Business insurance: The impacts of COVID-19

Boards are once again at the helm of companies trying to stay afloat. We recently wrote about the impact of the COVID-19 pandemic on directors’ and officers’ (D&O) insurance but this is only part of the picture.

As more companies and their staff face disruption, businesses and their boards may be activating new and untested contingency plans. After all, these are unprecedented times. One key risk management tool is insurance. Directors should be asking themselves, apart from D&O cover, what other insurances do we have and how are they impacted by COVID-19? Is there any scope to claim on an insurance policy?

Relevant cover may be available under a variety of policies, such as cover for business interruption, travel and event cancellation, trade credit or project insurance. We consider some of the most relevant below, as well what to consider when renewing or notifying potential claims under these policies.

Business interruption

Most businesses will hold industrial special risks (ISR) insurance or something similar, which covers first party property damage and consequent business interruption.

These policies generally require physical damage so not all policies provide cover for loss arising due to a pandemic. However, some policies contain extensions covering business interruption arising from infectious diseases, government intervention, prevention of access, loss of attraction and interruption to suppliers or utilities.

Since the SARS outbreak in 2013, many business interruption insurers have adopted exclusions for any disease that is declared under the now repealed Quarantine Act 1908 (Cth) and its successor the Biosecurity Act 2015 (Cth). In March 2020, COVID-19 was declared a human biosecurity emergency under the Biosecurity Act. Uncertainty also exists as to the proximate cause of lost profits; is it closure or simply lack of custom?

Nevertheless, policy wording varies and it is possible that some cover is available. Even where exclusions exist, some policies may provide limited cover for specific circumstances such as the government-ordered closure of premises. Organisations should be speaking early and regularly with their lawyers and insurers to understand their rights and understand what pragmatic solutions may be available.

Cyber

COVID-19 has led to the world’s largest work from home experiment. However, with the increased reliance of technology, there is a greater risk of compromise to commercially sensitive or personal information and unauthorised access to systems.

Social engineering to obtain credentials and access corporate systems may appear credible at first glance, particularly if linked to health or internet issues associated with COVID-19. It is important to review cyber insurance cover to ensure that it will properly respond to the increased risk of exposure in the current environment. Such cover should also align with any revised business continuity and incident response plans developed to meet the altered arrangements.

Trade credit

Companies may be able to submit a claim under trade credit insurance policies if there is non-payment of debt. Despite the statutory demand changes considered in our previous article, these types of claims are likely to increase as the economic downturn continues. The trigger for these policies is generally insolvency, default or non-payment after a specified timeframe. Trade credit insurance may be particularly useful for companies with exposure to defaults from small-to-medium sized enterprises, who may not have available cash reserves to ride out the economic downturn.

Workers compensation

Workers compensation insurance is operated by the relevant state and territory agencies and may provide cover if a worker contracts COVID-19 in the course of their employment. Proving exposure while in the course of employment may be difficult, although a factor that might be considered includes whether the employer directed the worker to do something which led to their exposure to the virus. There also needs to be a nexus between the duties performed and the contraction of the virus and the test for this differs between each state and territory.

Travel and event cancellation

Event cancellation insurance policies purchased prior to COVID-19 becoming a ‘known event’ may cover some financial losses, depending on the policy. These policies are often complex and, even though some may contain exclusions for SARS or government-ordered quarantine, they may still respond to some losses.

Travel insurance coverage will primarily depend on the policy’s level of cover, travel destination and when the policy was taken out. Most insurers have classified the outbreak as a ‘known event’ from around late January or early February onwards, others have implemented cut-off dates for COVID-19 related claims around this time (most policies contain a definition of when an event becomes ‘known’). Therefore COVID-19 is no longer a future event unknown for travel booked after that cut-off date, and/or policies purchased after that cut-off date and will exclude cover. Policies taken out before the cut-off date may be used to recover medical expenses, cancellation costs or accommodation costs depending on the level of policy coverage.

Special arrangements for small businesses

A number of insurers have obtained interim authorisation from the ACCC to provide a coordinated response to small business customers. These are customers that employ fewer than 20 employees (or 100 if a manufacturing business) and have an aggregated annual turnover of less than $10 million. Under the authorisation,

• eligible business customers can defer their insurance premium payments for up to six months for premium due up until 30 June 2020;
• insurers will refund unused premiums for any insurance policy an eligible business needs to cancel as a result of the pandemic;
• insurers will provide a credit or refund for unused travel insurance premiums;
• administration and cancellation fees will be waived for the above cancellations; and
• cover can continue for eligible business customers who need to close their premises due to COVID-19 with no change to premium.

Although aimed at smaller businesses, Boards should consider whether the company is eligible to opt in to these arrangements. Further information is available here.

Project insurances

Directors of companies involved in construction projects should have a look at project specific insurances. These policies may provide cover for business interruption losses and project delays. Delay in start-up (DSU) insurance generally covers delays in completion and consequent delay in the commencement of the business. While the cover is usually triggered upon physical damage, similar to ISR cover considered above, cover for infectious diseases may have been applied as an extension. The extent to which interruption or delays are caused by excluded circumstances or force majeure events will require assessment.

Renewals and notifications

COVID-19 will also impact insurance renewals and notifications. Under the Insurance Contracts Act 1984 (Cth), before a policy in entered into insureds must disclose known matters they or a reasonable person would know are relevant to the insurer’s underwriting decision. Failure to do so may prejudice future claims or preclude recovery altogether. As renewal approaches, companies will need to consider carefully what should be disclosed in relation to COVID-19.  Insurers will want to know of any potential or actual losses or claims, together with information about the ongoing health or viability of the business.

Despite the new temporary safe harbour for insolvent trading (see AICD article on the reform here and our fact sheet here), insurers will still want to know whether the company is, or may become, insolvent. A qualified solvency declaration remains highly relevant to an insurer’s underwriting decision. Policies are generally written on an annual basis so the potential for claims will arise within the policy period long after the safe harbour expires.

Insurance policies also contain terms requiring prompt notification of claims or circumstances that could give rise to claims against an insured. Companies will need to pay close attention to any actual, threatened or potential losses or claims to ensure compliance with policy terms. This is particularly important for D&O and professional indemnity (PI) policies written on a claims made basis, where a failure to notify circumstances during the policy period can result in the policy (and future policies) failing to respond. This was recently demonstrated in DIF III – Global Co-Investment Fund LP v Babcock & Brown International Pty Limited, where the NSW Supreme Court found late notification resulted in neither the relevant D&O or PI policies providing cover.

What next?

Insurance is just one device in a company’s risk management toolkit. In performing their role with due diligence and skill, directors and officers should consider whether their risk mitigation strategies and protocols are working as expected and whether the company’s operations are affected by new laws. If they do not have one, they should put together a crisis response plan. Directors and officers should also consider whether COVID-19 will impact the company’s or a counterparty’s ability to perform their contracts.

As the situation remains fluid, boards may need to consider what position to take in relation to key contracts with reference to the rights under those contracts. Directors and officers should use their knowledge and insight, as well as engage external experts, to guide the company through this time and make appropriate disclosures to staff, customers, regulators and investors.