Business interruption: exploring denial of access and failure of public utilities extensions

Industrial special risks (ISR) policies (see explanation of ISR cover here) provide cover for material damage to property and consequential financial loss, often referred to as business interruption, as a result of that damage.

It is fundamental for policyholders to understand specific coverage that can extend under an ISR policy, which may only be available via bespoke endorsement wordings.

Two key extensions provided under a typical ISR Mark IV Policy wording are premises in the vicinity (prevention of access) and remote premises of public utilities. Each extension provides business interruption cover and does not require material damage to occur at the policyholder’s insured premises to enliven.

Premises in the vicinity (prevention of access)

A standard prevention of access clause reads as per the below:

Where –

  1. there is damage to a property within a 5km radius of the Premises; and
  2. that damage was caused by a peril (damage as a result of which is insured hereunder); and
  3. as a result, a competent government, public or statutory authority has ordered the closure or evacuation of the whole or part of the Premises during the Period of Insurance

then any loss as insured by this Policy which has resulted from interruption of or interference with the Business following (a) (b) and (c) above, shall be deemed to be loss resulting from Damage to property used by the Insured at the Premises whether the Premises or property of the Insured therein shall be damaged or not…

Importantly the coverage permits policyholders to bring a claim for business interruption where there has been damage: (a) to property not owned by the policyholder; and (b) happens external to an insured premises; and (c) which results in the insured premises being closed by a public authority.

The more substantive requirements of these three elements include:
  1. First, there must be damage to property, not owned by the insured, within a 5km radius of the insured premises. Prior to the hardening of the insurance market, in approximately 2017, coverage extended to a much wider radius. Since this time, insurers have sought to restrict this distance so there is a closer physical nexus between the insured premises and the external, third-party property that has been damaged.

  2. Secondly, the damage must occur as insured peril that would trigger policy response if it had occurred directly to the insured premises. Summarily this means that the loss cannot be caused to property not covered by the policy and by circumstances which are already excluded. A key consideration for policyholders, are natural catastrophes that typically affect wide-ranging areas. By way of example, flood and named cyclones: these are commonly applied exclusions across ISR policies, or otherwise the indemnity available for such events are sub-limited by insurers.

  3. Thirdly, the damage must result in the closure or evacuation of the premises due to an order of a competent public authority. The policyholder cannot decide voluntarily and unilaterally to close their premises to benefit from the cover. Arguments can arise as to whether there has been such an order and, frustratingly, this can often hinge on the discretion of public authorities. It is often out of the hands of the policyholder, and in some cases the insurer, to indemnify absent such a determination. In this regard, if the policyholder cannot access its premises due to an event (that would trigger the cover) the policyholder may attempt to press a determination with the relevant public authority. In doing so it could seek forced closure to be officially ordered and documented.
Excess considerations

Policyholders should also be aware that a time deductible (being a form of excess) will ordinarily apply to business interruption claims.

A standard time deductible is 48 hours and can be higher, we have seen up to 96 hours, for properties with exposure to natural catastrophes, such as flood, named cyclone and bushfire.  Relevantly, indemnity under the policy for loss of income will only be available after the period has expired.

It follows that there is a likelihood that prevention of access claims may not exceed the deductible, where:
  1. a loss impacts an individual asset, rather than a wide area, and

  2. where the loss occurs in a metropolitan area where repair services can be more quickly called upon (compared to remote areas).
COVID-19 related business interruption claims for prevention of access

Policyholders should be aware that the scope business interruption resultant of prevention of access was recently tested by the Courts in two recent COVID-19 decisions, see our articles here.

Under certain ISR policies, the definition of “damage” was extended to include business interruption as a result of outbreaks of disease at or near an insured premises, resulting in closure of same by a competent public authority.

The first test case was HDI Global Specialty SE v Wonka [2020], which was brought before the NSW Supreme Court of Appeal. The case concerned whether insurers could rely on a common exclusion within ISR Policies, being “diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments”, to deny policyholder’s claims. The Court ruled in a full majority that the Quarantine Act exclusions did not apply to COVID-19, with the High Court rejecting the insurers’ request for special leave to appeal.  At the time, this was seen as a significant win for policyholders.

However, in the subsequent decision of Swiss Re International Se v LCA Marrickville Pty Ltd [2021] the Courts focused on the requirement for premises to be closed due to the outbreak of disease within a certain radius of the insured premises (often at the insured premises distinct from an extended radius) and, as a direct result of orders of competent public authorities.

For most policyholders, there is no cover for COVID-19 related closures because it was deemed that most closures were the result of COVID-19 restrictions in the community in general, rather than as a result of an order by a competent public authority.

Many claims are still ongoing where the specific clause allowed an outbreak within a wide radius of the insured premises, some policies permit a 20km radius.

Public utilities extension

A standard public utilities clause reads:

Any loss resulting from interruption of or interference with the Business caused by Damage (not otherwise excluded) covered by Section 1 of the Policy to any land based premises or property in Australia of any company or authority producing, supplying, providing or delivering electricity, gas, water, sewerage or communications services to the Insured’s Business shall be deemed to be loss resulting from Damage to Property used by the Insured at the Premises.

The intent of cover is for business interruption caused by the failure of a utilities service provider to supply critical services to an insured property, as a result of damage to that service provider’s assets.

By way of example: a fire causing damage to a power station, leaving an insured premises without power and unable to operate.

As per the prevention of access clause:
  1. damage incurred must not be excluded by the policy: an insured peril is a prerequisite for coverage

  2. a minimum 48-hour deductible will apply

  3. insurers have moved to impose a restricted radius in which damage can occur from the insured premises: some policies are worded to cover premises adjacent or attached to the insured property

  4. Whilst clear to most ISR policyholders that cover extends for material damage and business interruption at their premises, these extensions demonstrate that coverage can extend to damage to property external to the premises.

To obtain these broader coverage benefits a bespoke solution must be negotiated and agreed by insurers with amendments to standard policy terms and conditions.

If you are an ISR policyholder interested in reviewing the breadth of cover and benefits available under your ISR policy; or if you have a question regarding coverage intent or policy response under your ISR policy; please contact our Team of risk advisors or claims advocates who can assist you.

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