The onset of the COVID-19 pandemic and the subsequent nationwide lockdown to control its spread has impacted businesses significantly and also led to various entertainment and sporting events being either postponed or cancelled. While one would expect business interruption and event cancellation insurance to cover such losses, such claims are likely to encounter certain issues, which are discussed in this post.
Being Covered under an Insured Peril
Most insurance policies have a list of causes/ events that are covered by the policy. These events/ causes are called insured perils. Only losses/ damages that are caused by insured perils can form the basis of a claim under the said policy. For instance, the policy wording of a standard-form future events insurance covers certain specified losses if any insured event is cancelled due to either (i) loss or damage to the venue due to fire, allied perils, earthquake, flood or cyclone, resulting in cancellation of the event; or (ii) death of current Prime Minister, President of the Republic of India, Chief Minister of the State in which the event is being held, due to which National/ State mourning is declared or any other prominent personality. Claims under such policies are generally triggered when events like sporting tournaments, award functions, etc., are cancelled due to insured perils. It is possible for insurance companies to include epidemic/ pandemic as an insured peril in such policies and charge a higher premium for doing so. For instance, the All England Lawn Tennis Association has been paying a higher premium for the past 15 years for such insurance. In contrast, the cancellation of Indian sporting events like the Indian Premier League are unlikely to have insurance coverage for epidemic/ pandemic since the same are generally not underwritten by insurers in India.
A standard-form fire and special perils policy covers destruction and damage to the insured property due to (i) fire; (ii) lightning; (iii) explosion/ implosion; (iv) aircraft, other aerial or space devices; (v) external violence (riot, strike, etc.); (vi) storm, cyclone, typhoon, tempest, hurricane, tornado, flood, inundation; (vii) impact by any rail/ road vehicle or animal; (viii) subsidence of part of the site where the insured property stands, landslide/ rockslide; (ix) bursting and/or overflowing of water tanks, apparatus and pipes; (x) missile testing operations; (xi) leakage from automatic sprinkler installations; and (xii) bush fire. COVID-19 related claims under standard fire and special perils policies will be covered only if the list of insured perils includes (or is capable of being construed as including) epidemic/ pandemic or actions of governmental/ public authorities. Since most of the standard-form policy wordings that are available in the public domain do not appear to specifically mention either epidemic/ pandemic or actions by governmental/ public authorities as insured perils, this is a significant issue that businesses desirous of making insurance claims relating to COVID-19 are likely to face, unless the wordings of their insurance policies are different from such standard-form policies.
Comprehensive ‘all-risk’ policies are slightly different, in that they cover loss, destruction or damage to property due to any reason other than an excluded cause/ event. Such policies also cover losses resulting from interruption or interference with business carried on by the insured as a consequence of loss, destruction or damage covered under the policy. Business interruption may also be covered under loss of profit policies that are an extension/ add-on to a material damage policy. Coverage under comprehensive ‘all-risk’ policies will depend on whether the epidemic/ pandemic and actions by governmental/ public authorities are listed as exclusions (the issue of exclusions is discussed later in this post). Claims for business interruption/ loss of profit will be triggered only if a claim for material damage is admissible under the terms of the policy.
Avoiding the Exclusions
Insurance policies invariably contain a list of excluded causes/ events. Loss/ damage due to any of these excluded causes/ events will not trigger coverage under the policy. For instance, the policy wording of a standard-form future events insurance specifically excludes any loss directly or indirectly arising out of, contributed to by, or resulting from any communicable disease or threat or fear of communicable disease (whether actual or perceived), which leads to (a) the imposition of quarantine or restriction in movement of people or animals by any national or international body or agency; or (b) any travel advisory or warning being issued by a national or international body or agency. Similarly, the policy wording of a standard-form fire and special perils policy specifically excludes loss, destruction or damage caused by pollution or contamination unless (a) such pollution/ contamination results from an insured peril; or (b) such pollution/ contamination results in an insured peril. Even the standard-form policy wordings of industrial all-risk policies specifically exclude any loss resulting from interruption or interference with business, which is directly or indirectly attributable to any restrictions on reconstruction or operation imposed by any public authority.
Insurers can be expected to rely on the above exclusions by contending that (a) COVID-19 is a communicable disease; (b) the SARS-CoV-2 virus is a pollutant/ contaminant; and (c) the lockdown orders are restrictions on operations imposed by public authorities. Businesses desirous of making commercial insurance claims, relating to COVID-19, are likely to run into such exclusions, unless the wordings of their insurance policies are different from the standard-form policies that are available in the public domain.
However, courts in India have been seen to apply the principle of contra proferentum (i.e. in case of ambiguity, the interpretation, which is against the party who drafted the contract shall be adopted) while interpreting insurance policies and construing exclusion clauses strictly, i.e. against the insurer. For instance, in United India Insurance Co. Ltd. v. Kiran Combers & Spinners, the Supreme Court held that since ‘subsidence’ was not specifically mentioned as an exclusion, damage due to collapse of a building due to flooding was not excluded merely because subsidence was a specific extension to the policy that the insured had not opted for.
Demonstrating Physical Loss or Damage
Material damage policies invariably require there to be physical loss or damage/ destruction of the insured property in order to trigger coverage. While the COVID-19 pandemic and the restrictions imposed by public authorities in response thereto would rarely have caused actual physical loss or damage to any property, they are more likely to have had the effect of preventing or depriving the insured from using the property. There is divergence of judicial opinion on the issue of whether mere loss of use/ function of property constitutes ‘physical loss or damage’.
Courts in Ohio and Michigan (United States) have taken the view that in order to constitute physical loss or damage, there must be a harm to the insured property that adversely affects structural integrity and that mere detrimental economic impact does not trigger coverage if it is unaccompanied by a distinct, demonstrable, physical alteration of the property. Applying this test, the said courts have held that mold/ mildew growth on the wooden walls of the building and presence of mold and/or bacteria in the air and ventilation system of the building, resulting in strong odors did not constitute physical loss or damage to the building, even though the building was rendered unusable for a period of time.
On the other hand, courts in New Jersey and Colorado (United States) have taken a more liberal view of what constitutes physical loss or damage to property. For instance, leakage of ammonia from the refrigeration system in a packaging facility, which resulted in the facility having to be evacuated was found to constitute physical loss or damage because it rendered the facility unusable for a period of time. Similarly, whilst mere presence of asbestos or the general threat of its future release was found not to be enough to constitute physical loss or damage, it was observed that an actual release of asbestos fibres, which results in contamination of the insured property such that its function is nearly eliminated or destroyed or the structure is made useless or uninhabitable as well as the existence of an imminent threat of release of a quantity of asbestos fibres that would cause such loss of utility would constitute physical loss or damage. Likewise, it was found that an electrical grid was ‘physically damaged’ because it was unable to perform its essential function of providing electricity. In yet another instance, the Supreme Court of Colorado found that seepage and accumulation of gasoline under and around the insured property to such an extent as to render it uninhabitable and make the continued use thereof dangerous constitutes physical loss or damage. Interestingly, coverage was found to have been triggered despite the fact that the actual closure of the building was ordered by the Fire Department (which was not covered by the policy), presumably because the closure was ordered because of an insured peril.
The above divergence of judicial opinion manifested itself before the Bombay High Court in JSW Steel Ltd. v. ICICI Lombard General Insurance Co. Ltd. In that case, heavy rains at the site of a plant caused flooding. Flood water mixed with slush and raw materials (mixture referred to as slurry) entered the electrical/ hydraulic motors of a particular machinery (apron-feeder) and the operations of the plant were impaired. The majority award held that there was no physical damage to the apron-feeder because the same only had to be cleaned after removal of slurry whereas the minority award held that the apron-feeder was physically damaged because it could not be operated until the slurry was removed. The Bombay High Court observed that both the majority award and minority award were possible views on the interpretation of the word ‘damage’ and it may even be that the view taken in the minority award appears to be the better of the two, as well as the one with which the court may, in all probability, have concurred. However, the court refused to interfere with the majority award, having regard to the limited scope for interference by courts while hearing a challenge to an arbitral award.
Businesses making claims, relating to COVID-19, will have to convince the appropriate forum (i.e. arbitral tribunal, court or consumer forum) to take a liberal view of what constitutes physical loss or damage and apply the loss of use/ function test instead of the loss of structural integrity test, unless the wordings of their insurance policies are different from the standard-form policies that are available in public domain.
Potential Legislative/ Regulatory Intervention
Recognising that there are significant issues that commercial insurance claims (especially business interruption claims) relating to COVID-19 may encounter, several legislators in the United States have proposed legislative intervention in order to make it easier for such claims to trigger coverage. For instance, Massachusetts is considering a Bill, which proposes that (a) every insurance policy insuring against loss or damage to property that includes coverage for loss of use/ occupancy and business interruption shall (notwithstanding any terms or exclusions contained therein) be construed to include coverage for business interruption directly or indirectly, resulting from the COVID-19 pandemic; and (b) no insurer may deny a claim for the loss or use and occupancy and business interruption on account of inter alia there being no physical damage to the insured property or there being an exclusion for losses, resulting from viruses. The Bill, which applies only to policies issued to insureds with 150 or fewer full-time employees, also enables insurers who provide coverage to an insured on account of the provisions of the Bill to apply to the government for relief and reimbursement out of funds collected proportionally from all licenced insurers. Similar Bills are also being considered by New Jersey, New York, Ohio, Pennsylvania and South Carolina, as well as the House of Representatives (United States Federal Government).
Given the significant issues discussed above, businesses in India are likely to face an uphill task in recouping their losses through commercial insurance claims in the absence of either legislative intervention by the Parliament (including promulgation of an ordinance by the Central Government) or regulatory intervention by the Insurance Regulatory and Development Authority of India (IRDAI). Although, the IRDAI has intervened promptly to provide much-needed relief to policyholders by inter alia directing insurers to expeditiously handle COVID-19 related cases and claims under hospitalisation covers, granting extensions for payment of renewal premium in respect of existing policies without lapse, it appears that business related insurance claims may be dealt with, if at all, once further clarity emerges on the extent of damage that businesses in India may suffer. While legislative intervention along the lines being considered in the United States is one option, the same could face legal challenges from insurers in case it is applied retrospectively, on the ground that it seeks to re-write the terms of existing insurance policies. Legislative intervention and liberal interpretation of insurance policies could also affect the re-insurance cost of such policies that cover COVID-19 related damages/ losses and, by extension, affect the premium of such policies that will be charged by insurers from policyholders.
Since the cost of appropriate commercial insurance that covers losses arising from COVID-19 in the future is likely to be exorbitant and the possibility of a second wave of cases in the future cannot be ruled out, one option for legislative/ regulatory intervention could be to make it mandatory for all loss of profit policies and other ‘all-risk’ policies issued/ renewed from now on to necessarily cover business interruption losses due to the COVID-19 pandemic and related actions by public authorities and impose a cap on the premium that can be charged for the same. IRDAI could also formulate a standard Business Interruption Policy, which would include coverage for COVID-19 (and similar events) as well as related actions by public authorities and prescribe a cap on the premium that can be charged for such standardised policy.
*The authors would like to thank the Partners Paridhi Adani, Indranath Bishnu, Ramanuj Kumar and Associate Anirud Sudarsan for their inputs.
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 Standard Fire and Special Perils Policy Wording, available at https://general.futuregenerali.in/general-insurance/pdf/StandardFire%20SpecialPerils-PolicyWordings-WRFRE02.pdf (Last accessed: May 13, 2020).
 For example, see Section I of Industrial All Risk Policy Wordings, available at https://general.futuregenerali.in/general-insurance/pdf/IndustrialAllRiskInsurance-PolicyWordings-WR02.pdf (Last accessed: May 13, 2020).
 For example, see Section II of Industrial All Risk Policy Wordings, available at https://general.futuregenerali.in/general-insurance/pdf/IndustrialAllRiskInsurance-PolicyWordings-WR02.pdf (Last accessed: May 13, 2020).
 For example, see Fire Loss of Profit Policy Wordings, available at https://general.futuregenerali.in/general-insurance/pdf/FireLossofProfit-PolicyWordings-WRFLO02.pdf (Last accessed: May 13, 2020).
 See Public Advisory dated April 21, 2020 issued by the General Insurance Council, available at http://www.gicouncil.in/gi-council-public-advisory/ (Last accessed: May 13, 2020).
 Section VI Clauses 21 & 22 of Future Events Insurance Policy Wording, available at https://general.futuregenerali.in/general-insurance/pdf/EventInsurance-PolicyWordings-WRFEI02.pdf (Last accessed: May 13, 2020).
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 Sushilaben Indravadan Gandhi & Anr. v. The New India Assurance Co. Ltd. & Ors., 2020 SCC OnLine SC 367.
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 Mastellone v. Lightning Rod Mutual Insurance Co. Ltd., 175 Ohio App.3d 23: 2008-Ohio-311: 884 N.E.2d 1130 (Court of Appeals, 8th District, Ohio); Universal Image Productions Inc. v. Chubb Corp., 703 F.Supp.2d 705 (US District Court, Eastern District, Michigan).
 Mastellone v. Lightning Rod Mutual Insurance Co. Ltd., 175 Ohio App.3d 23: 2008-Ohio-311: 884 N.E.2d 1130 (Court of Appeals, 8th District, Ohio).
 Universal Image Productions Inc. v. Chubb Corp., 703 F.Supp.2d 705 (US District Court, Eastern District, Michigan).
 Gregory Packaging Inc. v. Travelers Property Casualty Co. of America, 2014 WL 6675934 (US District Court, District of New Jersey).
 Port Authority of New York and New Jersey v. Affiliated FM Insurance Co., 311 F.3d 226 (US Court of Appeals, 3rd District).
 Wakefern Food Corporation & Ors. v. Liberty Mutual Fire Insurance Co., 406 N.J. Super 524: 968 A.2d 724 (Superior Court of New Jersey, Appellate Division).
 The Western Fire Insurance Co. v. The First Presbyterian Church, Littleton, Colorado, 165 Colo. 34: 437 P.2d 52 (Supreme Court of Colorado).
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 Pennsylvania House Bill No. 2372, available at https://www.legis.state.pa.us/cfdocs/billInfo/billInfo.cfm?sYear=2019&sInd=0&body=H&type=B&bn=2372 (Last accessed: May 13, 2020), Pennsylvania House Bill No. 2386, available at https://www.legis.state.pa.us/cfdocs/billinfo/billinfo.cfm?syear=2019&sInd=0&body=H&type=B&bn=2386 (Last accessed: May 13, 2020) and Pennsylvania Senate Bill No. 1114, available at https://www.legis.state.pa.us/cfdocs/billInfo/billInfo.cfm?sYear=2019&sInd=0&body=S&type=B&bn=1114 (Last accessed: May 13, 2020).
 South Carolina Senate Bill No. 1188, available at https://www.scstatehouse.gov/sess123_2019-2020/bills/1188.htm (Last accessed: May 13, 2020).
 Business Interruption Insurance Coverage Bill, 2020, available at https://mikethompson.house.gov/sites/mikethompson.house.gov/files/BusinessInterruptionInsuranceCoverageAct.pdf (Last accessed: May 13, 2020).