Coronavirus outbreak: What businesses should know regarding coverage

The new coronavirus (2019-nCoV) outbreak, originating in Wuhan in China, has been widely reported in the media and there’s a handy summary of what we know about it so far on the Sedgwick blog. The world has already seen more than 2,000 reported cases, some of them deadly.

With evidence of the virus spreading beyond China, what should insurers, brokers and claims handlers be considering when it comes to policy coverage?

A look back

For additional context regarding the current outbreak, let’s take a look back. In 2002 and 2003, the Severe Acute Respiratory Syndrome (SARS) virus emerged globally – identified as a coronavirus select agent in 2002, with first cases reported in Asia in 2003 – and its spread infected over 8,000 people across 17 countries, killing more than 750 before it was contained. In addition to tragic loss of life, SARS went on to cause a huge drop in tourism – up to 40% in some parts of Asia. Our team handled business interruption (BI) and contingency claims related to SARS in Asia and New Zealand.

Already there are predictions of negative effects on tourism and other sectors from the new coronavirus outbreak, with Scenic Hotel Group publicly reporting 800 room cancellations by inbound Chinese tourists. The Chinese Government has currently banned all overseas travel by tour groups and all sectors of the tourism industry are likely to feel the effect. The impact will not only be on hotels, but also on things such as domestic flights, tourism activities and restaurants. Further, companies that sell into China might find that a reduction in demand occurs over the next several months, causing a loss of revenue.

Common factors

All of this activity may or may not lead to a flood of BI claims. As with every widespread event, each claim will need to be dealt with on the merits of specific policy wording. However, there are likely two common factors to most claims.

  • Policy trigger
  • Policy exclusions

First, there must be a trigger. Normally BI policies respond when there is covered damage to property used by the insured at the premises – the “material damage proviso.” However, there are extensions for other circumstances related to BI, commonly referred to as “contingent BI” covers. These include things like prevention of access, damage to utilities and acts of civil authorities. 

In 2003 some policies specifically insured losses arising from diseases, although many of these extensions will have been deleted since then. Therefore, insureds may well find difficulty in identifying a covered trigger. Although the “Acts of Civil Authority” extension normally doesn’t specify which authority (i.e. acts of the Chinese Government might qualify), normally the act must be in response to a covered peril.  Disease might not be included in the list of covered perils.

Second, if a trigger exists, then there might also be an exclusion.  Many policies will contain an infectious disease exclusion, perhaps along the following lines: “This policy excludes any loss in connection with a Notifiable Infectious Disease under the Health Act 1956 or notifiable disease under the Biosecurity Act 1993.” An exclusion might well not apply until such time as the government takes that step. Given that the banning of all overseas Chinese tour groups occurred before the disease was declared notifiable, in some cases the loss might have already occurred before the exclusion takes effect.

When a disease becomes notifiable

In the case of the 2003 SARS outbreak, for example, significant damage to the economy of Hong Kong took place, even before the disease was declared notifiable:

  • In February 2003, SARS spread from South China to Hong Kong
  • 11 February 2003: the Hong Kong government requested (voluntary) reporting of cases by hospitals
  • 12 March 2003: the World Health Organization (WHO) declared SARS a worldwide threat
  • 27 March 2003: SARS was declared (compulsorily) notifiable by the government in Hong Kong

Businesses had seen a downturn in trade from February 2003, some time before SARS became notifiable on 27 March – and further deterioration followed.

The New World Harbourview Hotel in Hong Kong sought to recover its losses from insurers, resulting in an important legal case. In 2012, the appeal judges on the case found that the insurance trigger was 27 March, the date that the disease became notifiable, and that the claimants should base their expected turnover on their reduced performance from February 2003, not on the anticipated unaffected turnover, had there been no outbreak.

In other words, claims should be dealt with on the basis that turnover would have been impacted by SARS even if it had not become a notifiable disease.

This ruling is also consistent with the judgement in the case of Orient Express Hotels (2010), which found that the general impact of a peril affecting the premises (in that case, flooding in New Orleans) should be taken into account when applying the other circumstances, or trends, clause.

Notifiable disease cover

While some policies list the specific diseases that are covered, obviously that won’t include diseases that were unknown at inception. Other policies provide wider cover by allowing diseases which are notifiable at the point that a claim is submitted.

Typically, policies require a specific outbreak of (rather than a general fear of) a notifiable disease, and will also specify a distance within which the outbreak must occur. General economic downturn, caused either by fear before a disease is declared notifiable, or by the impact of outbreaks beyond the specified distance, is not covered.

This was also the case in the 1980s and 1990s during the outbreaks of ‘mad cow disease’ in the U.K. The government had discouraged the public from going into the countryside – which had already negatively impacted some businesses – before notifiable outbreaks subsequently occurred. Only the exacerbation of loss caused by the latter was covered.

Other policy extensions

There are also other policy extensions that could be relevant in the event of an outbreak.

  1. Act of competent authority (non-damage denial of access)
  2. Supplier/customer extensions

Policies don’t tend to cover business interruption losses merely because the police (or other agency) restrict access to (or hinder the use of) their premises. Wordings usually require these restrictions to be due to some other occurrence – typically a disturbance, commotion, emergency or danger in the vicinity. Each wording should be considered on its merits.

Wordings usually require physical prevention, not just hindrance or advisory guidance, for a claim to succeed.

Wordings in these extensions are sometimes poorly defined, with a particular challenge around the terms ‘customer’ and ‘supplier.’ Whilst these may intend to apply only to the entity that a policyholder trades with, they sometimes inadvertently include more of the supply chain than intended.

Cover requires ‘damage’ at the supplier or customer premises, as opposed to ‘damage’ as defined, at the premises. Outbreaks causing hospital closures, which require deep cleaning/disinfecting, may constitute damage. Laundries and other service providers might be covered too.

Most of these extensions do not require the customer or supplier themselves to be covered for their own losses.

It's worth noting that injury or loss of health to people will not trigger cover, as damage to assets is required.

Another point for consideration is how territorial limits apply in terms of these extensions. For example, policies for U.K. businesses affected by customer or supplier damage in the Far East may not respond, as many policies have territorial limits that would apply.

Certainly, coverage concerns will continue to evolve along with this situation. While we all hope that the new coronavirus doesn’t give rise to any significant claims, Sedgwick is engaging in early discussions with our clients to determine how they would want to respond. As always, we will stay ahead of the issue and our team of business interruption specialists and forensic accountants is ready to assist with any questions you might have.

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