Covid-19-Related Implications For Liability Insurers In Hong Kong

The first case of COVID-19 was reported in Hong Kong nearly five months ago, on 22 January 2020. No new local cases have been recorded for over two weeks and social distancing measures are being eased to allow the city to return to some semblance of normality. However, it will be a case of “so close, yet so far” as the disease has had a devastating impact on businesses, not to mention the tragic loss of life. The impact and consequences will be felt for some time and there is unlikely to be a return to the old “normal”.

For liability insurers in Hong Kong, the COVID-19 pandemic has not only impacted their own operations. They will also have to contend with claims arising from it. This update seeks to give some insight into the COVID-19 related claims that liability insurers may face in Hong Kong.

Employees Compensation

• Certain businesses like fitness centres, bars, pubs and restaurants have had to close or restrict patrons and the construction industry has experienced a slowdown in projects. Although the government has not released the official data yet, anecdotal evidence suggests there has been a decrease in employee compensation (“EC”) cases, something that, on its face, augurs well for employee compensation insurers. However, with the impact on the economy, it is expected that as businesses downsize and shut up shop there will be an impact on premiums as well.
• According to the Hong Kong Confederation of Trade Unions, there have been about 75 suspected cases of employees contracting COVID-19 during the course of their employment. Though COVID-19 is not classified as an occupational disease, under section 36 of Employees’ Compensation Ordinance (Cap. 282) – there is ongoing debate as to whether it should be an employee shall have the right to recover compensation if contraction of the disease amounts to a personal injury by accident arising out of and in the course of employment.
• Apart from making a claim under the Employees’ Compensation Ordinance (Cap. 282), an employee might also be entitled to bring a common law claim. This will not be the first time Hong Kong employers have experienced claims arising from an outbreak of a disease as there were a number of EC claims made by employees who contracted SARS following the outbreak in 2003. Though employers in Hong Kong are under no legal obligation to specifically have in place a plan to handle the COVID-19 outbreak, they are required to review workplace safety and measures to minimise its spread. What will be an issue in respect of any common law proceedings is the standard of care to which an employer will be held to. This will of course depend on the nature of the industry in which the employer is engaged (e.g. hospitals and medical clinics would have a higher standard), but businesses that have increased contact with customers will also be expected to ensure their employees are provided with appropriate personal protection equipment (“PPE”) and develop systems of work that minimise the risk of infection. There is currently no guideline from the authorities as to the type of PPE required for specific work environments. Nonetheless, employers should be mindful of the condition to take all reasonable precautions to prevent accidents and diseases under their EC policies.
  
  For more information on and a practical guide to dealing with employment issues, please refer to https://www.mayerbrown.com/en/perspectives-events/publications/2020/03/managing-hr-through-covid19-a-practical-guide-for-multinational-employers

Professional Indemnity

• Medical negligence professional liability insurers might face malpractice claims arising from failures such as insufficient coronavirus safety protocols and inappropriate treatment for patients once diagnosed. As knowledge of the virus is still evolving, what long-term effects the virus or the treatment used may have on those who have recovered is unclear. Patients may argue treatments were unnecessarily invasive or adversely affected their health in the long run. Indirect medical negligence claims may also arise from non-COVID-19 patients whose treatments may have been delayed or affected due to COVID-19 patients taking precedence or medical resources having been directed to dealing with the crisis (e.g. delay in routine operations, chemotherapy, lack of medication).
• With the impact on cash flows and finances on certain professions, professionals may be more vigilant in chasing for promised payments and may be met with defensive allegations of negligence (e.g. lateness, incorrect design and breach of contract). Traditionally, professional negligence claims are counter-cyclical to the economy and the effects of a recession caused by COVID-19 is no different. As such, professional indemnity insurers might experience some upward trend professional negligence claims.

Public Liability

• With the recent news of people contracting COVID-19 after visiting certain bars and fitness centres in Hong Kong, these individuals could bring a claim under tort law or the Occupiers Liability Ordinance (Cap. 314) for failing to ensure that the premises were safe for visitors. This gives rise to interesting arguments on the issue of liability, such as like what measures, if any, the establishments took when it was known there were community infections and whether there could be contributory negligence on the part of the customer. Public liability insurers faced with such claims will have to turn their minds to these issues.
• Further, workplaces and premises visited by infected individuals were forced to close for deep cleaning and disinfecting, leading to losses. Business interruption insurance is unlikely to cover closure in such circumstances, so businesses may wish to consider the possibility of claims against individuals to recoup for their losses in appropriate cases (e.g. where there has been a breach of the quarantine order). However, issues with causation make this type of claim difficult to establish. An interesting point to note is that home insurance policies usually contain an extension covering an individual for legal liabilities to third parties for accidental loss of or damage to property. Such policies may be triggered if they do not have an exclusion relating to the transmission of communicable diseases or viruses by the insured or his/her family.
• As educational institutions are looking to reopen and resume classes, they will need to carefully consider what coronavirus safety protocols they need to implement. This will give rise to complex issues as there is no one-size-fits-all solution. The measures to be put in place will vary significantly depending on the institution concerned, for example, you would expect the protocols for kindergartens and primary school students to be more stringent. Tertiary institutions also have to grapple with what measures they need for student residences. Any outbreak at an educational institution resulting in students getting infected brings with it a real risk of claims being made against institution concerned.

Cybersecurity

• To minimise business disruption, many companies are allowing their employees to work remotely, but this has led to an increased risk exposure and potential data breaches. The expanded remote workforce gives rise to an increase in vulnerable “surfaces” and working off mobile devices (mobile devices are vulnerable to attacks as well – Check Point Research has discovered 16 different malicious apps, masquerading as legitimate coronavirus apps, containing malware directed at stealing users’ information¹). Other risks include employees connecting through unsecured Wi-Fi networks for convenience and the security standards at home not being as robust as those in the office.
• On the other hand, cyber criminals have also been seeking to exploit COVID-19 through phishing scams, ransomware, business email compromises and other attacks. Google has reported that they observed 18 million daily malware and phishing emails related to COVID-19 in just one week in mid-April. This is in addition to more than 240 million COVID-related daily spam messages². Recently, there have been reports of security breaches on Zoom, a popular video chat app used by businesses globally. In Hong Kong, we have been involved in phishing scams involving with cyber criminals setting up fraudulent websites based on websites of well-known organisations tricking users into providing certain personal or confidential data in return for information or useful items related to the coronavirus. There have also been spear fishing matters where a hacker purporting to be a customer duped client-facing representatives into giving them confidential information, resulting in email accounts being compromised, as well as attempted wire transfer frauds by hackers preying on victims during the disruption.
• Businesses should have contingency plans in place in case of cyber security breaches. Cyber insurance is more important than ever and can assist businesses to react quickly by providing access to professional assistance when an event does occur. We believe cyber security is paramount and cyber insurance will become increasingly important due to the increased risk of data breaches and vulnerability of working from home.
  
  For information regarding cybersecurity, please refer to our article - https://covid19.mayerbrown.com/cyber-managing-cybersecurity-and-privacy-risks-through-covid-19/

Warranty & Indemnity Insurance

• The spread of COVID-19 is also impacting M&A transactions because of an increased desire to renegotiate deal terms due to uncertainty over the long-term economic impact. Depending on the parties’ respective bargaining powers, buyers may now be looking at specific indemnities to COVID-19 and sellers may seek to make exclusions for it.
  
  

  If the business of the target company (e.g. significant operations or supply chains located in countries adversely affected by COVID-19), the buyer may call upon a Material Adverse Clause to terminate the contract as the disease may affect the solvency of the target company and impact on potential customers’ contracts and supply chains. In times of uncertainty, there might be an increased appetite for W&I (warranty & indemnity) insurance to mitigate the risks involved, though the increase in the numbers of W&I insurance policies written is likely to be contingent upon the availability of funding in the current climate.

• Underwriters are likely to adopt a cautious approach in the current climate and governments are taking unprecedented steps affecting the economy. If insurers are unwilling to cover the risks of COVID-19-related disruptions, policies and exclusions will need to be carefully drafted.
  
  For more information regarding the impact of COVID-19 on private M&A and W&I insurance, please refer to our articles –
  https://www.mayerbrown.com/en/perspectives-events/publications/2020/04/private-ma-in-the-post-pandemic-world-how-covid-19-could-shape-deal-making-in-the-future and https://www.mayerbrown.com/en/perspectives-events/publications/2020/03/covid19-and-the-warranty-and-indemnity-market

Directors & Officers Insurance

• Generally, directors have a responsibility to oversee the business and affairs of a corporation, requiring them to act in good faith and have in place systems to monitor and control the company’s operations. In the current climate, it is reasonable to require directors to have systems in place to evaluate those risks and business contingency plans to minimise the associated risks and business interruptions. If a company fails, directors are likely to face allegations of unpreparedness and be accused of negligence for failure to foresee risks and put in place adequate contingent plans. Directors may also be accused of failing to disclose the risks the pandemic posed to the company’s performance.
• Under Part XIV of the Securities Futures Ordinance (Cap. 571), a listed corporation is under an obligation to disclose “inside information” (which is defined as information not generally known to those accustomed in dealing with the listed securities but is likely to materially affect the price of the listed securities). If the current pandemic materially impacts on the operations and business of the listed corporation directors are under an obligation to disclose such information as soon as practicable. An example of this could be a major customer of the listed corporation discontinuing a particular product due to the outbreak and that product accounting for a significant portion of the listed corporation’s revenues. It should be noted this obligation is imposed upon each and every officer and director of the listed corporation, thus it is necessary to have in place measures for the handling of sensitive information so as to meet the disclosure obligations.
• The COVID-19 pandemic is also adversely affecting liquidity, with many businesses facing tighter cash flow. Businesses are dependent on customers to make timely payments and suppliers to allow for credit periods. If a customer is unable to make a payment on time, it is likely to have a knock-on effect on the business’ ability to pay its suppliers or outstanding loans. This can lead to liquidation action by creditors trying to recoup payments and lenders accelerating loan repayments though liquidation is not desirable since the recovery rate for unsecured creditors is rather low. Creditors and lenders may also target directors and their insurance policies to recover losses.

Insurers in Hong Kong are feeling the impact of COVID-19 on every facet of operations, from frontline sales, to underwriting and administration, and claim management. In respect of claims management, the disruption is not confined to the sudden shift to remote working and lack of cross-functional collaboration, but also the complex nature of COVID-19-related claims they have to contend with.