The COVID-19 pandemic and its impact on the Insurance sector

Ever since the World Health Organisation (WHO) declared COVID-19 as a global pandemic on March 11, 2020, businesses and individuals have suffered huge losses and insurance claims are at an all time high.

Industries across the globe often opt for “Industrial All Risk” policies. In India, most businesses opt for “Standard Fire Special Perils” policies through a general insurer to hedge the risk of these kinds of losses. Policies commonly cover Material Damage and Business Interruptions.

Traditionally, an insured would opt for such a policy to cover physical damage to the property or equipment due to occurrence of an insured peril. Business Interruptions insurance is given in combination with Material Damage insurance to cover loss of revenue while the business operations remain suspended on account of the physical damage to the property or equipments. In these times, there are a number of arguments insurers may use to reject COVID-19 related claims.

In view of business closure, an insured may present his claim for resultant losses under a Business Interruption policy. The pandemic, however, does not cause any physical damage to property. Therefore, the claim could be rejected due to the absence of physical damage to the insured material/property.

This issue is alive in the courts of the United States. In the case of Ocean Grill v Lloyds in Louisiana, the insured, restaurant owner, has claimed under Business Interruption insurance for lost of net income and extra expenses due to shutdown of restaurants by executive order. The insurers have resisted on the ground that the virus does not cause any damage whatsoever to the restaurant property.

Our courts have not yet had an opportunity to decide these issues. They may take a conservative view and hold that “physical damage” should be tangible.

Recently, one of the courts in Canada, while deciding the case of MDS Inc. v. Factory Mutual Insurance Company, gave an analysis of the definition of “physical damage” with respect to an All-Risk Property insurance policy. Here, the insurer had rejected the claim saying there was no physical tangible damage to the property in order to avail business interruption insurance.

The judge emphasized that there is no definitive meaning of “resulting physical damage” in all-risk policies in Canada and that there are conflicting lines with respect to the interpretation. Her Honour explicitly rejected the notion that physical tangible damage should be apparent and instead adopted a broad interpretation, which would treat the loss of function or use of premises as physical damage. Her Honour concluded that the policy is meant to provide broad coverage. To simply interpret physical damage to be tangible would deprive policyholders of a vital aspect of coverage for which they contracted, which would undoubtedly be in direct contrast to the commercial purpose of all-risks coverage.

It is important to note that the MDS case did not deal with COVID-19. However, the reasoning given in this case may be used by the businesses to successfully claim business interruption losses arising from COVID-19 under traditional commercial policies.

Another defense could be that pandemics and epidemics are not specifically covered by the policy. The world has seen other epidemics like Spanish Influenza, SARS, Yellow Fever, Ebola, etc. all of which caused economic losses. So businesses can take a pandemic insurance policy or at least add specific clauses covering losses due to epidemics into their policy.

Forbes reported that after the outbreak of SARS in 2003, the All England Lawn Tennis and Croquet Club had taken a pandemic insurance policy by paying a premium of $2 million every year and thus they will be able to recoup almost half of the losses due to cancellation of the Wimbledon Championship this year. Pandemic insurance policies have huge premiums, and therefore, many insured do not opt for such policies.

Many policies contain a force majeure clause which excludes pandemics. However if there is no specific clause excluding viruses or infectious diseases, then the insured can recover losses under such a policy. A suit on this ground has already been filed by a group of Chicago restaurant and movie theater owners i.e. Big Onion Tavern in federal court against Society Insurance Inc, a Wisconsin-based insurance company. They allege they have suffered losses due to closure of all restaurants, bars and movie theaters by authorities due to the pandemic. Since their insurance policy does not contain virus or pandemic exclusion, they say that their claims are valid.

For health and life insurance policies, the Insurance Regulatory and Development Authority (IRDA) of India has issued guidelines which call upon insurers to settle all claims related to COVID-19 responsibly. However, there are certain exclusion clauses which can prevent a successful claim:

1. The standard exclusion as set out by IRDA in its guidelines for standardised exclusions in a contract exclude any unproven treatment for which there is no medical record or study. At present, there is no proven medical treatment or vaccine prescribed for treating COVID- 19 patients and the claim can be rejected on this ground.

2. The contract may exclude claims of a person infected with COVID-19 if he or any of his family members have recently travelled to COVID-19 affected countries like China, Italy, etc.

3. A claim may be rejected if a person contracts COVID-19 during the policy waiting period, which is generally 30 days after the issuance of policy.

4. A claim may not be allowed if an insured was not hospitalised for 24 hours or more.

These are just a few examples, but they can be resisted by the main purpose rule, which lays down that wide exclusion clauses will be read down to the extent to which they are inconsistent with the main purpose, or object of the contract.

In the case of Skandia Insurance Co. Ltd. v. Kokilaben Chandravadan, the Supreme Court said:

“When the option is between opting for a view which will relieve the distress and misery of the victims of accidents or their dependents on the one hand and the equally plausible view which will reduce the profitability of the insurer in regard to the occupational hazard undertaken by him by way of business activity, there is hardly any choice. The Court cannot but opt for the former view. Even if one were to make a strictly doctrinaire approach, the very same conclusion would emerge in obeisance to the doctrine of 'reading down' the exclusion clause in the light of the 'main purpose' of the provision so that the exclusion clause does not cross swords with the 'main purpose' highlighted earlier. The effort must be to harmonize the two instead of allowing the exclusion clause to snipe successfully at the main purpose.”.

However, the Supreme Court recently held in the case of Bajaj Allianz General Insurance Co Ltd & Anr v. The State of Madhya Pradesh,

“The provisions of an insurance contract must be imparted a reasonable business like meaning bearing in mind the intention conveyed by the words used in the policy document. Insurance policies should be construed according to the principles of construction generally applicable to commercial and consumer contracts. The court must interpret the words in which the contract is expressed by the parties and not embark upon making a new contract for the parties. A reasonable construction must therefore be given to each clause in order to give effect to the plain and obvious intention of the parties as ascertainable from the whole instrument.”

If the exclusion clause in the contract is ambiguous or capable of two different interpretations, an interpretation in favour of the insured (and against the insurance company who drafted the contract) will be accepted by the Court. This is the doctrine of “contra proferentem”. The Supreme Court in General Assurance Society Ltd. v. Chandmull Jain and Anr., held that there is no real difference between a contract of insurance and any other contract as regards its interpretation. However, there are limitations to the applicability of contra proferentem.

In the case of Suraj Mal Ram Niwas Mills Pvt. Ltd v. United India Ins. Co. Ltd, the Supreme Court held that the words used must be given paramount importance and it is not open for the court to add, delete or substitute words. It held that the policy terms have to be strictly construed.

Will our courts take a strict view by following the letter of the contract? Or will our courts keep in mind the principle enunciated in Skandia Insurance Co’s case that the main purpose of the policy is to protect the interest of the policy holder?

The authors are practicing Advocates at the Bombay High Court and can be reached at zubin.behramkamdin@gmail.com and nair.vidya89@gmail.com respectively.