Covid-19 impact on event cancellation & business interruption insurance policies.
On the 11th March 2020, the World Health Organization declared COVID-19, disease caused by SARS-Cov-2, a Pandemic.
As a consequence of the spread of the Pandemic, in the first weeks of March, the authorities in most countries within our region decided to implement lockdown and social distancing measures, including restrictions (which in most cases are total) to almost all production and commercial activities, except for those that are considered to be “essential”. To illustrate this, we mention below some of the more relevant rules issued in Argentina (the list is non-exhaustive):
- On the 12th March, the Government of the City of Buenos Aires issued Order No. 140-20, which established a 30-day suspension period for tourism-related activities and mass gathering events, which refer to all events comprising more than 200 participants.
- On the 17th March, the Argentine Ministry of Tourism and Sports issued Order No. 131/2020, effective from the 18th March to the 31st March 2020, which established that hotels must reimburse all payments received from tourists in respect of reservations during said period.
- On the 19th March, the Argentine Government issued Presidential Decree No. 297/2020, establishing the total and mandatory lockdown for the entire country, effective from the 20th March to the 31st March. Such measure was later extended for subsequent two-week periods pursuant to Presidential Decrees No. 327/2020, 355/2020, 408/2020 and 459/2020. At present, the period of mandatory and preventive social lockdown has been extended until the 7th June 2020 pursuant to Presidential Decree No. 493/2020.
Many productive and commercial activities have been affected by the measures implemented by the authorities in different countries, which has resulted in claims being submitted under Event Cancellation and Business Interruption policies. We are currently working on cases of these types, in the context of which problematic issues may arise.
Business Interruption Coverage
It should be noted that the traditional coverage for Business Interruption is triggered whenever there is a material (physical) damage to the insured property that is covered under the policy. In principle, it seems difficult to allege that a disease could cause material damage to property.
Although there have been attemps in other countries to elaborate sophisticated theories that are contrary to this basic instinctive conclusion, to date, as far as we know, they have not been widely embraced.
Denial of Access due to public authorities’ orders
Notwithstanding the above, there are policies which, by means of specific clauses, afford coverage for Business Interruption in the event of situations of “Denial of Access” due to public authorities’ orders issued as a consequence of the threat or spread of a contagious disease.
In these cases, the Pandemic and the subsequent orders issued that impose restrictions on different productive and commercial activities may give rise to claims that are covered under these policies, provided that, in the corresponding policy wording, the Denial of Access/Governmental Order is not subjected to arise from material damage to the insured property.
Effects of the Pandemic on the adjustment of Business Interruption losses in general
The Pandemic and the restrictions implemented in consequence may have varied effects on the adjustment of losses unrelated to the Pandemic. For instance, the interruption period resulting from a loss that is not related to COVID-19 may last for longer than planned/usual, as the repair or replacement of the damaged property that caused the interruption may be delayed due to the Pandemic.
Moreover, it should be recalled that the adjustment of the loss under a Business Interruption policy usually requires to take into consideration any special circumstances that may occur within the Interruption Period, so that indemnity be based on the profits that the Insured would have obtained during this period and under such special circumstances had the loss not occurred. Should the Insured sustain a loss in which the Interruption Period is simultaneous, whether totally or partially, with the Pandemic, the resulting indemnity may be significantly less than that which could result from the same loss in the absence of a Pandemic. The reason is that, had the loss not occurred, the business would have been affected by the Pandemic nonetheless, and this type of cover is intended to reflect and take into consideration these types of circumstances.
Multiple and successive measures
Another issue we have encountered is that there are orders of lockdown and restriction on activities/circulation that have been implemented for short periods and, although they were never extended, the negative effects on a business may continue due to the general situation of the Pandemic and other orders imposing restrictions on circulation and on certain activities that are still effective.
We have also identified orders which, despite having been initially effective for short periods, were subsequently extended. For instance, we note that, in Argentina, the initial Presidential Decree No. 297/2020, whereby a mandatory lockdown was established, was repeatedly extended through subsequent decrees.
The third aspect we would like to highlight on this topic is that there are existing measures adopted by different governmental authorities which overlap and/or are successive between each other.
The issue that arises by the existence of multiple/successive orders issued by different authorities is whether each of them should be regarded as an individual loss or if they all constitute a single loss under the policy because either the measures affecting the business remain unaltered or the effects on the business derived from each order are the same.
Event Cancellation Coverage
Finally, regarding Event Cancellation Policies, we note that the basis of settlement varies depending on whether the Insured is the producer of the event or the lessor of the premises where the event is to be held.
In the first scenario, coverage could be based on the reimbursement of such irrecoverable costs assumed and incurred by the producer in the organization of the event (such as the transportation and accommodation of artists, advertising, etc.) or the Loss of Profit.
While in the second scenario (the insured being the lessor of the premises where the event is to be held), depending on the lease agreement, the loss could be based on the rental fee of the premises and which the lessor would not be able to obtain upon the cancellation due to a force majeure event, as well as any other cost incurred by the lessor. In these cases, the lease agreement entered into between the lessor and the producer of the event is particularly relevant, in addition to the policy conditions.
In conclusion, although most businesses have been affected by the general situation of the Pandemic and the governmental orders issued in consequence, the adjustment of each loss under the policy will depend on the conditions of such policy and the circumstances of each business/situation, all of which requires a detailed and careful analysis.