Rule Britannia! Britannia rules COVID-19 insurance coverage waves

By Dentons Kensington Swan’s Stuart Robertson (partner), Justin Fredrickson (associate), Ossama Mohamed (summer clerk)

As all of us will be aware COVID-19 has caused massive disruption and financial stress around the world. New Zealand as a whole and regionally has been in different levels of lockdown since March 25, 2020. While there has been assistance from government and the banks, a perhaps overlooked area of assistance for businesses is insurance.

In January 2021, a major decision in the UK’s highest court was delivered concerning the effect of COVID-19 on business interruption insurance policies (The Financial Conduct Authority v Arch and Others). In summary, in the UK at least, COVID-19 related claims can be covered under business interruption insurance. This allows businesses in the UK to claim for loss of profits due to COVID-related interruption.

Why does a UK Supreme Court case matter to NZ?

The Alert Level 4 lockdown from March 5 to April 27, 2020 prevented construction work with the exception of works concerning essential services. This ground the vast majority of building work to a halt under Level 4. Profits were reduced for contractors across the industry who were unable to access sites to complete projects. Whilst construction work was allowed to continue under Levels 2 and 3, efficient work was hindered by contact tracing and physical distancing requirements for workers on site.

Whilst not binding in New Zealand courts, the UK Supreme Court decision is persuasive reasoning. Its findings could be applicable in a New Zealand construction and/or insurance context, especially in relation to similarly worded insurance policies related to business interruption insurance policies. The decision should cause insurers to sit up and take notice in New Zealand and potentially making it easier for policy-holders to make out certain insurance claims.

What does the case actually say?

Along with the many types of insurance coverage policies there are even more policy wording variations. How can any one case possibly begin to consider such variations? The Court did this by considering 21 sample policy wordings. According to estimates, the case would be binding on 700 different policy types across 60 insurers that covered 370,000 UK policyholders.

The critical determination in all of the policy wordings was interpretation of certain key words. Eventually, the Court ruled that the COVID-19 pandemic could be included as a relevant consideration. Therefore businesses would be entitled to cover under their policies.

What types of insurance in the construction market could help with COVID-19 losses?

The UK Supreme Court case focused on business interruption insurance. Depending on the wording this could cover loss of profits in the event of the closure of transport routes, ports, or airports, damage to assets at a supplier’s or customer’s premises, loss resulting from the prevention of access to your premises, or damage to public/private utilities. Contingent business interruption insurance is an extension to business interruption insurance and can extend to damage and/or lack of access to a supplier’s or customer’s premises. (Note that these types of insurance are not a part of the insurance requirements under NZS3910 and specific project interruption costs would likely be dealt with under the variation mechanism in the contract, depending on the cause of the interruption.)

Another type of insurance is advance loss of profit insurance (also called delayed completion coverage or delay in start-up insurance). This can provide cover where companies face delays, higher costs, or lost profits when a project takes longer than expected to complete. This type of insurance is often used in PPP projects. It may well prove more popular in the future.

Other types of insurance that contractors may hold and which may be relevant are key person insurance, shareholder or partner insurance, and personal income protection insurance.

What should I do next?

Not all readers are likely to have business interruption insurance. However, it does exist in the construction insurance market and there are several other types of insurance that may provide cover for COVID-19 related losses. If you have suffered a loss of any sort arising from COVID-19, it is not covered under your construction contract, and you have insurance, then it is worth checking your policy in the first instance or talking to your broker or insurer about what cover applies.

If you believe there could be cover for your losses but are told otherwise by your insurer, it would be worth talking to your adviser. The UK Supreme Court case is an indication of the general theme that we expect the New Zealand Courts to follow against insurers who try to avoid cover in New Zealand arising from the pandemic.

Dentons Kensington Swan offers 15 minutes of free advice on construction issues to CCNZ members. This article is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Dentons Kensington Swan does not accept any liability other than to its clients, and then only in relation to specific requests of advice.