COVID-19: Does your insurance cover your risk?

At the time of writing, as the national lockdown moves into Stage 4, fortunately the government has realised that without transport there is absolutely no economy, and some restrictions are being lifted.

Many transporters will have already realised that a number of the losses they are facing are simply not covered by their insurance. Apart from assessing claims against existing policies, transporters urgently need to review their insurance arrangements going forward, because there is no doubt that Covid-19 and its after-effects are going to be felt in the national and global economies for several years to come. 

The majority of claims have arisen out of delays caused indirectly by the pandemic. Leaving aside ocean transport, the vast majority of the delays have been caused by regulations issued by national governments or port authorities. 

This has given rise to losses and claims for cargo owners because their cargo is either perishable or time sensitive, such as seasonal greeting cards. They may also have agreed penalties with their customers for failing to deliver by a certain time. These losses give rise to claims against transporters, who themselves are suffering losses while their trucks are stuck at border posts or container terminals. 

As with all types of insurance, whether any of these losses are covered by an existing insurance policy depends entirely on the wording. Broadly speaking, however, most cargo is insured under marine all risks terms such those contained in the Institute Cargo Clauses (A).

Generally, claims for losses arising out of delays caused by Covid-19 and consequent lockdowns are not covered by these policies. This is because these policies, without exception, exclude losses caused by delay.

The policies typically contain a clause that allows the owners of cargo to claim for the costs of forwarding the cargo to its final destination if the voyage has been terminated earlier by the carrier. However, the obligation to indemnify the cargo owner arises only if there has first been loss or damage to the cargo. This aspect of the policy provides cover only if first, the voyage has been abandoned, and second, there is actual damage to the cargo.   

The only exception to this general rule is found in some of the extension policies that apply to frozen and chilled food where, in certain cases, delays are covered. Whether this arises as a result of the pandemic and consequent lockdown depends on the wording of the policy.

One crucial issue for cargo owners and transporters whose cargo has been delayed is that they need to immediately notify the insurers and ask them to extend cover during the delay. Underwriters are obliged to extend cover, but may charge an additional premium. This is because detention due to the lockdown is not part of the ordinary course of transit and exposes the goods to additional risks. 

Frustrated at not being able to claim under the insurance policy, cargo owners may look to transporters and storage facilities for the losses caused by delay. Those transporters and storage facilities need to check their contracts and standard trading conditions to ascertain whether they are liable for any losses caused by delay. In the vast majority of cases they are not liable, either because they have not guaranteed a date of delivery, or because they have excluded losses caused by delay.

Of course, the transporter or storage operator can only claim under the liability insurance policy if it is, in fact, liable under the contract. Because most contracts exclude liability for claims of this nature, it is unlikely that transporters’ insurers will have to respond to a claim under a liability policy.

From a transporter’s and storage operator’s perspective, this then leaves the possibility of claiming under a business interruption policy. Those policies are designed to respond to events of this nature, but vary enormously and, therefore, no general advice can be given as to whether or not a business interruption policy would respond to claims of this nature.

Transporters and storage operators have been facing losses, claims and complaints for a number of months. They need to assess those and their contractual arrangements with their clients, as well as their insurance arrangements. This is to make sure that their contracts and insurance policies will respond to these losses in the future. 

In carrying out that assessment, the parties must remember that they need to specifically describe the events that will exclude liability under their contract, or provide cover under the insurance contract. The description of the event can be broad, for example, it could include an exclusion for “acts of God”. The danger of such a broad definition is that the loss then has to be linked with the event.

The current losses and claims, for example, do not arise, legally, as a result of the virus. The immediate and legal cause of the current losses is, in fact, either the national lockdown regulations promulgated by the various governments in response to the virus, or because entities, such as the port authorities, have issued their own regulations in response to those issued by national government. 

In these circumstances the contract and policy would, for example, have to refer to the virus or a pandemic and any directives, regulations, orders or restrictions issued by national or other properly constituted authorities in response to the virus.   

The reality is that the unprecedented challenges brought on by Covid-19 require transporters and storage operators to not only apply their minds very carefully to their contractual arrangements to deal with a repeat of this disaster, but also to try and cater for as yet unconsidered possibilities.