Whether business interruption (BI) policies respond to losses caused by COVID-19 remains a vexed issue. While many New Zealand BI policies explicitly exclude losses caused by notifiable or infectious diseases such as COVID-19, the position overseas is less clear, with cases recently brought in both the United Kingdom and Australian courts to determine whether certain BI policies do provide such cover. The decisions of those courts serve as important reminders for insurers (and insureds) to continue to review the terms of their insurance policies and ensure they are updated to reflect legislative reform and developments.
New Zealand BI policies and COVID-19
As explained in our previous update, BI policies exist to cover losses resulting from interruption to business activities. However, BI policies are typically linked to physical property or material damage insurance policies, meaning they generally do not respond to losses caused by COVID-19. In addition, most New Zealand BI policies contain exclusions for losses caused by notifiable diseases under the Biosecurity Act 1993, or infectious diseases notifiable under the Health Act 1956. Both the novel coronavirus and COVID-19 have been added as notifiable/infectious diseases earlier this year under these statues.
Developments overseas
Australia – exclusions ineffective
The Court of Appeal in New South Wales this week released its judgment on whether certain BI policies responded to losses caused by COVID-19 or were excluded by the terms of those policies. The relevant policies deemed the outbreak of a disease to be damage to property but excluded losses due to "any circumstances involving…diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments."
In June 2016, the Quarantine Act 1908 was repealed and replaced by the Biosecurity Act 2015. The Biosecurity Act did not provide for declarations of "quarantinable diseases" but instead provided that the Director of Human Biosecurity may determine certain diseases to be a "listed human disease". On 21 January 2020, COVID-19 was determined to be a listed human disease.
The Court held that COVID-19 was not a disease declared to be a "quarantinable disease" under the Quarantine Act and accordingly was not excluded under the relevant policies. The Court considered the words "subsequent amendments" should be given their ordinary meaning, referring to changes made to that Act, and did not extend to the new Biosecurity Act. The policyholders were therefore covered under the relevant policies.
United Kingdom – Financial Conduct Authority test case
The Supreme Court in the UK also this week heard a "leapfrog" appeal and test case bought by the Financial Conduct Authority (FCA), on behalf of policyholders, regarding the proper construction of various insurance policies and extension wording. The key issue is whether losses caused by COVID-19 are covered or excluded under those policies.
In September 2020, the lower Court largely found in favour of the FCA, and therefore policyholders, on the key issues. In particular, the lower Court considered three types of clauses and held:
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Cover for losses arising out of disease clauses (where cover is extended to BI due to a notifiable disease, some of which included geographical boundaries) was generally available;
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Cover for losses arising out of prevention of access clauses (eg government ordered lockdowns) was narrower, only being available in some cases although the extent of cover depended on the specific terms of the policies and how the business was affected; and
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Cover for losses arising out of hybrid clauses (eg those that blend disease and prevention of access clauses) depended on the wording of the disease clause component and the wording of the prevention of access component (as outlined above), being available in some cases.
In all of these cases, the Court considered that cover was available even if business did not completely stop – ie a disruption was enough (although again, the wording of the policy remained important).
How will this affect us in New Zealand?
Losses resulting directly from COVID-19 are generally excluded under New Zealand BI policies. Given the UK test case and Australian decision, however, it is always worth checking the specific wording of your BI policy.
Further, the decision of the NSW Court of Appeal serves as a timely reminder to ensure that policy wordings are up to date in light of legislative changes or other market developments.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.