking.
• Property damage Business interruption insurance typically requires physical loss or damage to the insured’s property. Where a business sustains economic losses because a large number of its employees fall ill, claims under BI insurance will not usually be covered. If, however, it can be argued that the outbreak has caused property damage the position may be different. A potential example could be where premises are closed and have to be deep cleaned before they can reopen, raising an argument that this was physical damage to the property. Policy terms should, however, be checked carefully. Disease at the location, contamination and pollution may be covered under property policies but the terms may be restrictive with sub-limits applied.
• Legal liability Where individuals’ infection by coronavirus can be traced to a particular place or activity, claims may be brought against businesses or individuals deemed responsible. These could, for example, include claims against employers, hospitals and medical staff, schools and universities, airlines, hotels and retail outlets for unreasonably exposing employees, patients, students or customers to the risk of contamination. Claims by shareholders against directors may also been seen in connection with decisions taken in response to the outbreak.

Force Majeure

Businesses will also be looking to the terms of their commercial contracts, including force majeure clauses, to determine whether they can recover uninsured losses or comply with their duty to mitigate losses claimed under available insurance cover.

In the UK force majeure will not be implied and there must be an express force majeure term in the contract. Clauses will typically provide for the suspension of obligations under the contract or its cancellation on the happening of certain events that are outside the parties’ control. The clause may set out events constituting force majeure such as outbreak of disease, epidemic and pandemic.

Where the contract does not contain such wording, a party wishing to rely on a force majeure clause will need to consider the clause carefully to determine whether coronavirus or disruptions resulting from the outbreak could be considered a force majeure event under the contract. Clauses may refer to ‘acts of God’, but it is unlikely that coronavirus is an ‘act of God’. As a matter of English law, where a clause suggests that force majeure must arise from an identifiable ‘event’, there is case law that an ‘event’ means an identifiable happening resulting from a specific cause at a specific time and at a specific location. In contrast, an epidemic or pandemic is a gradually evolving state of affairs and probably not an ‘act’. Nor are epidemics or pandemics commonly referred to as ‘acts of God’. In contrast, and depending on the wording of the clause, it is possible that an act or order for the quarantining of a town or city as a result of coronavirus could constitute a force majeure event.

To rely on force majeure, a party must also demonstrate that the force majeure was the sole cause of the failure to perform obligations, that the circumstances were unforeseeable and beyond its control, and that it has taken steps to mitigate its losses.

Finally, force majeure provisions commonly contain strict notice provisions and, particularly in the light of the continually evolving situation, businesses would be well advised to check these.

CMS is publishing regular alerts as the coronavirus situation develops. You can read more on:

• Coronavirus and force majeure.
• Key considerations for outsourcing agreements, goods and services supply and other commercial contracts.
• Key considerations for employers of UK staff.
• Coronavirus and the hotel sector.
• Indirect consequences for UK listed companies.