The Pandemic, Physical Damage, Business Interruption Losses and Reinsurance
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2020
Tue
07
Apr
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The Pandemic, Physical Damage, Business Interruption Losses and Reinsurance
How is your 2000 piece jigsaw puzzle progressing?
Coronavirus and physical damage
You may have seen reference to the recent Ontario Superior Court of Justice decision in MDS Inc v Factory Mutual Insurance Company (FM Global) (2020) ONSC 1924. A copy of the judgment is attached.
The judgment has been punted as “significantly increasing the possibility of coverage for business interruption arising from Covid-19”.
The judgment needs to be approached with significant caution. It is of course a Canadian judgment and only persuasive and not binding on South African courts.
It dealt, inter alia with what constitutes “physical damage” in the context of an all-risks property insurance policy. In the context the insurer unsuccessfully argued that the mere loss of use of the premises did not give rise to physical damage, insisting that there must be “tangible” property damage.
Asides from not being South African authority on the point, the judgment is distinguishable for various reasons. The case dealt with an all-risks property insurance policy. The traditional South African business interruption section wording is not all-risks. It requires damages defined emanating usually from the fire perils listed under the fire section of the policy. The case also turned on the wording of the exception raised by the insurer and on which the insurer bore the onus. It was accepted that on the all-risks basis but for application of the exception the policy would be required to respond.
It is for the insured to bring themselves into the four corners of the business interruption section of the policy and discharge the onus on the probabilities in that regard.
The case also arose in a different context, the proactive shutdown, for safety reasons of a nuclear facility that was not actually damaged but in respect of which there was actually the presence of leaking heavy water. In most cases there is unlikely to be the actual presence of coronavirus or a coronavirus positive person upon the insured premises.
Of course in each case the specific wording of the policy needs to be considered on the facts. Whether loss of use is damage in the context remains unlikely.
The judgment is a lengthy one.
When you have finished your 2000 piece puzzle and have nothing else to do it is worth a read in particular the consideration of the case law examples given regarding damage and physical damage.
Reinsurance
In the anticipation of Coronavirus claims and the determination of your policy responses, your reinsurance coverage should not be forgotten. Is there reinsurance cover back-to-back? And what is the claim settlement authority?
Is the cover follow the fortunes or follow the settlements?
The risk is of course where an insurer agrees to settle claims without being able to establish that on the balance of probabilities it has a legal liability to do there may well be a challenge to collecting such settlements from reinsurers.
For example of a full follow the settlement clause see Insurance Company of Africa v Scor [1985] 1 Lloyd’s Rep 312. For an exception example, see Wasa v Lexington, [2009] UK HL 40.
Also consider the effects of any “double proviso” follow clause. See for example Hill v M&G [1996] 1 WLR 1239. The double proviso clause usually requires a cedent to prove that the loss falls within the terms of both the original and the reinsurance contract. It may not be sufficient for the purpose of that clause to rely on the advice of a lawyer . In Commercial Union Assurance Company PLC. v NRG Victory Reinsurance Ltd [1998] 2 Lloyd’s Rep. 600 the court said that the question whether it was arguable that the reinsurer might be not liable to the reinsureds was for the Court to decide.
Source: Donald Dinnie - Norton Rose Fulbright South Africa Inc
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