As a result of the government’s response to Covid-19, especially since New Zealand moved to Alert-Level 4, many businesses have been forced to shut down or, at least, to work remotely. This is likely to have a significantly detrimental effect on business revenue. One way of mitigating this risk is for businesses to take out insurance for business interruption. There is no question that the Covid19 lockdown arrangements have resulted in interruption to business activity in New Zealand. But business interruption insurance cover is a form of consequential loss insurance. In other words, the cover depends on a triggering event.
Unfortunately, there are some pitfalls in establishing a successful claim. First, many business interruption policies are only triggered when physical damage occurs, typically under a material damage policy. Physical damage is unlikely to have occurred as a result of Covid-19. Ironically, if there was social unrest which resulted in physical damage to property, it would be more likely to trigger cover for business interruption.
Second, many policies will expressly exclude cover for pandemic events. However, exclusion clauses will need to be clearly worded because it is likely that any ambiguity will be interpreted in favour of providing cover for an insured business. Businesses should not simply rely on the advice of brokers or insurers but should obtain their own advice as to the extent of cover and the scope of any exclusions.
Third, there could be issues with causation and quantification. Are losses caused by staff illness, or by the need to self-isolate, or by government regulation. Are losses a result of travel restrictions imposed by this government or measures imposed by other governments? On that point, although a national state of emergency has been declared under civil defence legislation, it is far from clear what the legal basis is for implementing the four-tiered system of alert levels. The current Covid-19 lockdown may not meet the test of formal government regulation.
Finally, qualifying for relief under the government’s wage subsidy scheme is dependent on there being no insurance cover for business losses. If cover is disputed, establishing whether cover exists could be a drawn-out process. This could be problematic for businesses who need wage subsidy relief urgently in order to remain viable.
I recommend that businesses seek advice from an insurance law expert as soon as practicable to clarify the extent of cover for business interruption in the current and unpredictable circumstances.