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COVID-19: Can It Trigger Business Interruption Insurance Coverage?

Introduction

To curb the spread of the COVID-19 pandemic, the Malaysian Government has imposed the Movement Control Order (“MCO”) with effect from 18 March 2020. On 10 April 2020, the Malaysian Government announced that the MCO is further extended to 28 April 2020.

Under the MCO, most businesses are not allowed to operate from their premises, save for essential services and, following the announcement on 10 April 2020, “selected sectors” will be allowed to open in stages during this 3rd phase of MCO.

The COVID-19 outbreak has resulted in businesses facing substantial losses and, thus, it is only natural for businesses to review their existing insurance policies and for insurers to assess their liability risks.

One of the kinds of insurance that may be applicable to the COVID-19 outbreak is the business interruption (“BI”) insurance, or commonly known as consequential loss insurance. In this article we will discuss in brief some of the considerations as to whether a BI insurance policy may cover COVID-19 related claims in Malaysia.

What is Business Interruption Policy?

In essence, BI policies provide coverage for losses (e.g. loss of income and continuing expenses such as lease and rental payments) arising out of a physical damage to the insured property (e.g. following a fire or other casualty). In Malaysia, BI policies typically are not sold as a standalone policy but either constitute a component of or are included by way of a rider to an insurance policy, most commonly a property policy or material damage policy (e.g. fire insurance and industrial all risk insurance). Generally, a BI policy will only be triggered where a covered peril or casualty has caused direct physical damage or physical loss to the insured property.

Thus, a claim in respect of COVID-19 related losses faces two challenges.

  1. Whether COVID-19 is a covered peril

Firstly, the COVID-19 outbreak has to qualify as a covered peril within a policy. This would depend on whether the perils set out in the policy can be construed to cover the said contingency. However, in an “all perils” or “all risks” policy, the question is arguably whether or not the policy specifically excludes such contingency. In any case, one has to scrutinise the language of the policy. As the COVID-19 outbreak is unprecedented, this contingency may be caught by or subsumed under words such as “infectious diseases”, “notifiable disease”, or arguably, “contamination” and the like.

  1. Physical damage or physical loss to property

Secondly, the policyholder would have to demonstrate that the COVID-19 outbreak has caused physical damage or physical loss to the insured property. This may be an uphill task as the main effect of the COVID-19 outbreak is the temporary closure of business premises, which in itself is not a form of property damage.

An ingenious argument was raised in an insurance suit filed before the Louisiana Court in Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London et al., No. 2020-02558. In essence, a restaurant sought to argue that the contamination of the insured premises by Coronavirus, which causes COVID-19, constituted a “direct physical loss needing remediation to clean the surfaces of the establishment” as the Coronavirus “physically infects and stays on the surface of objects or materials, “fomites,” for up to twenty-eight days, particularly in humid areas below eighty-four degrees”. The restaurant relied on a previous Louisiana Court decision which ruled that the “intrusion of lead or gaseous fumes constituted a direct physical loss under insurance policies”. At the time of writing, the case is currently pending.

For the time being, it remains to be seen if the argument in Cajun Conti would inspire a floodgate of COVID-19 related insurance claims in Malaysia. Firstly, this argument can only be invoked if there is contamination of the insured premises by Coronavirus. In this regard, it is unclear what degree of proof of contamination is required, e.g. whether the fact that a person who had physically been to the insured premises and was later confirmed to have COVID-19 is sufficient proof that the premises is contaminated. Secondly, it is yet to be determined if the Malaysian Courts would interpret “physical loss” broadly to include contamination by Coronavirus.

Cajun Conti likely typifies the plethora of legal actions involving COVID-19 related claims under BI insurance policies that have been commenced worldwide recently. The prerequisite of physical damage in these policies have, among other things, forced businesses to resort to creative arguments in an attempt to bring COVID-19 outbreak within the coverage of their existing BI policies.

Non-Physical Damage Business Interruption Extension: Infectious Disease Extension and Prevention of Access Extension

Some BI policies provide coverage extension to include business interruption caused by non-physical damage events. These are commonly known as a non-physical damage business interruption (“NDBI”) extension. Under such policies, businesses need not demonstrate physical damage or loss to their property to trigger coverage.

Examples of NDBI extensions which may potentially provide for COVID-19 related claims include infectious disease coverage and denial of access coverage. Some of the matters that may determine whether COVID-19 is covered by an NDBI extension include the following:

  1. “Notifiable” infections or disease clauses

Certain NDBI extensions contain clauses that provide that the policy will only be triggered once the outbreak of a disease becomes “notifiable”, i.e. the authorities have officially declared that a disease is one which the public is required to declare to the authorities upon the occurrence of an outbreak. In Malaysia, Section 10 of the Prevention and Control of Infectious Diseases Act 1998 (“Act”) imposes a general duty on the public to notify the government of cases of infectious diseases. In this regard, “infectious disease” is defined under the First Schedule of the Act to include “any other life threatening microbial infection” and would include COVID-19 [this is confirmed by the Malaysian Government in Section 2 of the Prevention and Control of Infectious Disease (Declaration of Infected Local Areas) Order 2020 P.U.(A)87/2020]. Hence, it is arguable that the COVID-19 is a “notifiable” disease at the outset by virtue of the Act.

  1. Exclusion clauses

Certain NDBI extensions may exclude certain classes or types of diseases, under which the COVID-19 may fall. For instance, a policy may contain an exclusion which prohibits policyholders from claiming insurance arising out of “epidemics” and/ or “pandemics”. In such a case, COVID-19, which was declared a pandemic by the World Health Organisation, would arguably be excluded.

Further, an NDBI extension which sets out an exhaustive list of diseases covered may also exclude COVID-19.

  1. Geographical proximity provision

Often, BI policies may only provide cover where someone is found to have contracted the disease at or within a certain distance of the premises. For example, in the Hong Kong case of New World Harbourview Hotel Company Limited & Ors v. ACE Insurance Limited & Ors [2012] HKEC 264 which involved a SARS outbreak, the insurance in question required the notifiable human infectious disease to occur within 25 miles of the insured premises. Where such provisions exist, a COVID-19 related claim may be contingent on there being a confirmed COVID-19 case within the stipulated area of the premises.

  1. Nature of claim

Even where the COVID-19 outbreak is covered by the NDBI, a claim for resulting losses may nevertheless be rejected if it is too remote. Thus, in the case of PMB Australia Limited v. MMI General Insurance Limited [2002] QCA 361 concerning a BI policy claim dispute due to contamination of salmonella in the production of Kraft’s peanut butter, the Australian Court held, amongst others, that losses indemnified under the relevant BI policy does not extend to further losses or expenditures incurred to minimise the prospect of similar outbreaks in the future.

  1. Mitigation

It is a principle of insurance law that a policyholder must take reasonable steps to mitigate his or her loss. For instance, where an insured property is forced to be closed due to potential contamination, a policyholder may be expected to take reasonable steps to decontaminate the property soonest possible to minimise the loss caused by prolonged closure time.

Conclusion

As BI policies vary in coverage and terms across the board, there is no one size fits all rule to COVID-19 related claims under such policies. Instead, the success or otherwise of a claim is ultimately dependent on the wording of the policy concerned and the facts of the case.

This article is intended for general information of the clients of our Firm. It should not be regarded as legal professional advice. If you need advice based on specific facts, please feel free to contact us.

 

Lam Ko Luen

Partner

[email protected]

Romesh Abraham

Partner

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Jocelyn Xie Hui

Associate

[email protected]

Gavinesh Siva Dharma

Associate

[email protected]

 

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