On Wednesday 25 March 2020, our COVID-19 status will rise to level 4. New Zealand will go into lockdown. Schools and non-essential businesses will close, causing serious financial hardship for many. While insurance policies vary, for most, it is unlikely business interruption insurance will cover those financial losses.
Business Interruption (BI) Insurance covers a businesses' loss of revenue, profit or rent as a result of an insured peril. It is usually packaged with, and bought together with, a material damage policy that insures the business' building and/or assets from physical loss or damage. The inter-relationship between the two policies limits the ability of a BI policy to respond to a non-damage based, pandemic claim.
BI insurance cover usually has two triggers:
- Unintended and unforeseen physical loss or damage to insured property; and
- Consequent interruption to or interference with the business.
So, business losses as a result of COVID-19 will usually not be covered due to a lack of physical damage, unless a policy extension or memorandum that is not reliant on property damage applies.
Most BI policies have a memorandum that covers claims for business losses arising from the actions of public or civil authorities. Often this is optional, so check whether this is included in your policy schedule. If it is, the wording of the memorandum is important. Some are broad and generic, that is, a public authority's action for any reason. More often, the memorandum only responds to actions in connection with bodily injury, or perhaps vermin or contamination. Helpfully, some expressly extend to actions in connection with illness. If your "public authorities" extension is generic or includes illness you may have some cover available. If so, there will be a waiting period and a sub-limit of 10% of the sum insured.
Some BI policies cover business interruption as a result of closure of the business due to an outbreak of an Infectious Notifiable Disease under the Health Act. As COVID-19 is now an Infectious Notifiable Disease under Schedule 1 of the Act and you have this cover, you may have a valid claim. This extension will also have a waiting period and a sub-limit which will vary from policy to policy.
However, most BI policies also exclude claims for loss, damage or interruption arising from infectious diseases. These broad exclusions are widespread and will preclude any claim arising from today's announcement and Wednesday's lockdown.
Pandemics have been a growing threat for some time. In 2018, in response to Miami business losses during the 2016 Zika virus outbreak, Marsh and Munich Re announced the launch of PathogenRX, a specialist policy covering businesses affected by an infectious disease outbreak (mostly in the US). We understand that there was limited uptake of this product when launched, but unsurprisingly, demand is now rising. Specialist pandemic cover may become a feature of the local insurance market in the future, but for now, pandemic claims are mostly excluded.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.