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Business interruption insurance amidst a global pandemic

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It is a fundamental principle of insurance law that an insurer is only liable for losses where the proximate cause of the loss is an insured peril. It is frequently the case that a loss arises from a series of events, some of which are insured perils and others which are either uninsured or excluded perils, and here the task is to determine which of those perils was the actual proximate cause of the loss.

The burden of proving proximate cause is on the policyholder who must demonstrate a natural chain of causation leading from the insured event to the loss in order to recover under the policy.  Determining proximate cause is a question of fact and must be assessed on a case-by-case basis.

Proximate cause need not be the only cause of the loss but it must be the predominant cause in that the loss must be said to be an ordinary consequence of the insured peril or have lead naturally and in the ordinary course from the insured peril. It cannot arise as a result of a subsequent, independent cause.  If the insured peril merely ‘gives occasion’ for the operation of a subsequent, independent cause which is not an insured peril, then the insured peril may not be a proximate cause. A cause has been held to be proximate if it can be described by terms such as dominant, direct, actual, effective, determining, operative, predominant or efficient.

When dealing with business interruption claims triggered by the current corona virus outbreak the question will be whether the proximate cause of loss is a contagious disease or Government’s response to the outbreak and the subsequent changes to the law.

This can be illustrated by the following examples:

  • Assuming that a business has cover for in place for hurricane damage and an accompanying clause stating that there is extended cover for loss of income as a result of a hurricane. A hurricane is present in the area but causes no damage to the business premises. Following the hurricane, and in order to facilitate clean-up operations and remedy the damage that was done, Government decrees that all businesses are required to close for the weekend. The proximate cause of the business interruption would not be the hurricane. Rather it would be the government decree.
  • As a converse example – assuming a business held interruption insurance for losses arising from a change in the law but that the policy excluded losses arising from infectious disease. Notwithstanding the fact that the infectious disease gave rise to a change in the law, the proximate cause of the loss would still be the change the law and not the infectious disease. Accordingly the business should be entitled to institute a claim.

When evaluating the validity of a claim under a business interruption policy, the wording of the policy and the intention of the parties is determinative in coming to a decision. As such Insurers and insured businesses alike should carefully review the wording of business interruption policies and seek the necessary legal advice.