The unprecedented outbreak of the Covid-19 coronavirus pandemic has halted the world as we know it. From restrictions on movement to job losses, school closures and complete lockdowns, it is safe to say that severe disruption is likely to be far reaching and widespread for the uncertain foreseeable future. What effect does this changing society therefore have on your business?
Businesses need to be prepared to minimise the adverse impact the virus is already having. This article explains the key legal and contractual issues which could arise as a result of the pandemic, such as the impact on insurance cover and whether the virus could be covered as a force majeure event in your contract.
Contractual Position: Force Majeure
Under English law, parties are bound by a contract they are a party to and are required to perform its obligations under that contract. If one party fails to fulfil its obligations, then it could face potential liability to its counterparty for breach.
If a force majeure clause, however, is in operation, then this could protect your business from being subject to such liability. Such a clause specifically deals with how an event affects a party’s ability to fulfil its contractual obligations. Usually, contracts include a range of these types of events, such as various natural disasters and acts that are generally “beyond the reasonable control” of the parties.
The question in this case, therefore, is whether coronavirus could be covered under the force majeure clause in your contract. It is important to review such a clause in light of the following considerations:
Is a pandemic specifically covered as a force majeure event in the contract?
If not specifically, is it the type of event that could fall within the more generic wording of the clause?
Can causation be established between coronavirus and your business’ inability to fulfil its obligations?
Have you taken reasonable steps to mitigate the effects of the event? E.g. considered obtaining goods/materials from alternative suppliers.
What notice requirements apply? You must comply with the strict time limits within which force majeure claims must be made (if applicable); otherwise your claim will be invalid.
It is important to look at each force majeure clause in the context of the contract as a whole. If you can establish force majeure, it may lead to relief from performance, i.e. avoid outright termination of the contract by the counterparty or agreement to an extension of time, to enable your business still to fulfil its obligations, albeit some time later.
As a result of the more recent virus outbreaks such as SARs and Swine Flu, your contract may specifically exclude the application of a virus such as coronavirus to a claim under an insurance policy. If this is the case, an attempt to rely on a force majeure clause will likely be unsuccessful.
Impact on Insurance Cover
In these unfortunate times, it is likely that most businesses will have suffered some disruption to its day to day running. It is therefore important to know whether the loss your business has suffered as a result can be claimed on your insurance policy.
The Association of British Insurers released a statement on 17 March explaining that, although standard business interruption cover does not include forced closure by authorities, your firm might have purchased an extension to their cover for closure due to any infectious disease. For example, it is understood that the organiser of the annual Wimbledon tennis tournament will be receiving a payout of approximately £114m as a result of taking out insurance cover for cancellation of the event for any reason: here.
The ABI has stressed on 25 April 2020 that:
As only a small number of businesses have policies that could provide coverage against Covid-19, insurers have not been collecting premiums (and therefore building up reserves), that enables them to pay claims in this area.
No country in the world is able to provide widespread pandemic insurance. Whether cover for pandemics can be provided through an insurance model in the future is an important debate. Given the massive, systemic impacts affecting a huge number of businesses at once, it is clear that significant state involvement would be required.
Insurers are offering policy extensions, waiving restrictions and supporting customers across the full range of insurance products during this difficult time. Only 4% of products were withdrawn in March 2020, and all members who responded are being flexible to make payments and support or advise customers as much as possible.
Huw Evans, ABI’s Director General, has said:
“This is an unprecedented event, and insurers recognise that it is a very worrying time for everyone. While many business owners are uninsured for pandemics, UK insurers still expect to pay over £1.2 billion in claims, making this a significant insured event. From paying all valid claims, to providing a range of extra help and support to customers, insurers are working hard to reassure and support policyholders through this uncertain period.
“However, we are also painfully aware that the majority of businesses are uninsured for global pandemics, as is the case throughout continental Europe and North America. Although ABI members expect to pay £900 million in business interruption claims, most policyholders are not covered for pandemic losses. We agree strongly that the UK should examine public-private partnerships to find a lasting solution, to enable more affordable, more extensive pandemic insurance cover to be available to those firms who want it”.
A review of the specific wording of your insurance policy is therefore crucial, as is checking with your insurer or broker to see if you are covered.
If you are not covered, then it is worth considering whether you can invoke a force majeure clause to excuse performance of your contractual obligations. In addition, it is also worth considering whether you can rely on the doctrine of frustration, as set out in an article recently published by one of our litigation partners, Richard Harrison here.
Practical Steps to Consider
Review the force majeure clauses in your contracts in light of the considerations above;
Review the individual wording of your insurance policy and check with your insurer/broker to see if you are covered; and
Seek appropriate legal advice if the wording is unclear or to consider alternative solutions