Coronavirus (COVID-19) - the insurance issues

Summary

The world is watching closely as the Covid-19 strain of coronavirus spreads. Businesses and individuals are feeling its effects even in regions with no or few reported cases, given the nature of global business arrangements. Mounting concerns and precautionary measures are disrupting markets and supply chains.

Affected companies will be checking carefully the wording of any contracts and the extent of any available insurance cover. All business lines are potentially impacted and likely to see claims. Policy wordings will obviously be the key to insurers’ exposure.

The impact of Covid-19 on business

Our materials exploring the implications of the outbreak can be found here, including considerations for employers and this article on the implications of force majeure clauses and the doctrine of frustration under Hong Kong and English law. Our analysis of the insolvency implications will follow.

The economic disruption caused by the virus includes:

• Disruption to global supply chains and staffing

  Shortages of personnel and materials will disrupt many industries. Compulsory quarantine regimes are in place in some parts of the world; components manufactured in China and other affected regions are unavailable. Elsewhere, people are being asked to self-isolate after travel to certain regions. Concerns are growing about the impact, particularly for banks and credit card providers, of the closure of call centres.

• Disruption to travel

  Airlines are limiting or cancelling flights to certain regions, and cruise ships are being refused port by many countries due to fears over the spread of the virus.

• Interruption to business and/or increased costs of working

  Many large businesses are putting in place contingency arrangements which include separate temporary offices, additional staff and improvements to IT systems.

• Market volatility

  Reports of the virus spread have already significantly impacted markets across the world, and led to predictions of a global downturn. It is reported that the coronavirus outbreak is likely to trigger a payout of $132.5m from the World Bank pandemic catastrophe bond.

• Cancellation of travel plans and events

  Many events involving travel and/or large numbers of attendees from around the world are being cancelled. The Tokyo Olympic Games scheduled for July 2020 may also be cancelled if the virus is not contained by spring.

What are the key implications of a global pandemic for insurers?

As the virus spreads further, businesses will face ever more severe staff and materials shortages. They will, first, carefully examine their contractual rights and obligations, including any force majeure clauses contained in the contract and any business continuity obligations. Businesses will then examine the scope of any available insurance cover. The London Market is reportedly already seeing large numbers of claims for business interruption.

The initial impact will be felt by travel, aviation and marine insurers, but legal disputes and insurance claims are, of course, likely to arise across many other business lines.

The Department of Health and Social Care has announced that it will update its list of notifiable diseases to include Covid-19.

Those in the course of renewal negotiations, in already hardening markets, may struggle to account for the potential impact of coronavirus in terms of presenting and pricing the risk.

We explore other considerations for insurers below:

Business interruption

Policy wordings will be scrutinised, and we may see coverage disputes arise in fairly short order.

Most traditional business interruption cover is contingent on physical damage. Non-damage business interruption policies may pick up losses without physical damage, but the analysis will obviously depend on the scope of the defined “insured peril”.

Many BI wordings include some cover for business interruption or disruption as the result of compulsory closure by public bodies arising from discovery of a “notifiable disease”.

The precise policy wording, including the definition of a “notifiable disease”, will determine whether a Covid-19 related circumstance will trigger cover, and whether issues affecting third parties (such as suppliers) fall within the scope of cover. The extent of exclusions, and the effect of any aggregation provisions will be areas for potential disputes.

Event and contingency cover

As time goes on, depending on the development of the virus, we may see government intervention requiring cancellation of many international and domestic events, and/or taking place without spectators.

Depending on the wording, Event Cancellation/Contingency policies will generally provide cover for financial loss due to perils beyond the control of the insured, when such perils result in the necessary cancellation, postponement, curtailment or abandonment of an event.

Cover may pick up financial loss like lost ticket revenue, ticket refunds and contractual guarantees to others. The insured is often required to mitigate its losses (i.e. by reasonably seeking to reschedule or postpone an event to a different time or venue), but the terms and conditions of each policy will vary.

Many wordings include a ‘communicable disease’ or ‘epidemics’ exclusion, although most insurers offer cover for the same via an extension and/or endorsement.

Key to triggering cover is to establish that the cancellation is beyond the control of the insured. In the current climate, insureds might hope that the policy will respond where (for example) an event is cancelled as a precaution. Subject to any extension of cover (such as to include precautionary cancellations) though, this is not likely to be the case. Policies will not normally respond where the insured event could strictly take place (i.e. there are no specific restrictions) but is cancelled by the insured for other reasons.

Financial lines and D&O

Senior management teams in all industries will need to focus on ensuring continued regulatory compliance, employee protection and continuation of the business’ services, in the face of reduced staff numbers, supply chain difficulties and market volatility.

Insurers will be watching closely for claims against their insureds arising out of falling values in particular asset classes or regions. There is a risk that financial professionals may fail to value funds properly and/or to divest funds of problematic investments in good time. Financial professionals who fail to respond promptly and effectively to the changing market are likely to be a target if investors then suffer losses as a result.

Asset managers will need to ensure that they are closely monitoring the geographical and economic effects of the outbreak and taking appropriate steps to protect their clients’ investments. Claims against those firms, and/or their directors and officers, can be anticipated in time from employees, regulators, clients, shareholders or investors. All entities (regulated or not) should ensure that their contingency plans, and any steps taken in response to the economic impact of the virus, are documented. Firms should be able to provide a clear trail to justify as reasonable any action (or inaction) in due course.

Regulated entities (including insurers) will need to ensure that appropriate contingency plans are in place, and that the right disclosures are made to regulators and also to their clients, shareholders and investors (as appropriate). Senior management teams will need to track efforts to ensure regulatory compliance, and report.

The FCA has issued a Statement confirming that firms are expected to have contingency plans in place and to take all reasonable steps to comply with their obligations. Volatility in financial markets is likely to impact on the capital strength of insurers and other financial institutions, so maintaining capital standards may be a concern.

Professional liability

Government estimates are that during the peak of a COVID-19 epidemic in the UK, up to a fifth of the workforce may be off work. If this transpires, the resulting disruption could have significant professional liability implications.

Professional services firms should be preparing robust contingency plans to ensure that services can continue in the event of increased staff absences. The absence and illness of key personnel within the professional services firm itself, as well as at the client and among third party advisors, may increase the likelihood of errors (and therefore potential negligence claims). Contractual or court deadlines may be missed, for example, by colleagues picking up unfamiliar files.

A more difficult analysis, beyond the scope of this note, is the potential liability of professionals who contract the illness and then spread the illness to clients and colleagues, affecting both individuals’ health and the running of the business.

As more employees work from home, professional firms will also need to look closely at the stability of their IT systems and data security plans. Staff under pressure or picking up workstreams outside their usual remit may also be more likely to fall for scams, such as those highlighted below in relation to cyber security.

Construction

Wide-scale border control point closures, mandatory quarantine and extensive interruption to public services in many jurisdictions obviously means potential material and staff shortages.

As above, construction professionals should anticipate staff absences and prepare robust contingency plans.

The construction industry is particularly vulnerable to issues arising from supply chain disruption and restrictions on the movement of migrant workers.

Our short video exploring the impact of the coronavirus on the construction industry and force majeure clauses in construction contracts can be found here.

Cyber security and data risk

Insurers of both affirmative and silent cyber risks will be paying attention. As more and more workers are asked to work from home there will be far greater reliance on technology to keep businesses running. Arguably, insurers’ potential exposure to losses in the event of IT failures or interruption of network access could increase.

There may also be increased data security risk for businesses implementing contingency plans, particularly where employees are accessing systems from home and/or taking hard copies of materials home.

In addition, cyber security will need to remain a priority. It is reported that cyber criminals are seeking to capitalise on disruption and employee fears caused by the coronavirus outbreak. There has been an increase in coronavirus related phishing emails, some purporting to be from healthcare facilities or sellers of protective equipment (like face masks), and if businesses are short-staffed the risks of employees falling for such scams will increase.

The future

The current outbreak is presenting a significant challenge to the way the world currently does business. Once over, will it produce a drive for businesses towards more robust contingency plans, more diverse supply chains, more flexible and remote working?

In turn, these changes will affect the way insurance is viewed and applied in the business world. Policy terms and conditions may need to change. Not least, pandemics will be expressly dealt with, either through exclusions, or with speciality pandemic cover offered as an extension.