Already there are predictions of negative effects on tourism and other sectors from the new coronavirus outbreak. The Chinese government has 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 domestic flights, tourism activities and restaurants. Further, companies that sell to China might find a reduction in demand over the coming months, causing a loss of revenue.
All of this activity may or may not lead to a flood of business interruption claims. As with every widespread event, each claim will need to be dealt with on the merits of specific policy wording.
When a disease becomes notifiable
In 2003, the SARS outbreak caused significant damage to the economy of Hong Kong.
Businesses had seen a downturn in trade from February, 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 and 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.
Notifiable disease cover
While some policies list the specific diseases that are covered, 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 UK. 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.
Force majeure cover
China's Belt and Road Initiative involves infrastructure development and investments in nearly 70 countries across Asia, Europe, the Middle East and Africa.
The ongoing travel restrictions in the current outbreak and quarantine orders are affecting Chinese labour from returning to work. In addition, there is a possibility of production delays by Chinese manufacturers.
These may result in project delays, potentially triggering policy coverage in force majeure; delay in start-up and difference in conditions.
Almost by definition, the damages resulting from a force majeure can be disastrous. Types of losses covered include continued debt servicing, loss of income, ongoing fixed costs, spoilage and related contingencies.
Act of competent authority (non-damage denial of access)
Policies tend not 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.
Supplier/customer extensions
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 UK businesses affected by customer or supplier damage in Asia may not respond, as many policies have territorial limits that would apply.
Certainly, coverage concerns will continue to evolve along with this situation. 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.
Damian Glynn
Head of financial risks (UK)
MOBILE +44 (0)7920 877658
EMAIL damian.glynn@uk.sedgwick.com
Stephen Hope
Head of MCL global (Asia)
MOBILE +65 9179 8189
EMAIL stephen.hope@global.sedgwick.com
Jenny Teo
Head of forensic advisory services division (Asia)
MOBILE +65 9743 0566
EMAIL jenny.teo@sg.sedgwick.com