How COVID-19 will change the Interpretation of Insurance Law

Zubin Behramkamdin, Counsel, Bombay High Court
Vidya Nair, Counsel, Bombay High Court

Introduction

The World Health Organisation declared COVID-19 as a global pandemic on  March 11, 2020. Most nations have been forced to take extreme and unprecedented measures to curb the spread of COVID-19. The Indian Government implemented a nationwide lockdown on March 24, 2020 in order to protect its citizens from COVID-19. Due to this, almost all the services (except notified essential services such as healthcare, banking, public utilities, etc) have come to a sudden halt. This abrupt discontinuation of most businesses is likely to have a severe and long lasting effect on the economy. In this scenario with inevitable losses touching most businesses and individuals, insurance contracts have an important role to play. This is true of (i) existing contracts where parties will try to mitigate their losses and (ii) proposed insurance contracts where different considerations will now arise for drafting and executing such contracts.

In this Paper we look at various issues that the Insurer and Insured will face owing to COVID-19 and the lockdown. Due to the growing rate of COVID-19 cases, increase in the number of fatalities and interruptions to various businesses on account of the nationwide lockdown, insurance claims are bound to be at an all time high. Will insurers use exclusion clauses under the contract to avoid claims arising out of COVID-19? Would the Insurers be obligated to settle claims due to the extraordinary nature of the virus and its impact on people and the economy? We look at these issues while also keeping in mind the relevant guidelines and regulations recently issued by the Government and competent authorities.

General Insurance

COVID-19 not only has a devastating impact on public health but also a catastrophic effect on businesses. In response to COVID-19, businesses, particularly those in the food, hospitality, travel, and event industries, have been shut or restricted. Since social distancing seems to be here to stay, all these industries are anticipating massive economic losses even when business restarts.  The losses involved will vary depending on the industry. For instance, due to the lockdown, the hotel industry is restrained from entertaining guests in their hotels. However hoteliers will have to continue to bear expenses and overheads like rent, employee wages and salaries, maintenance and administrative costs etc. Similarly, in case of a production house, the film maker has to make prior arrangements such as booking a location for the shoot, hiring equipments like cameras, costumes, accommodation for the crew and actors in the film. The film maker either has to pay the entire amount or a large percentage of these costs as advances. During the present lockdown, the film maker and his crew are barred from travelling or undertaking any activity. Even if the film maker cancels the shoot, he still would have suffered loss due to cancellation charges. Even after the lockdown is lifted, people may be apprehensive to step out and participate in large gatherings. On this account too, the event organisers may suffer losses due to postponement of events and concerts. Industries across the globe often opt for “Industrial All Risk” policy. In India, most businesses opt for “Standard Fire Special Perils” policy through a General Insurer to hedge the risk of these kinds of losses which could be of a huge magnitude.

Potential hindrances to a successful claim under a General Insurance contract 

Policies commonly taken by businesses mainly cover Material Damage and Business Interruptions. Traditionally, an Insured would opt for such a policy to cover physical damage to the property or equipments due to occurrence of an insured peril. Business Interruptions insurance is given in combination with Material Damage insurance to cover loss of revenue while the business operations remain suspended on account of the physical damage to the property or equipments. There are however practical difficulties in claiming under these policies. There are also a number of possible arguments Insurers may use to reject the COVID-19 related claims, some of which are set out hereinbelow.

• In view of temporary business closure / suspension mandated by the lockdown, an Insured may present his claim for resultant losses under a business interruption policy. In the present scenario, the pandemic cannot be said to have caused any physical damage to any material or property. Therefore, the possible reason for rejection of such a claim could be the absence of physical damage to the insured material/ property. In fact, cases have already been filed in the Courts of the United States of America due to rejection of claims under the Business Interruption policy by the Insurers on the ground that COVID-19 virus does not cause a dangerous condition to the property. For instance, in the case of Ocean Grill v Lloyds in Louisiana., the Insured i.e. the restaurant owner has claimed under the business interruption insurance for lost net income and extra expenses due to the impact of COVID-19 and the recent shutdown of restaurants by executive order. It is the case of the Insured that the policy does not contain the virus exclusion but the Insurers, with a view to avoid payment, have alleged that the virus does not cause any damage whatsoever to the restaurant property.
• One may however argue in the given facts of a case that premises in which a COVID-19 case was detected or was employed requires closure for a temporary period and thus a business interruption loss arises due to an “accident” cause. Under most insurance contracts, an accident is commonly defined as: “a fortuitous event or circumstance, which is sudden, unexpected and unintentional including resultant continuous, intermittent or repeated exposure arising out of the same fortuitous event or circumstance.”
• Our Courts have not yet had an opportunity to decide whether business interruption due to COVID-19 could fall under the purview of a business interruption insurance. There is a possibility that the Courts may take a conservative view and hold that “physical damage” should be tangible. One of the Courts in Canada recently on March 30, 2020, while deciding the case of MDS Inc. v. Factory Mutual Insurance Company (FM Global)[1] (hereinafter “MDS”), gave an analysis of the definition of “physical damage” with respect to an All-risk property insurance policy. In this case, the Insurer had rejected a claim on the ground that there was no actual damage to the property in order to avail business interruption insurance. It was further argued by the Insurer that physical damage ought to be tangible damage. This argument generally forms the basis for decisions to deny such insurance claims. This is because the interruption has led to what would be classified as a “loss of use” rather than “property damage.” However, this argument was rejected in the MDS case with the Court finding that loss of use could be considered property damage so as to trigger the business interruption coverage. Madam Justice Wilson emphasized that there is no definitive meaning of “resulting physical damage” in all-risks policies in Canada and that there are conflicting lines with respect to the interpretation. Her Honour explicitly rejected the notion that physical tangible damage should be apparent and instead adopted a broad interpretation, which would treat the loss of function or use of premises as physical damage. Accordingly, Madam Justice Wilson concluded that all-risks property insurance is meant to provide broad coverage and as such, her interpretation is in accordance with that principle. To simply interpret physical damage to be tangible would deprive policyholders of a vital aspect of coverage for which they contracted, which would undoubtedly be in direct contrast to the commercial purpose of all-risks coverage. It is important to note that the MDS case did not deal with COVID-19.  However, this decision and the reasoning given in this case may be used to eliminate a significant hurdle that businesses will have to overcome if they wish to successfully claim business interruption losses arising from COVID-19 under traditional commercial policies.
• Another hurdle for settlement of claims under a general insurance policy could be that pandemics and epidemics are not specifically covered by the policy. Even though COVID-19 is one of a kind, the world has in the past fought various other pandemics and epidemics like Spanish Influenza, SARS , H1N1 Swine Flu, Yellow Fever, Ebola, etc. All these epidemics had caused enormous losses to the people and various businesses. Therefore event organisers, film makers, etc. do often take extra precautions and opt for a pandemic insurance policy or at least add specific clauses covering losses due to epidemics into the contract. The clause may not specifically cover COVID-19 but may be worded in such a manner that pandemics like COVID-19 will be included. Forbes reported that after the outbreak of SARS in 2003, the All England Lawn Tennis and Croquet Club (AELTC) had taken a pandemic insurance policy by paying a premium of $2 million every year for the last 17 years. As a result of this, they will be able to recoup almost half of the losses due to cancellation of the Wimbledon Championship this year. Similarly, the Olympics 2020 which were to be held in Tokyo had to be postponed due to the pandemic. Reuters reported that the International Olympic Committee (IOC) takes approximately $800 million of insurance protection for each Summer Games, covering most of the roughly $1 billion investment it makes in host cities. Insurance policies like a pandemic insurance policy have huge premiums and therefore many Insured do not opt for such policies. However foresight and vision is most essential while deciding on an insurance policy (especially if the loss to be hedged is huge) and comes to the rescue during difficult times like the present situation.
• Many policies contain a force majeure clause which excludes the effects of pandemics. Some policies use more general language such as “diseases” or “biological agents.” Such exclusions are very likely to prevent a successful claim for business interruption losses on the basis that the pandemic eliminated an Insured’s trade. Interruption of a supply chain (often titled “contingent business interruption” in policy language) is less likely to have premises – based exclusions. This coverage applies to circumstances where suppliers to a business cease operating and the consequential effects prevent the Insured itself from operating. Contingent business interruption coverage is rarely open-ended and, if available, a time limit of weeks or even days is provided. However if there is no specific clause excluding virus or infectious diseases then the Insured may be able to recover losses under such a policy. A suit on this ground has already been filed by a group of Chicago restaurant and movie theater owners i.e. Big Onion Tavern in federal court against Society Insurance, Inc., a Wisconsin based insurance company. It is their case that they have suffered losses due to closure of all restaurants, bars and movie theaters by the Governor of Illinois in response to the COVID-19. Since their insurance policy does not contain virus or pandemic exclusion, they claim that their losses are covered under their respective policies and the Insurer must make payments to them.
• A business interruption policy might cover losses arising from an order of a civil authority. If the Insured is closed by operation of law to counter the risk of spreading COVID-19, this coverage might be of assistance. For instance, the lockdown was implemented by the Government to contain the spread of COVID-19 and therefore losses due to such lockdown may be covered by the policy. It may not be available if a business closes because trade is discouraged by a public entity, or simply ceases as customers avoid public commerce. In India, traditionally, All Industrial Risk policy specifically excludes risks arising from government enforced closures or orders passed by government authorities and civil authorities.
• Insurance polices usually work on the concept of probability and only cover an unknown risk. The Insurer can very well argue that COVID-19 has been looming over the nation and the economy since January 2020. Insured like event organisers / film makers etc. could have taken necessary precautions to avoid losses. In view thereof, the Insurer may well take this stand to reject the claim under all risk coverage policy.

From the above instances, it is clear that COVID-19 claims will have to be determined based on the factual matrix of individual cases. We have no doubt that the handling of such claims from the outset to the date of denial – and the denial letter itself – may be critical to the outcome in court. All internal and external communications may be considered in determining whether a particular COVID-19 claim is covered. As such, it is imperative that each claim is assessed individually and properly from the outset. It is also clear that the handling of such claims is a complex task and not as simple as reading the words in the given policy.

 Health and Life Insurance 

Due to the unprecedented nature of COVID-19 and resulting loss of human lives, the Government along with Insurance regulatory bodies like the Insurance Regulatory and Development Authority (IRDA) and Life Council of India have issued guidelines in public interest. Some of the important guidelines issued in this regard are set out hereinbelow.

• On February 19, 2020, the Department of Expenditure under the Ministry of Finance has clarified, through its office order, that Coronavirus be treated as a ‘Force Majeure’ event in relation to existing agreements for procurement of goods entered into by the Government and various departments.
• On March 4, 2020, IRDA directed all the Insurers to expeditiously handle COVID-19 related claims if the existing policies covered hospitalisation expenses. IRDA further gave instructions to the Insurers to settle claims of admissible medical expenses during the course of treatment including the treatment during the quarantine period in accordance with the applicable terms and conditions of the policy contract and the extant regulatory framework.
• On March 14, 2020, the Ministry of Home Affairs notified the states and declared Coronavirus as a notified disaster.
• On March 23, 2020, to ease the financial burden of the Insured, IRDA issued guidelines granting policy holders a grace period of 30 days for payment of premium due in the month of March, 2020 for renewal of their life and health insurance policies. IRDA also called upon Insurers to give information to existing policy holders about admissibility or otherwise of COVID-19 claims on their website. Subsequently, on April 21, 2020, IRDA further directed the Health and Life Insurers to provide the option of payment of premium in instalments of twelve months for all the health policies due and payable by March 31, 2020.
• On March 30, 2020, IRDA instructed travel Insurers to give policy holders with travel insurance policies which were/are valid between 22nd March, 2020 and 30th April, 2020, an option to defer the date of travel without any additional charge.
• On April 7, 2020, the Economic Times reported that Life Council of India had announced in a press conference that all the life insurance companies, both public and private, will process death claims related to COVID-19 at the earliest. The Council also made a categoric clarification that the force majeure clause in the contract relating to life insurance will not be applicable. This announcement put to rest the anxiety amongst thousands of policy holders.
• On April 15, 2020, Ministry of Home Affairs, Government of India vide an order issued as part of the Consolidated Revised Guidelines interalia stipulated that (1) All industrial and commercial establishments, work places, offices etc. shall put in place arrangements for implementation of Standard Operating Procedure (SOP) before starting their functioning. (2) As per clause no. 5 of Annexure – II of the said SOP for social distancing for offices, workplace, factories and establishments, medical insurance for the workers was made mandatory.
• On April 16, 2020, IRDA, asked health Insurers to provide medical health insurance policy for employees of various organisations at affordable costs. This initiative by IRDA is an encouraging step and could be a game changer for the Insurance sector. By making insurance for the employees mandatory, the Insurance sector would definitely see a positive growth in its business. But more importantly, it will help employees to get quality medical help which otherwise would have been impossible for them. Also, creating an environment where the employers are attentive about the health of their employees, is certainly a step towards building a promising future for employees.

These guidelines, undoubtedly, are issued for the benefit of the Insured. These instructions will ensure that the Insurer processes each and every claim related to COVID-19 with more accountability. At the same time, by introducing these guidelines, IRDA has opened up new avenues for the health Insurers who can now design new policies specifically covering COVID-19 related treatment and in turn charge higher premiums because of the nature of risk involved in it. After issuance of such guidelines, 4 out of the 29 permitted health Insurers designed new products covering COVID-19 treatment. There has also been a rise in the claims submitted to the Insurers after such guidelines were issued. Now what one has to see is if the Insurers are able to take up such a huge liability at a time where the losses due to COVID-19 are yet to be fully ascertained.

Exclusion clauses  in a health insurance policy

Even if the health insurance contract does not contain a force majeure clause the Insurer could use the standard exclusions in the contract to repudiate a claim related to COVID 19 despite the various guidelines issued in this regard. Some of the exclusions that find place in a standard health insurance contract and which could be of relevance in the present situation are explained hereinbelow:-

1. The standard exclusion as set out by IRDA in its guidelines for standardised exclusions in a contract exclude any unproven treatment for which there is no medical record or study. At present, there is no proven medical treatment or vaccine prescribed for treating COVID- 19 patients. Therefore an Insurer could reject a COVID-19 claim on this ground.
2. The contract may exclude claims of a person infected with COVID-19 if he or any of his family members have travelled to COVID-19 affected countries like China, Italy, Spain etc. in the immediate past.
3. Similarly, if a person contracts COVID-19 during the policy waiting period which is generally 30 days after the issuance of policy, then his claim may not be entertained.
4. A claim may not be allowed if an Insured was not hospitalised for 24 hours or more. Such and other exclusion clauses will have to be studied carefully by the policy holders.

This list is not a comprehensive list and there could be many more exceptions. Therefore while raising a COVID-19 related claim against an Insurer, the Insured must go through the contract and its terms minutely to ensure that he does not fall within the ambit of any such exclusions.

Two principles to fight the “Exclusion Clause” in Insurance contracts

I. The Main Purpose Rule

The main purpose rule is one of the most fundamental principles used while interpreting insurance contracts. This principle lays down that wide exclusion clauses will be read down to the extent to which they are inconsistent with the main purpose, or object of the contract. Thus, if an Insurer attempts to reject any claim of an Insured by taking a very hyper technical approach by relying on the exclusion clauses, then in a given case, the Court may consider it necessary to read the contract as a whole to identify the main object for which the Insurer opted for such a policy. Once the Court comes to a conclusion about the main object of the contract then it may look into the exclusion clause relied on by the Insurer to determine whether the exclusion clause is inconsistent with the main purpose of the contract or not. This principle has been relied upon in various judgments.

• In the case of Glynn v. Margetson & Co.^[2] (AC at P. 357), Lord Halsbury, L. C. stated–

“it seems to me that in construing this document, which is a contract of carriage between the parties, one must in the first instance look at the whole instrument and not at one part of it only. Looking at the whole instrument, and seeing what one must regard…as its main purpose, one must reject words, indeed whole provisions, if they are inconsistent with what one assumes to be the main purpose of the contract”

• In the case of Skandia Insurance Co. Ltd. v. Kokilaben Chandravadan^[3], the Supreme Court observed as under:

“When the option is between opting for a view which will relieve the distress and misery of the victims of accidents or their dependents on the one hand and the equally plausible view which will reduce the profitability of the insurer in regard to the occupational hazard undertaken by him by way of business activity, there is hardly any choice. The Court cannot but opt for the former view. Even if one were to make a strictly doctrinaire approach, the very same conclusion would emerge in obeisance to the doctrine of ‘reading down’ the exclusion clause in the light of the ‘main purpose’ of the provision so that the exclusion clause does not cross swords with the ‘main purpose’ highlighted earlier. The effort must be to harmonize the two instead of allowing the exclusion clause to snipe successfully at the main purpose.”.

• However recently, the Supreme Court has taken a different view in the case of Bajaj Allianz General Insurance Co Ltd & Anr v. The State of Madhya Pradesh^[4] wherein it held that “The provisions of an insurance contract must be imparted a reasonable business like meaning bearing in mind the intention conveyed by the words used in the policy document. Insurance policies should be construed according to the principles of construction generally applicable to commercial and consumer contracts. The court must interpret the words in which the contract is expressed by the parties and not embark upon making a new contract for the parties. A reasonable construction must therefore be given to each clause in order to give effect to the plain and obvious intention of the parties as ascertainable from the whole instrument. The liability of the insurer cannot extend to more than what is covered by the insurance policy.”

 The Courts have over a period of time emphasised the cardinal principle that a contract must be treated as sacrosanct and neither party to the contract should be given the liberty to rewrite the contract to suit their personal motives.

II. Doctrine of Contra Proferentem and its applicability

Apart from what has been discussed earlier, if the exclusion clause in the contract is ambiguous and is capable of two different interpretations, an interpretation in favour of the Insured will have to be accepted by the Court. Thus the insured has one more weapon in his duel with the insurer i.e. the doctrine of “contra proferentem”

Halsbury’s Laws of England^[5] explains contra proferentem as under :

“Principle of contra proferentem rule is that where there is ambiguity in the policy the court will apply the contra proferentem rule. Where a policy is produced by the insurers, it is their business to see that precision and clarity are attained and, if they fail to do so, the ambiguity will be resolved by adopting the construction favourable to the insured. Similarly, as regards language which emanates from the insured, such as the language used in answer to questions in the proposal or in a slip, a construction favourable to the insurers will prevail if the insured has created any ambiguity. This rule, however, only becomes operative where the words are truly ambiguous; it is a rule for resolving ambiguity and it cannot be invoked with a view to creating a doubt. Therefore, where the words used are free from ambiguity in the sense that, fairly and reasonably construed, they admit of only one meaning, the rule has no application”

• The Supreme Court in General Assurance Society Ltd. versus Chandmull Jain and Anr.^[6], held that there is no difference between a contract of insurance and any other contract except that in a contract of insurance there is a requirement of uberima fides, i.e., good faith on the part of the Insured and the contract is likely to be construed contra proferentes, i.e., against the company in case of ambiguity or doubt. It was further held in the said judgment that the duty of the Court is to interpret the words in which the contract is expressed by the parties and it is not for the Court to make a new contract, however reasonable.
• The Supreme Court of India in the case of B.V. Nagaraju versus Oriental Insurance Company^[7], had to decide whether there was a fundamental breach. The issue was whether carrying more than the permissible passengers in a goods vehicle in breach of the insurance policy terms, is so fundamental a breach, as to afford ground to the Insurer to dispense with liability altogether? While deciding this issue, the Court held that the exclusion clause of the insurance policy must be read down so as to serve the main purpose of the policy on the ground that carrying of extra passengers could not contribute to the accident. The Supreme Court held that the exclusion terms of the insurance policy must be read down so as to serve the main purpose of the policy – that is to indemnify the insurer.
• However there are limitations to the applicability of contra proferentem. In the case of Suraj Mal Ram Niwas Mills Pvt. Ltd versus United India Ins. Co. Ltd^[8], the Supreme Court while construing the terms of a contract of insurance held that the words used therein must be given paramount importance and it is not open for the court to add, delete or substitute words. It held that since upon issuance of an insurance policy, the Insurers undertake to indemnify the loss suffered by the Insured on account of risks covered by the policy, its terms have to be strictly construed in order to determine the extent of the liability of the insurers. The endeavour of the Court should always be to interpret the words used in the contract in a manner that will best express the intention of the parties.
• Similarly, in the case of Oriental Insurance Co. Ltd versus Sony Cheriyan^[9], the Insured obtained a policy for their truck, which caught fire while carrying Ether Solvent. The Insurer rejected the claim on the ground of breach committed by the Insured by carrying hazardous goods. The policy clearly specified “Limitation of use”, which indicates that policy was meant to cover only carriage of goods defined within the meaning of Motor Vehicle Act, 1988. The permit granted to the Insured under the Act specifies the nature of goods which could be carried. The Supreme Court upheld the rejection of claim by the Insurer.

Conclusion

Scientific researchers and the entire medical fraternity have not yet been able to discover a vaccine or a cure for COVID-19. The World Health Organisation claims that a vaccine for COVID-19 will take at least 18 to 24 months to produce. This means the present situation will continue. In the meantime the Government and legislators may come forward with amendments to existing legislation and may introduce new legislations to curtail business losses. All such steps would have to be carefully calibrated so that the health of the insurers is also kept in mind. While legislating to provide relief to the insured care must be taken to ensure that the insurance sector does not suffer irreparable harm. 

It will be interesting to see what views Indian Courts will take while deciding different insurance claims. Would the Courts take a strict view by following the letter of the contract? Or will the courts keep in mind the principle enunciated in Skandia Insurance Co. Ltd Versus Kokilaben Chandravadan & Ors^[10] that the main purpose of the policy is to protect the interest of the policy holder?

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Zubin Behramkamdin has been practicing as a Counsel since 1993, mainly in the Bombay High Court and Supreme Court of India. He has appeared  before statutory tribunals like the, National Company Law Tribunal and Debt Recovery Tribunal. He can be reached at zubin.behramkamdin@gmail.com. 

Vidya Nair is a practicing Advocate at the Bombay High Court. She can be reached at nair.vidya89@gmail.com.

A modified version of this article was first published with Bar and Bench.

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Photo Credits: JOHN THYS/AFP

Notes

^[1] 2020 ONSC 1924

^[2] [1893] AC 351

^[3] 1987 AIR 1184

^[4] 2020 SCC OnLine SC 401

^[5] Halsbury’s Laws of England (fifth edition) Volume 60 Para 105

^[6] [1966] 3 SCR 500

^[7] [1996] 4 SCC 648

^[8] [2010] 10 SCC 567

^[9] AIR 1999 SC 3252

^[10] 1987 AIR 1184