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15 September 2020
Insurance cover for business interruption losses has been extensively debated in light of the COVID-19 pandemic. Although numerous businesses have sustained such losses due to the pandemic, insurance cover for business interruption is in most cases contingent on the existence of physical damage to the insured properties. While the interruption losses are primarily caused by the restrictions imposed by governments in the combat against the pandemic, there would normally be no physical damage to trigger the insurance cover.
In marine insurance, business interruption is covered by loss of hire (LoH) insurance under, for example, the Nordic Marine Insurance Plan 2013 (the Nordic Plan) (Chapter 16 of the 2019 version). LoH is a separate insurance for loss of time caused by a casualty and thereby linked to the hull and machinery insurance for the insured vessel or unit when it covers repair costs.(1) The pandemic and the restrictions imposed will not be considered a 'casualty' as such for an insured vessel or unit. However, for marine casualties caused by other perils, it is clear that COVID-19 has led and will lead to significant prolongations of repair periods: yards have been closed, spare parts are being delayed, surveyors and other experts are subject to travel restrictions and crew changes are impeded. This has triggered issues as to what extent prolongation periods caused by COVID-19 are also covered under LoH insurance. If a repair should take 30 days (net of retention days) and COVID-19 adds 30 days to that, how much of the 60-day loss will be covered?
There are various approaches possible. One could be to consider the whole repair period – in the above example, 60 days – as coverable. However, this would be unreasonable for marine insurers, since the restrictions imposed by the pandemic as such are not perils traditionally covered by marine insurances and the premium charged has been calculated on the basis of normal reparation periods. An opposite approach could be to cover only the 'normal' repair period – in the above example, 30 days. However, this would be unreasonable for the insured, as also the prolonged loss of time may be seen as caused by the initial casualty that put the vessel or unit in need of repair. Accordingly, none of these solutions to the problem are ideal.
The Nordic Plan offers a different approach by a rule of apportionment in Clause 2-13, which in Sub-clause 1 reads as follows:
If the loss has been caused by a combination of different perils, and one or more of these perils are not covered by the insurance, the loss shall be apportioned over the individual perils according to the influence each of them must be assumed to have had on the occurrence and extent of the loss, and the insurer shall only be liable for that part of the loss which is attributable to the perils covered by the insurance.
There is some guidance in the commentaries to Clause 2-13 of the Nordic Plan, as well as to Clause 16-1 in respect of LoH, on how such apportionment will be made. However, none of these comments address a situation similar to the COVID-19 pandemic. In relation to LoH, the commentaries to Clause 16-1 state the following on apportionment:
Consequently, the loss of time shall be apportioned over the individual perils according to the influence each of them must be assumed to have had on the occurrence and extent of the loss. Guidance has to be sought in the Commentary to Cl. 2-13 where criteria for weighing the different causes in different situations are given. One of the criteria will be how foreseeable the event prolonging the loss of time is when the ship is sent to the repair yard. In relation to Loss of Hire insurance, this criterion of foreseeability must be seen in connection with the rules regarding evaluation of tenders in Cl. 16-9, the assured's duty to reduce the loss and general preventive considerations.
The criterion 'foreseeable' is difficult to apply to the COVID-19 pandemic. While the pandemic was not foreseeable in early 2020, it is more so at present and will usually have an impact on repair periods in some way or another. Thus, marine insurers have an interest in limiting their LoH cover in cases of excessive delay beyond a normal repair period. Hence, on 1 July 2020 the Nordic Association of Marine Insurers suggested that the following pandemic delay clause be incorporated into marine LoH policies based on the Nordic Plan:
If the assured is deprived of income as a result of a casualty covered by Cl. 16-1, all loss of time caused by the COVID – 19 virus or any other infectious diseases declared by the World Health Organization as a pandemic, shall be limited to… days.
This limitation shall apply to loss of time otherwise attributed to the casualty.
This Clause shall in no circumstances extend the cover under the standard conditions of the Plan.
First, it should be noted that the limitation applies only to COVID-19 or a pandemic declared by the World Health Organisation. In cases of other diseases or epidemics, the limitation will not apply. However, such events will probably not have much effect on the prolongation of repair periods when compared with COVID-19. A second and more important remark is that the limitation is applied after any apportioning of the loss subject to Clause 2-13 or other apportionment rules in Chapter 16. Thus, it must first be determined whether any portion of the prolonged delay is coverable according to the apportionment rules before any limitation may apply. The commentaries to the pandemic delay clause illustrate this by the following example:
Casualty repairs of a recoverable damage would have taken 60 days. In addition, an extended delay of 70 days is caused by COVID-19, which delay would not have occurred but for the casualty. Limitation stated in the Clause is 30 days. As an example; if these 70 days are split 50/50 according to Cl. 2-13, and 35 days of delay caused by the pandemic is attributed to the initial casualty, then due to the limitation in this Clause, these 35 days of delay caused by the pandemic, will be limited to 30 days. In this example, 90 days (60 days of ordinary repairs + 30 days caused by pandemic) will be covered by the LoH insurance, less the agreed deductible period.
Although the apportionment rules and the limitation may provide some clarity, it is up to the more detailed assessment of the factual aspects of each case to determine the impact of COVID-19 on an LoH cover. This may be complicated, as many ship owners also use a stay at a repair yard to upgrade the vessel, perform class surveys and general maintenance. Such simultaneous repairs will also call for apportionments of the time lost to determine what the LoH insurance will cover.(2) In individual cases, these activities may be affected differently by COVID-19-caused delays. Adjustments of the LoH cover may be complex in such matters.
Irrespective of the potential complexity in adjustments, Clause 2-13 of the Nordic Plan and the pandemic delay clause represent a fair and reasonable apportionment of the COVID-19 risk between insureds and insurers in cases of LoH insurance. The apportionment of time lost due to a pandemic is a more attractive approach compared with a polarised 'no cover' or 'full cover' solution that would favour only one of the parties. However, it will be interesting to observe the adjustment practice for these matters going forward and whether potential disputes on cover will be amicably resolved or end up in litigation.
For further information on this topic please contact Andreas Meidell, Henrik Hagberg, Henrik Fabian Torgrimsby or Bettina Thaulow Harto at Advokatfirmaet Thommessen AS by telephone (+47 23 11 11 11) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Advokatfirmaet Thommessen AS website can be accessed at www.thommessen.no.
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Henrik Fabian Torgrimsby
Bettina Thaulow Harto