How Covid is playing out for insurers and employers
Covid-19 has been a moment of reckoning for insurance companies and employers. The repercussions are ongoing, ensuring good business for insurance and employment lawyers around the globe.
The insurance industry scrambled during December 2019 and January 2020 to limit its exposure to the emerging threat of a new virus from Wuhan, which soon spread across the globe. Covid became a notifiable disease under the Health Act 1956 on 30 January 2020 and declared a pandemic by the WHO on 11 March 2020.
Most business interruption (BI) and travel policies had ‘sorry mate, no cover’ exclusions for a pandemic, or government intervention such as lockdowns. For employers, the implications were longer burning, with the government and employers grappling with issues such as compulsory testing and vaccination.
Last year, LawNews covered the legal issues surrounding the three. As the pandemic has marched on, so too has the law, here and abroad.
When the pandemic hit, insurers relied on the notifiable diseases clause in policies, says Insurance and Financial Services Ombudsman Karen Stevens. They were also quick to point out that ‘your loss is due to a government-ordered lockdown, not material damage to the business premises’, which is usually needed for BI policies to pay out.
High-profile cases in the UK and Australia, and hundreds more in the United States, have given business owners in those countries hope. New Zealand businesses are unlikely to be as lucky because of differently worded policies.
Neither MinterEllisonRuddWatts partner Andrew Horne nor AUT law lecturer Christopher Whitehead who were interviewed for this article have seen or heard of any Covid-related BI litigation in New Zealand. That’s not to say that there won’t be. Horne did hear of an insurance broker gaining a restraining order against a client, upset his income protection policy didn’t pay out.
A test case was brought in the United Kingdom by the Financial Conduct Authority (FCA) and leapfrogged to the Supreme Court. In that judgment, Covid was deemed to be an effective proximate cause of the government’s restrictions on businesses. Prevention of access didn’t require legal or physical hinderance. An instruction from a public authority triggered the extension; a total cessation of business activities was not required.
The court also determined that the oft-cited Orient Express test case after Hurricane Katrina wrongly decided that the business loss would have happened anyway because of wider consequences.
The UK decision is useful in giving guidance on how to interpret or construe certain wordings in BI policies and, consequently, other types of policies, Whitehead says.
He has written more about how the test case shows how misleadingly lawyers use the terms ‘cause’ and ‘causation’. That discussion can be seen here.
In June this year, Australian insurers failed to gain special leave from the High Court of Australia to appeal a judgment from November 2020: HDI Global Specialty SE v Wonkana No. 3 Pty Ltd trading as Austin Tourist Park  NSWCA 296. The case related to a specific exclusion clause that is not relevant to New Zealand polices. The Insurance Council of Australia has lodged another test case, citing multiple issues. If successful, the industry can most likely avoid paying out on as many as 250,000 policies. More can be read about the Australian action here.
By May this year, 335 cases relating to government shutdown and other orders had been filed in the United States, the National Law Review reported in mid-August. The review noted more than 50 decisions so far resulted in the courts either granting summary judgment to policyholders or denying insurance companies’ motions to dismiss.
The central argument in most of these cases, the publication noted, was whether there was physical loss or damage to the policyholder’s locations, which is usually required to trigger any liability. Even where there was proof the virus was present at the location, the insurance industry contended that the virus did not cause physical loss or damage.
The US cases are of interest, says Horne, because they have gone both ways. “In one case, Cincinnati, there was a finding that Covid did not cause direct loss to property, or that lost operations were not synonymous with physical loss. But in another decision in the state of New Hampshire the court found that Covid had caused distinct and demonstrable alteration to the insured’s hotel on a precedent that extended the definition of physical loss beyond just tangible changes to property. The court found that the microscopic virus that you can see only with electron microscope was, in fact, physical damage to the property,” says Horne.
That doesn’t mean New Zealand businesses are likely to get BI pay-outs any time soon. The Reserve Bank of New Zealand noted in its May 2021 Financial Stability Report that most insurers here believe the overseas court rulings in the UK and Australia are not applicable for most New Zealand BI policies.
While the cases internationally have raised issues, they’re not that interesting legally, Whitehead says, because they have mostly been courts determining whether or not wordings fitted the exact details of the claim. But they are interesting from a policy perspective.
Whitehead says any victories for policyholders will be short-lived. “The clarity that comes from the court cases allows insurers to word their way out of liability for future claims,” he says.
Endorsement writers in London have been working hard during the last year, Horne adds “There was a proliferation of endorsement [wordings] that have come out of the Lloyd’s Market Association.” Minters works with a number of large insurers here and many have incorporated such clauses into a range of policies to effectively exclude any loss that is connected to fear or threat of communicable disease, he says.
In the US, 11 states have pending legislation addressing BI insurance policies. Some of these proposals would retroactively force insurers to pay for BI losses incurred by the coronavirus shutdowns.
The pandemic wrought havoc on travel insurers. Many, but not all, policies included pandemic or epidemic clauses, which translated into ‘yeah, nah’ and claims were declined.
Over the next few months many insurers rewrote and tightened their policies to remove any ability for customers to claim in the future. The issue for insurers then became too few people buying policies.
Insurers eventually realised they’d have to offer some sort of pandemic cover if they wanted to do business. The airlines were the first to step in, offering limited cancellation cover. The greater risks of having your trip cancelled or extended because the trans-Tasman bubble had burst and the cost of resulting MIQ stays weren’t, and still aren’t, covered.
Horne says underwriters can accept the risk of a number of individuals coming down with Covid-19 and needing treatment. Only a fraction of those will end up in hospital.
Insurers can’t, however, get their heads around the risks involved in burst bubbles. “They can’t necessarily accept that suddenly every [New Zealand traveller] in Melbourne claims for MIQ stays when the bubble bursts,” he says. “That’s not to say that actuaries won’t get their heads around that in the future.”
Here in New Zealand several complaints have made their way to dispute resolution services, the Insurance & Financial Services Ombudsman and Financial Services Complaints Limited but to date none has escalated to the courts. Mostly they’re too small financially to be worth policyholders taking court action, says Stevens.
Litigation by travellers in other jurisdictions has offered few surprises. Being Americans, many travellers in that country automatically sued their insurers. Some cases came down to whether stay-at-home orders limiting non-essential travel constituted quarantine, in which case policyholders would be covered and whether a pandemic could be a natural disaster. “English, like every other language, is not precise,” Tom Baker, a University of Pennsylvania law professor, told Bloomberg Law. “So, there’s going to be room for people to make arguments about why a policy does or doesn’t offer coverage.”
On the drawing board
The government plans to introduce rules requiring insurers to have ‘fair conduct program’ as part of the new conduct of financial institutions (CoFI) regime in the Financial Markets (Conduct of Institutions) Amendment Bill. The new conduct rules are being debated by Parliament and are expected to pass into law in 2023.
The Insurance Contract Law Reform Bill was drafted before Covid and the pandemic is unlikely to delay it, although sources say it has fallen into a black hole.
Going back to the drawing board now would slow down other much-needed reforms, Whitehead says. The reform, which among other things addresses issues around accidental non-disclosure by policyholders, was first recommended in 1998, says Stevens.
Horne adds that typically regulators here are interested in systems failures such as policies being sold that are not appropriate for clients’ needs, or overcharging. They are less interested in insurers who have declined to take cover as they did with pandemic exclusions.
One thing that has surprised Horne and his colleagues at Minters is that our government hasn’t moved to provide some sort of government-backed risk pool for live events.
“We have seen that in other countries. In the UK, they have the live events reinsurance scheme. Some other countries have been quite conscious of the fact that a lot of people are dependent economically on events like football matches, rock concerts and so forth, which you can’t really plan for unless you’ve got some way of insuring.”
The risks haven’t been that great in New Zealand. The All Blacks vs Wallabies test earlier this month at Eden Park must have gone ahead uninsured, he says.
No vax jab, no job
Employers and workers have faced big questions around Covid such as whether employment contracts could be varied. Then the issue of compulsory Covid testing and vaccines for border workers raised its head. The mere suggestion raised red flags under the Employment Relations Act 2000 and, in particular, the New Zealand Bill of Rights Act 1990 (BORA). Section 11 of BORA gives people the right to refuse to undergo medical treatment and s 5 allows for justified limitations to all BORA-protected rights.
In May 2021, nine border workers employed directly by New Zealand Customs were fired after refusing a jab under the then Covid-19 Public Health Response (Vaccinations) Order 2021.
Barrister Catherine Stewart, convenor of the ADLS Employment Law committee, says in addition to substantive justification, an employer would need to follow a robust process before dismissing workers. Some of the workers are taking their case to court. Advocate Ashleigh Fechney believes their right to refuse medical treatment has been breached.
To date, there is no case law in
New Zealand. However, a much discussed case has been heard in Australia. Barber v Goodstart Early Learning  FWC 2156, involved a childcare centre worker who was fired for refusing a mandatory flu vaccine and failing to provide suitable medical reasons for her refusal. The company had consulted with unions and employees and followed a robust process. The Fair Work Commission ruled the dismissal was not unfair. The decision was specific to that industry, the flu vaccine and Australia’s different employment laws, Stewart says, but some of the principles would be relevant here – for example, New Zealand’s Health and Safety Act has a statutory obligation to ensure employees’ health and safety.