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Impact of the coronavirus (covid-19) outbreak on insurance law

a) Common Issue - Whether loss or damage arising out of Covid- 19 amounts to physical/property damage under an insurance policy?

Most insurance policies require a “loss,” which is often defined as “physical” damage, to trigger coverage subject to risks covered, exclusions and compliance with policy requirements. The key will be whether a Covid-19-related claim arises from a physical loss.

There is a body of law discussing whether the presence of bacteria, odours, or microorganisms constitutes “property damage.” Arguments are also being made that contamination from Covid-19 qualifies as property damage because these surfaces must be decontaminated before the building can be used, rendering buildings uninhabitable and unusable. Given the infancy of these issues, the jury is still out on this.

b) Issues arising out of specific policies

Contractor’s All Risk (CAR) Policy

The “all risks” coverage in most standard CAR policies are cut down considerably by exclusions. Some of the exclusions relevant to the Movement Control Order (MCO) are:-

1. (i)  General Exclusion (d) found in the standard template CAR Policy used in Malaysia, excluding any loss, damage or liability directly or indirectly caused by or arising out of or aggravated by a cessation of works whether total or partial.

Although an insurer may theoretically disclaim liability as it is not a risk it undertook to insure, it is unlikely in practice that an insurer would use General Exclusion (d) to avoid cover under the CAR policy given that the cessation of works arising of Covid-19 was precipitated by the MCO, a statutory order and it may be socially unacceptable to do so;

2. (ii)  General Condition 3 requires contractor to take all reasonable precautions to prevent any loss or damage on site. Arguably, a failure to ensure that the site is properly and adequately protected during a shutdown may result in the insurer denying liability for any loss or damage that may occur during this period. However, it is well recognised that in order to rely on this exclusion, one must establish that the Contractor was at least reckless, i.e., made with actual recognition by the Contractor himself that a danger exists, and not caring whether or not the loss or damage could be averted.

Public Liability Insurance

Public Liability Insurance is relevant, for example, if there is an accident on site leading to bodily injury or property damage to members of the public during the implementation of the MCO for which the policy cover would apply provided reasonable precautions were taken by the Contractor to ensure the site is reasonably safe.

Another aspect to this policy is also applicable in instances where a member of public alleged that they became ill due to inadequate hygiene standards at an establishment or site. It is debatable as to whether this might include Covid-19 arguing that public liability policies exclude cover for contamination or pollution. However, these exclusions are generally designed to exclude cover for gradual pollution escaping from the premises rather than presence of a disease or virus on the premises themselves. On this basis and absent of any specific exclusions, it seems unlikely that this would operate to exclude cover for Covid-19 related injuries.

Workers’ Compensation Insurance

Workers’ Compensation policies generally extend insurance benefits to Employees for injuries, which include work related illnesses, “arising out of or in the course of employment.”

An Employee would have to prove that they contracted Covid-19 as a result of a sudden and unforeseeable event that occurred during the course of work and was incidental to their employment to enjoy cover.

An interesting question arises where Employees contracted the virus by them being housed on the site although works have been suspended. It is likely that in such circumstance the Employee is likely to succeed in proving he contracted in the course of his work.

Professional Indemnity Insurance (PII)

The coverage provided under PII policies covers the insured’s legal liability to pay damages to persons who have sustained loss arising from the insured’s ownprofessionalnegligence or that of his Employeesinthe conduct of the business.

As the test for negligence is fact sensitive, the Covid-19 and MCO do not present any special issues in coverage for legal liability for professional negligence, which in this context may occur where the absence and illness of key personnel leads to errors in work or omission to ensure that sites are sufficiently made safe and continue to be so, where there is a supervisory function.

Business Interruption (BI) insurance

Business Interruption (BI) insurance usually covers loss of revenue or profit experienced by a business following damage to property and the cost of mitigating that disruption.

The most likely route to cover for Covid-19-related losses are extensions to cover found in some BI policies (which contains a relevant non-damage BI extension for infectious diseases). Such extensions may set out a list of ‘specified’ diseases and covers BI arising from the occurrence of such disease.

The Hong Kong Courts in the case of New World Harbourview Hotel Co. Ltd v ACE Insurance & Ors [2012] HKEC 264 confirmed that insurance cover is not (usually) retrospective and that loss will only arise as a consequence of the insured peril that triggers the policy.

As Covid-19 is not (yet) listed as a notifiable disease in any BI Insurance to our knowledge, active BI policies are unlikely to expressly include cover for Covid-19.

However, an order from a civil authority closing business triggers coverage under most insurance policies provided there is “direct physical loss or damage”, and the question is whether contamination from Covid-19 amounts to physical damage, which is still an open question.

c) Suggested Solutions / Remedies

  1. (i)  Preserve your ability to pursue a claim in the future by giving notice of the claim to the insurance company. Insurance policies often include notice obligations and there may be adverse consequences if notice is not provided in a timely manner.

  2. (ii)  Review all insurance policies and request that the project owner provide copies of all applicable insurance policies.

  3. (iii)  Create a good, structured and organised record keeping of “direct physical loss of or damage to property” (on the basis that Covid-19 contamination constitutes physical damage).

  4. (iv)  Be on the lookout for any expiration dates of coverage and extensions of such dates, typically in builders risk insurance policies to ensure proper coverage during these uncertain times.