Material damage and business interruption – risk and insurance issues from COVID-19
These polices are designed to protect tangible assets owned by the insured, and consequential loss following damage to property insured. There are various forms of policies covering material damage including industrial special risk (“ISR”), “business” or “office” packs, contract works insurance, machinery breakdown, marine (property in transit), landlords’ insurance, home and contents.
Under these policies there must be “material damage” to property insured. Perils causing damage to property may be fire, storm, tempest, accidental damage, theft, malicious damage etc. Once there is material damage, indemnity may extend to “consequential loss”. Types of such loss include increased cost of working, loss of profits, wages and loss of rent.
On 29 March 2020, the Prime Minister announced that the States and Territories agreed to a 6-month moratorium on at least some evictions. Owners and tenants have sought relief under their material damage policies. The common question is whether “consequential loss” is available under standard material damage policies.
Commercial property owners typically cover their loss of rent exposure under ISR, business pack or landlord’s policies. The general position is that the business interruption must result from material damage. There is commonly no cover for rental default by tenants in the absence of there being any material damage.
Bellrock has access to standalone commercial property policies that cover the full gambit of material damage and business interruption exposures, whilst extending the cover to include rental default by tenants. Please note that the cover is typically limited to 6 months loss of rent and there are requirements that relevant steps be taken to enforce the tenants lease obligations.
We expect that it will be increasingly challenging to obtain new rental default cover following the outbreak of COVID-19, whereas clients with existing cover should be able to obtain renewal terms, but rates will likely increase.
Some consequential loss policies are extended to provide coverage as a result of a closure of the business by a Public Authority for a number of circumstances, including “Infectious Disease”. The intent of an “Infectious Disease” extension is to provide Loss of Profits/Wages/Rent cover for things such as an outbreak of Legionnaires disease, or measles; which can close down one or two buildings disrupting a small number of businesses.
The “Infectious Diseases” clause generally incorporates either of the following Exclusions:
The insurer will not be liable for any loss or Damage arising as a result of any Highly Pathogenic Avian Influenza in Humans or any other diseases declared to be Quarantinable Diseases under the Quarantine Act (Australia) 1908 and subsequent amendments.
or more recently:
An occurrence of a human infectious or human contagious disease which the competent local authority has stipulated shall be notified to them, with the exception of any occurrence, whether directly or indirectly, arising from Quarantinable diseases listed in the Biosecurity Act 2015, as amended, which are all specifically excluded hereunder.
As at the end of January 2020, Coronavirus is a listed disease under the Biosecurity Act 2015. The second Exclusion therefore eliminates cover available under this extension. Specific advice should be sought on the first Exclusion as there may be scope to avoid the exclusion on the basis that the Quarantinable Diseases under the Quarantine Act (Australia) 1908 does not apply.
The reality is that the global funds held by insurers could not meet business interruption claims arising from such a large-scale pandemic.
- you may have provided declarations to insurers for your business turnover without consideration of your current circumstances following the pandemic. Reducing your turnover declaration may reduce the premium applicable. We would caution doing so without first discussing this with your broker.
- it is unlikely that the replacement value of your assets have fallen, and therefore unlikely any saving can be achieved, however if you are carrying significantly less (or more) stock on hand you may need to adjust your declaration to ensure you are correctly covered.
- crime rates are likely to increase. Security and facilities management measures should be implemented to safe-guard against risk during the unoccupancy of buildings. You should check your policies as regards “unoccupied buildings” exclusions and ensure, if your premises is unoccupied, that you notify your insurer. Many insurers apply higher excess and premiums for unoccupied buildings. Given the circumstances of COVID-19 a number of insurers are providing relief against the strict application of these exclusions.
- in relation to construction works (covering materials and labour associated with building works) you should check your policy carefully for a “cessation of work” clause. Such clauses render cover inoperative if work ceases at site for more than 30 days (depending on the wording). Should Australia move to a full shutdown of construction operations (currently unlikely) it will be important for you to advise your insurer of this to ensure you have their written confirmation that cover will remain in place during a mandated shutdown.
- with staff working from home, consideration should be had to any business assets that are not located at the business premises. In the event there is a transfer of significant business assets from office to offsite locations (as there have been with some of our larger clients), then that property should be specifically insured.
- unlawful taking of ‘money’ from the policyholder’s premises, or bank, or whilst in transit to and from premises/bank, or whilst being held by a director or employee at their premises.
- as regards marine insurance, there may be limitations on incoming/outgoings due to restrictions. If there is, you may be able to seek some premium adjustments.
- it is also of paramount importance to give your broker adequate time (at least 6 weeks) to negotiate renewal. Make sure you are aware of your renewal dates and engage with your broker as early as possible.