More lockdowns could open door for business interruption insurance claims, lawyer says

Could businesses forced to close by another lockdown find a way to claim on business interruption insurance?

Another lockdown could open the door for some New Zealand businesses to claim on their business interruption insurance policies based on a test case being taken in the UK, a legal expert believes.

But the chief executive of the body that represents New Zealand's insurers says New Zealand's policies are much tighter, and he doubts any would be able to make claims.

Insurers and legal experts have been closely watching two major legal test cases - one in the UK and the other in Australia.

The UK case has already been fast-tracked through to the Supreme Court with unheard-of speed, with the possibility of the judge making a ruling on it this side of Christmas.

A High Court case found largely in favour of policyholders although the Supreme Court appeal was taken by both insurers and regulator the Financial Conduct Authority.

While earlier this month in Australia the New South Wales Court of Appeal rejected the insurance industry's argument that policies do not cover Covid-19 losses prompting major insurers to provision for future claims.

The Australian case centred around insurers refusing to pay for Covid-19 related claims based on policies excluding interruptions caused by quarantinable diseases.

But many of the policies mistakenly referred to the Quarantine Act - a law in Australia which was repealed in 2015 and replaced by the Biosecurity Act. The Insurance Council of Australia has said it will look to appeal the case.

Jonathan Scragg, chair of Duncan Cotterill, said in New Zealand many businesses impacted by Covid had tried to claim business interruption insurance, only to come up against a pandemic exclusion in their contracts.

But he said the recent case in the UK may have significant consequences for New Zealand insurers.

"In the Financial Conduct Authority case, a UK high court found that the impacts of a government-mandated lockdown were separate from those caused directly by the pandemic. While the pandemic might stop many people going out or spending, the lockdown was a government decision and not necessarily covered in the pandemic exclusion."

Scragg said that may inspire similar cases here should New Zealand enter another lockdown.

"What is interesting to me about the UK case and this is where I think we may yet see something is what that case really did was to tie together Covid and then Government lockdown restrictions that were imposed in Britain.

"There will be cover under a number of standard business interruption wordings because of both the pandemic but because the government is restricting or prohibiting access to your business premises which is the trigger for cover."

Scragg said that gave shades of grey, which New Zealand last experienced after the Canterbury Earthquakes when there was a wave of litigation after a number of business property owners who were in the red zone weren't allowed to access their properties.

"That was a problem because normally under a BI policy in order to have cover you have to suffer some sort of physical damage to property and that drives disruption. Some property in the red zone was entirely structurally okay and could be used but because they were in the red zone you couldn't get to them."

Scragg said a lot of BI policies didn't respond to that and as a consequence the wording of policies was changed to include additional trigger clauses including one for loss of access.

"And so if you now have a BI policy with a loss of access trigger and you didn't have a pandemic exclusion but you had a lockdown then arguably your policy would respond to that," he said.

Tim Grafton, chief executive of the Insurance Council of New Zealand. Photo / Supplied

But Tim Grafton, chief executive of the Insurance Council of New Zealand, said while it was possible to purchase an extension to a BI policy to cover you for closure of your business as a result of the actions of a public authority they specifically excluded closure as a result of an infectious animal or human disease.

"They will cover you for if there is a sewerage spill in the street or infestation of rats in the area and have to close or hazardous material contaminating the area and the authority has said everyone out of here. Or if the property next door is about to fall over and deemed to be dangerous.

"Those extensions have specific exclusions in them that say but not a closure as a result of infectious animal or human disease.

"So the causality is specifically addressed typically in New Zealand policies."

He said the only conceivable policy in NZ where a claim could be made were ones where people have purchased cover that specifically covered a business for an infectious disease outbreak.

"And there are very few of those around."

Grafton said most New Zealand business interruption policies excluded pandemic cover and this was tightened in the 2000s after the outbreak of SARs in 2003 and then H1N1 swine flu 12 years ago.

"Back in that first decade of this century policies particularly in the Asia Pacific have had pandemic exclusions right in there for denial of access.

"So typically you might have an extension to a BI policy always triggered by material damage but your extension might be you get covered for closure of your business as a result of hygienic issues or damage to any property in the area. Typically policies in NZ say we will cover you for those various things but not a closure as a result of any animal or human infectious disease, so in our view it is most unlikely, well none of those policies would be covered by the decisions in the UK High Court."

But Scragg said he believed the UK court case had sowed a seed of doubt.

"What FCA [UK Financial Conduct Authority] case does is just start to sew a seed of doubt in some people's minds that perhaps it is not so black and white, at least it wasn't in UK.

"And so if we were to have another lockdown maybe that would help a policyholder if they were wanting to look at a possible claim."

He said it may take a group looking to take class action or one large business to take a case to test it.

"If we did have another lockdown watch this space. It is not an entirely closed book of possibility."

The Reserve Bank also mentioned the cases in its recently released Financial Stability Report.

"The insurance industry believes that the policy exclusion wordings used in New Zealand are clearer than those in other jurisdictions, and there is no need for legal test cases like those currently going through, for example, the UK and Australian courts.

"Those courts have ruled in favour of insured parties, but the findings are subject
to appeals. It is not yet clear how these rulings might affect the insurance industry in New Zealand either directly or indirectly through decisions made by overseas parent-entities."