Diversification of Business in COVID-19 – what you must do to stay properly insured

Businesses have been affected differently by COVID-19. Some have been forced to close, others have diversified their service/product offerings and some have flourished.

This article focuses on how significant changes to a business may affect its insurance coverage, what a company should do to comply with their obligations and a practical example with a focus on manufacturing.

You should always advise your broker of any material changes to your business. They will advise you whether you have discharged your disclosure obligations and confirm your coverage is adequate.

Duty of disclosure
Risk disclosures are generally made by a Policyholder when it first applies for, or renews a contract of insurance. Generally a proposal form is completed wherein the “proposer” is directed to “important notices”. The most critical of these notices, for the purposes of this article, are contained in s21 of the Insurance Contracts Act 1984 (Cth)  (“the Act”).

This provision requires the proposer to disclose all material information which the insured (or a reasonable person in the insured’s position) would consider relevant to the risk sought to be covered by the policy. The information is important because it informs the insurer in relation to the offer it makes to provide cover for the risk sought to be insured.

Insurers have remedies under s28 of the Act in the event of non-disclosure including that they may be relieved from meeting a claim in part or in whole due to any non-disclosure. If the non-disclosure is fraudulent the policy may be considered to have never existed.
Ongoing duty

That said, disclosure obligations do not end at renewal. Now the Policyholder, the “discloser”, will have continuing obligations under the Act and its policy to inform of material changes to the risk.

In the context of COVID-19 and the changes presently experienced in commerce, it is now, more than ever important to ensure your insurance cover evolves with the changes to your business.

If your business has experienced any significant changes in revenue, asset holdings, capital structure, staff numbers, situation, occupancy levels of its assets, use of new technology, different systems of work or any change in the nature of its services/products, these are “material” and capable of disclosure. The list is not exhaustive.

Failure to disclose such changes may mean you are in breach of your policy obligations, but worse you may not have any cover under your policy at all. You may otherwise, because of a significant change in services, require a different type, or types, of policies.

Example: manufacturing
The most common “diversified” operations of our clients during COVID-19 has been manufacturing. With global supply chains significantly affected and exports of essential medical supplies in high-demand, the NSW Government is calling on local manufacturers to redeploy spare capacity to manufacture items to assist with the shortages of COVID 19.

We have already seen examples of food packaging companies producing hundreds of millions of respirator and surgical masks. Distilleries nationally have been converting their production lines into high-capacity hand sanitiser. Other businesses have focused on existing supply chains and have increased quantities as they see necessary.
Steps to take
  1. Check the description of services in the policy schedule. Are you starting to manufacture, distribute, or import any new products that would be deemed outside of your current business activities or products manufactured?

  2. Are the policies comprising your insurance programme (including policy limit of indemnity / terms and conditions) in compliance with any contractual or other legal obligations for the new activities?

  3. Is there a marked increase or decrease in your stock levels (whether in transit or at a static location)?

  4. Does the policy extend to cover claims brought in jurisdictions outside Australia?

  5. Who has risk of damage or loss whilst goods are in transit?

  6. Is there exposure to product recall?

  7. What due diligence has been completed on suppliers? Are their credit risks?