Does a pandemic trigger business interruption insurance?

The COVID-19 pandemic has led to significant levels of State and Federal government intervention, including mandated business closures, the closing of State and Federal borders and the lockdown of movements of citizens.

Many businesses have experienced significant business interruption, with consequential loss of revenue and profit, due to government intervention and the effects of the pandemic more broadly.

Many businesses are insured for ‘business interruption’, and it is timely to consider whether businesses can claim against insurance for business interruption arising from the pandemic.

What is an insurance policy?

An insurance policy is a contract between the insurer (who provides the cover) and the insured (who pays a premium for the cover). Many insurance policies are written as broad exclusions that are then reduced to provide specific cover by precisely worded inclusions.

Sometimes the wording of inclusions and exclusions are inconsistent, and the cover provided is unclear. Inconsistencies must be resolved by applying the ‘principles of construction’- the courts’ tool box of rules to decide what the meaning of the contract is.

How insurers work

Insurers are profit making businesses. They model (as precisely as possible) their actuarial risk of an event occurring, and their ensuing liability to meet claims from that event. From these models they calculate:

1. a suitable premium that will compensate them for the risk of providing insurance for an event; and
2. the financial reserves (or ‘float’) they must maintain to meet the realised risk of an event and consequential claims.

If the risk of an event is too great, or cannot be accurately modelled, then insurers will specifically exclude that event from their policy and refuse to provide insurance for it.  

Insurance cover for disease and pandemic

In 2005 and 2006 the SARS virus caused insurers to reconsider their exposure to pandemic disease. Insurers were concerned that the exponentiality of viral spread, in an age of prolific air travel, made it very difficult to accurately model the potential losses arising from a pandemic.  The global insurance industry consequently introduced general exclusions for losses from quarantinable disease.

SARS and other outbreaks though were dealt with quickly and efficiently by developed nations, and as insurers are competitors seeking to offer points of difference in their policies, variances and relaxations in individual policy wordings inevitably occurred in the subsequent decade.

Can insurers be liable for business interruption arising from the pandemic?

On 15 September 2020 the United Kingdom’s High Court of Justice handed down a decision in a test case with a number of insurers. The High Court of Justice was asked by the insurers to interpret the wording of 21 standard insurance policy clauses, in an effort to clarify the insurer’s obligations (and likely to try and deter a floodgate of claims).

The High Court of Justice held that general exclusions depended on the individual contract wording of the policies but found there were inconsistencies in the considered policies that would permit some insured parties to claim for business interruption arising from the pandemic.

What about Australia?

There is a test case about to be heard in the NSW Court of Appeal on the construction of particular exclusion clauses as they apply to business interruption arising from the pandemic.  The principles of interpretation of contract are generally common to all States and Territories, so the decision will be relevant to Queensland. It is unknown when this matter will be heard and decided, however it will likely be dealt with promptly.

What about my business?

Each matter turns on its own circumstances and set of facts. Test cases only provide broad guidance as to how a court will be likely to rule in general circumstances.

If you are a business owner who has been adversely affected by the pandemic, then you should carefully consider:

1. how circumstances and events have affected you; and
2. the specific wording of your insurance policy.

If you believe you have a potential claim for business interruption arising from the pandemic under your insurance policy, then you should submit a claim to your insurer.

If your insurer refuses your claim, or if you believe the wording policy is equivocal and require advice on whether you may have a claim, then we highly recommend you instruct our Litigation + Dispute Resolution team to review your policy and situation.

Notification of any claim on insurance must be timely.  Late notice to an insurer of the fact of a claim can give the insurer an opportunity to decline to indemnify because a typical policy requires speedy notification after becoming aware of the circumstances giving rise to a claim.  For this reason you should contact us today.