Few industries have been as fiercely affected by the COVID-19 pandemic as travel and hospitality. Globally, the hospitality sector's income has been severely reduced by executive orders imposing hotel closures or restricting travel to a minimum. Even when hotels are allowed to operate, mass cancellations have, until now, shattered hoteliers' hopes of recovery. Greece boasts a large hospitality infrastructure exceeding 800,000 beds. Although only 28% of hotels seem to have adequate property insurance, an increasing number of resorts and properties owned or operated by risk-aware companies are purchasing select coverage designed specifically for the sector.
When it comes to hedging the risk of booking cancellations, a business interruption (BI) coverage extension available to the Greek market, and taken out by a number of policyholders in the hospitality sector, is the notifiable disease extension, the standard wording of which is as follows:
[The insurer will pay for] Loss of Gross Profit… resulting from interruption of or interference with the Business carried on by the insured in consequence of cancellation of reservations, and/or inability to accept reservations and/or inability to effect reservations for sojourn… or any other part of the Premises, occurring as a direct result of:
1. any occurrence of murder or suicide at the Premises
2. any occurrence of human infectious or human contagious disease at the Premises [excluding Acquired Immune Deficiency Syndrome (AIDS)], or attributable to food or drink, including water, supplied from the Premises an outbreak of which the competent local authority has stipulated, shall be notified to them.
3. any discovery of an organism at the Premises likely to result in the occurrence of human infectious or human contagious disease
4. any occurrence of human infectious or human contagious disease within a radius of 10 kilometers of the Premises.
5. the discovery of vermin or pests at the Premises which causes restrictions on the use of the Premises on the order or advice of the competent local authority
6. any accident causing defects in the drains or other sanitary arrangements at the Premises which causes restrictions on the use of the Premises on the order of the competent local authority.
Conditions:
The Insurer shall only be liable for the loss arising at those Premises which are directly affected by the occurrence discovery or accident and only for cancellations made by the tour operator.
The time period for which indemnity can be claimed shall not exceed the time period which is necessary for diligently restoring the operation of the insured hotel Business to the condition existing prior to the occurrence, and includes the period commencing from the interruption of or interference with the operation and which is necessary for making the Premises compliant with the orders of the competent public authority.
Business interruption insurance
BI is generally provided as secondary (complementary) cover with commercial property insurance programmes – so-called 'property damage BI' (PDBI). Property insurance aims to cover physical damage to insured properties. BI cover is typically triggered when such physical damage – indemnifiable under the policy – interrupts or interferes with the insured's business at the insured's defined premises. BI covers insureds for loss of income or profits or fixed costs associated with the suspension of their normal business operations, usually for the time necessary to repair the damaged property and resume operation.
The above extension of BI cover (the extension) belongs to a category of clauses, referred to as 'non-damage BI (NDBI) extensions', which do not require physical damage to the insured property. Examples of this category include non-damage denial of access and public authority closure clauses. The core characteristic of these extensions is precisely that cover is not dependent on the occurrence of any physical damage, as opposed to contingent BI (CBI) extensions (eg, standard denial of access or supplier and customer extensions), where physical damage is required (this need not be to the insured property, but still of the type covered under the controlling policy).
NDBI coverage extensions appear in policies designed for specific industries and businesses – namely:
- hotels;
- restaurants;
- food distributors;
- telecoms and media companies;
- hospitals; and
- schools.
Often, notifiable disease or communicable disease extensions (subject to different conditions for activation, as implied by their respective names) set out a list of specified diseases that trigger the cover of BI resulting from the occurrence of such disease. Other similar extensions may explicitly exclude contamination from specific agents, such as SARS or the avian flu.
The extension offers a broad spectrum of NDBI cover as it includes:
- non-specified notifiable and contagious diseases (carving out AIDS);
- foodborne and waterborne diseases;
- vermin;
- defective sanitary arrangements; and
- murder and suicide.
Further, the extension overrides and, within the frame of its application, invalidates the usual PDBI policy exclusions (eg, pure financial losses not linked to physical damage) and exclusions for contamination or diseases caused by bacteria, viruses or other agents. On the other hand, cover is restricted by being dependent on numerous conditions:
- The insured business must be interrupted or hindered by reservations being cancelled as a direct result of any of the six events mentioned in the clause (the standard wording for which is provided above).
- An obligation to notify the competent authorities must exist.
- Only booking cancellations by tour operators are indemnifiable.
- Insurers are liable for losses at insured premises which are directly affected by the event.
- Insurers are also liable for losses from cancellations resulting from infectious or contagious diseases which occur within a specified radius of the premises.
Under Greek law, insureds bear the burden of proof that a loss is the result of an insured risk and falls within the scope of the policy's operative clause defining the circumstances and the conditions under which the insurer's liability to indemnify is engaged.(1) Therefore, insured hotels that have purchased NDBI cover and seek to be indemnified on the grounds of the extension for financial losses resulting from COVID-19-related booking cancellations must prove to their insurer that the above conditions are met. However, questions arise as to what underwriters will consider constitutes adequate evidence that an insured risk has occurred and that a cancellation of a hotel reservation due to COVID-19 triggers the cover.
In Greece there is a legal obligation to report to the National Public Health Organisation all diagnosed COVID-19 cases, so this condition is automatically fulfilled. On the other hand, causation will be much harder to prove. The extension requires that indemnifiable cancellations be the direct result of any one of the events which could be triggered by COVID-19 (ie, those numbered 2, 3 and 4 in the standard wording provided above). Therefore, a solid, direct, adequate(2) causal link must be clearly established between any of these three events and the loss of profit from booking cancellations by a tour operator. Factors relating to the outbreak that may have led to cancellation but are not a named event for which cover is provided do not constitute insured risks under the extension. Cross-border travel restrictions, fear of contamination and consequent cancellation by a tour operator's clients, adverse market conditions and cancelled flight schedules have likely forced most tour operators to cancel hotel bookings since the COVID-19 breakout, but they are irrelevant to the insured risk.(3) For the same reason, voluntary or compulsory pre-emptive closure of insured premises without the manifestation of a COVID-19 case, either on the premises or within a 10km radius, would not trigger cover.
The extension, like most BI cover, is part of a property insurance policy – thus, cover applies to a specific location described in the schedule and referred to with the defined word 'premises'. The events described in the extension need not inflict physical damage; they constitute insured risks only if they take place at the premises. This is made abundantly clear by the extension's language, as reference to the premises is made in all six covered events in the standard wording provided above. Notably, it is also established by the last paragraph of the extension, which defines the timing of the loss – specifically, an insured can claim indemnity for the period commencing from the interruption of its business until it has made its premises compliant with the orders of a public authority. This passage has a dual effect:
- it confirms that cover is provided only for events at the premises; and
- it leads to the clause's construction as providing cover for booking cancellations resulting from the named events, as long as these have generated the need for specific works to be executed at the premises so that they comply with a public authority's orders.
In this case, the extension fits well in the factual frame of the named events relating to administrative impediments (eg, police or health service orders) hindering the business to an extent that bookings must be cancelled, but not so well in the case of COVID-19, where no murder or accident has taken place at the premises, no health regulations have been breached and no extensive works must take place so that the premises comply with a public authority's orders.
What is also notable with respect to the risk's location is the extension's named event Number 4, which contains the only provision under which cover is triggered by an event taking place outside the premises. Cases of any infectious or contagious disease within the hotel's vicinity, limited by the policy to a 10km radius, which lead to the cancellation of bookings by a tour operator will generate the insurer's liability. The language does not qualify as ambiguous; however, practical issues arise when implementing the clause, as discussed below.
The socioeconomic and political impact of COVID-19 on the insurance industry's operations is unprecedented, as is the pandemic itself. Human tragedy coupled with businesses around the world facing cliff-edge revenue drops, supply chain disruptions and various forms of liability have led businesses to claim under BI policies(4) and industries to lobby the governments to cushion the blow of the outbreak through emergency measures. This has also prompted legislative and executive government bodies worldwide (but mainly in the United States) to appeal to the insurance industry for contributions to COVID-19-related BI losses, even if such losses are uninsured.
Insurers are cornered into a difficult situation:
- Due to the global impact of the disaster, basic insurance concepts (eg, risk diversification and pooling) do not work. Conceptually, a pandemic is uninsurable; a damaging event's simultaneous occurrence throughout the world (ie, without geographical or temporal diversification) automatically invalidates the mutualisation of risk, which is the fundamental element of the insurance operating model.
- Practically no policies contain clauses designed to cover pandemics.(5)
- Rarely purchased NDBI cover will have wording, or coexist with exclusions, that heavily restricts its application in the current conditions as it was not designed to cover pandemics.
- There is political and commercial pressure on insurers to contribute to the financial losses from the outbreak. This has led the International Association of Insurance Supervisors (IAIS) to state in its press release of 7 May 2020:
the IAIS cautions against initiatives seeking to require insurers to retroactively cover Covid-19 related losses, such as business interruption, that are specifically excluded in existing insurance contracts… Requiring insurers to cover such claims could create material solvency risks and significantly undermine the ability of insurers to pay other types of claims. Such initiatives could ultimately threaten policyholder protection and financial stability, further aggravating the financial and economic impacts of Covid-19.(6)
Policies' operative clauses in general, but NDBI cover in particular, contain exhaustively detailed language to specify the conditions under which the underwriter's liability is triggered. The extension's coverage is broad, since cases of any notifiable infectious disease may result in an indemnity payment. On the other hand, the insured risk of loss of income due to booking cancellations is primarily – and narrowly – defined by the events leading only one type of hotel customer (ie, a tour operator) to cancel reservations. Five out of the six events described in the extension's subparagraphs require that these take place on the insured premises. However, under Subparagraph 4, the location factor is amended and cases of an infectious or contagious human disease (notably, not necessarily notifiable, in this specific case) must occur outside the premises, but within a 10km radius thereof.
Implementing cover for COVID-19-related losses based on the radius clause involves significant practical difficulties. The manifestation of the event itself must be undisputed: the potential argument that actual COVID-19 cases are understated as a result of limited or ineffective testing, particularly at the beginning of the outbreak, or that many cases are asymptomatic is invalid for the purposes of insurance cover. The cases must be certain and therefore must have been diagnosed. On the other hand, the exact location of the COVID-19 case manifestation, in terms of whether it was within or outside the 10km radius of the premises is difficult: did the case occur where the agent's carrier is domiciled, at the health facility where they were tested and diagnosed or at their workplace? These places can be much more than 10km away from each other.
When the premises are in a metropolitan area, it would be unreasonable to dismiss a claim if the insured can prove that bookings were cancelled because COVID-19 cases have occurred in the same city, but not whether they were within or outside a 10km radius of the premises. This is particularly true because the National Public Health Organisation does not commonly divulge detailed information on the exact location of COVID-19 cases, usually naming only the municipality, the broader metropolitan area or the administrative region.(7)
Another particularity of the Greek hospitality sector directly affecting the implementation of the extension based on the radius clause is that the islands are Greece's primary tourist destinations and, therefore, presumably where the majority of insured premises are located. Many islands are closed communities in the sense that they are accessible only by boat, and the distance between a remote location and the main town will not exceed 20km to 40km. It would not make sense to suggest that if a tour operator cancels bookings as a result of COVID-19 cases having occurred on the island, cover should be denied if it is not proven that they occurred within 10km of the premises. On the contrary, in the case of small islands, cover should be triggered if hotel bookings are cancelled because of COVID-19 cases, independently of whether those were within or outside the 10km radius.(8) For large islands, the vicinity condition should not be disregarded but rather considered in the same way as for the mainland (eg, on the basis of administrative regions).
However, it will be hard for an insured claiming compensation to prove that reservations at its premises were cancelled as a direct result of COVID-19 cases having occurred in the vicinity, even if the 10km radius is not strictly observed. This is mainly because cancellations have not, as a rule, been the direct result of such events. It appears that many bookings – particularly for the early holiday season – were cancelled after it became publicly known that COVID-19 was spreading outside China but before the first COVID-19 case was diagnosed in Greece on 26 February 2020. Cancellations were increasingly made in the following weeks, perhaps as a result of a fear of contamination and implemented or feared travel restrictions, and well before the cases started spreading to most Greek tourist destinations (where only a small number of cases have been diagnosed). In any case, insureds must produce solid proof of booking cancellations as a direct result of COVID-19 cases occurring in the premises' vicinity, even if this is a concurrent cause for the cancellation, along with another COVID-19-related cause.(9)
The Organisation for Economic Cooperation and Development(10) (OECD) has provided the following policy consideration to address the pandemic's coverage gaps:
Discussions should be held with insurers on the scope of interpreting policy terms more flexibly to support coverage. However, a broad expansion of the scope of insurance coverage could have implications for insurance companies' ability to meet their regulatory and contractual obligations.
There is no doubt that the notifiable disease extension was neither designed nor introduced to provide indemnity in the circumstances of the COVID-19 pandemic. However, the fact remains that the current conditions can trigger cover under the extension's wording. In implementing this NDBI clause, underwriters must act with flexibility and firmness in uncertain conditions. By applying common sense (and not the construction rules that a court would apply in litigation, which would probably benefit underwriters more than policyholders), they can support their customers and maintain their ability to meet their obligations to the rest of their insureds.
Endnotes
(1) On the other hand, insurers bear the burden of proving that an otherwise indemnifiable loss falls under the scope of an exclusion contained in the policy and that their liability is thus not triggered.
(2) As conceived in the doctrine of causa adequata (ie, objectively capable on its own of producing the injury, under the normal course of events).
(3) The general effect of the outbreak is not without consequence in this case; quantification of the loss is directly linked to the wider impact of the catastrophe, as the question of how the insured business would have responded to the wider disruption, even if reservations had not been cancelled or impeded as a direct result of the extension's named events, must be addressed. See Vincent, "Covid-19 claims notifications 'rising for non-damage BI extensions'", Insurance Day.
(4) An approach endorsed by part of the legal world; see Jeffer Mangels Butler & Mitchell LLP, "Business Interruption Insurance may cover hotel losses from COVID-19 shelter with judicial claims". See also "Business disruption insurance: can it help with coronavirus?", Financial Times.
(5) Notably, however, 'PathogenRX' cover launched by Marsh in 2018 and underwritten by Munich Re to protect US-based businesses' global operations from infectious disease outbreaks attracted no particular attention at the time. Interest has considerably increased lately. See Stuart Collins, "Insurers wary of meeting growing demand for specialist pandemic cover", Commercial Risk.
(6) IAIS, "IAIS facilitates global coordination on financial stability and policyholder protection during Covid-19 crisis".
(7) The Financial Sector Conduct Authority of South Africa resolved that BI cover requiring a competent authority to declare that COVID-19 exists within the specified radius of an insured's premises is unfair, as proof thereof depends on a declaration outside the policyholder's control. See Fasken, "The FSCA's position on BI Claims".
(8) However, the close community argument works both ways: if the distance between two islands is less than 10km, cases of an infectious disease on one island should not trigger cover for the other island if no cases have occurred there.
(9) The combination of causes, assuming that one is clearly proven to be the occurrence of COVID-19 cases in the premises' vicinity, should be tolerated by underwriters under the present circumstances, leaving aside exclusionary approaches such as the 'but for' test of the common law. See Locke Lord LLP, "'But for' and Business Interruption".
(10) OECD insurance coverage and COVID-19.
