The rapid spread and global impact of the COVID-19 pandemic is unprecedented. As the economic implications of the virus intensify, and with governments around the world taking drastic actions to contain the virus such as implementing nationwide 'lockdowns', businesses that suffer losses will be considering whether they can make claims under their insurance policies for business interruption ("BI").
BI policies exist to cover losses resulting from interruption to business activities. However, the scope of cover is typically limited by reference to the cause of the interruption, and such policies for the most part are unlikely to assist insureds suffering losses due to a pandemic. However, wording differs between policies, and businesses should review their policy and, if in doubt, begin discussions with their insurer.
General overview of BI policies
Typically, BI policies are linked to physical property or material damage insurance policies. This means that BI policies provide cover for business interruption that is caused by physical damage to insured property or, in some cases, interruption caused by damage to a supplier's premises.
Where cover is available, the insured will be entitled to recover losses suffered during a defined indemnity period, often 12 months from the date of the event. Cover generally applies to reductions in "gross profit" (usually applying a detailed mechanism in the policy) and increased costs of working resulting from the event. Cover will also take account of any cost savings resulting from the event.
While some BI policies also cover losses caused by events not involving damage to insured property, the extent of this type of cover is usually considerably more limited than for BI losses resulting from physical damage. For example, some BI policies provide cover for losses caused by state intervention to close business premises. The circumstances of such cover are often defined narrowly, such as interventions resulting from defects in drains or other sanitary arrangements or where there has been an escape of fumes or hazardous substances.
Limitations of BI policies
As the recent developments due to COVID-19 have demonstrated, significant business interruption losses can occur independently of physical damage to insured property. However, most BI policies will not cover events like COVID-19, even where they cover business interruption from external events other than physical damage to insured property.
That is because BI policies generally exclude losses caused by notifiable diseases under the Biosecurity Act 1993, or infectious diseases notifiable under the Health Act 1956. On 30 January 2020, by order in council, the novel coronavirus was added as an infectious disease notifiable under the Health Act (COVID-19 was added as an infectious disease by order in council on 11 March 2020). Therefore, this exclusion, if present in the policy, will be triggered.
The scope of BI cover exclusions such as those mentioned above are currently being tested by claims in a number of jurisdictions. This area of the law may therefore continue to develop.
What can you do?
1. Check your BI policy
Naturally, the starting point for determining whether your BI policy responds to COVID-19 will be the specific wording of your policy. While BI losses resulting directly from COVID-19 are generally excluded, businesses should check to see whether they might be covered. For example, many childcare centres are covered for BI losses because their particular insurance policies do not contain an exclusion for infectious diseases.
2. Make use of the government schemes and measures
On 23 March 2020, the New Zealand Government announced a four-week "lockdown" from 25 March, requiring the closure of non-essential services and people to stay home and self-isolate. To support businesses through this period, the Government announced a series of schemes and measures including a wage subsidy scheme, a business finance guarantee scheme (in conjunction with the participating banks), and business cash flow and tax measures.
The wage subsidy scheme helps businesses affected by COVID-19 to continue paying their employees and is estimated to cost approximately $12 billion. To qualify, a business must experience a 30% decline in actual or predicted revenue due to COVID-19 over a period of a month when compared to the same month last year, with alternative comparisons available for new or high growth businesses (details here).
The business finance guarantee scheme will support small and medium-sized businesses affected by COVID-19. The scheme allows businesses with annual revenue between $250,000 and $80 million to apply to participating banks for loans (including increases to existing limits) up to $500,000, for up to three years. The Government will guarantee 80% of the risk while the participating banks will cover the remaining 20%. Applications for this support can be made through participating banks (details here).
The business cash flow and tax measures include:
restoring depreciation deductions for buildings other than residential buildings. It will apply to buildings owned at the beginning of the 2020-21 income year and also going forward to newly acquired buildings and capital improvements made to existing buildings. The depreciation rate would be 2% declining value or 1.5% straight line;
temporarily increase the low-value asset write-off threshold from $500 to $5,000 in the short term, before decreasing this threshold to $1,000 on a permanent basis. The $5,000 threshold will apply to property purchased on or after 17 March 2020 and before 17 March 2021;
permanently increase the provisional tax threshold from $2,500 to $5,000 from the 2020-21 income year; and
removing the hours eligibility requirement for the in-work tax credit (IWTC) from 1 July 2020.
To see all of the Government's available schemes and measures, see this link.