Beginning at midnight of 17 March 2020, the entirety of Luzon including Metro Manila has been placed on an Enhanced Community Quarantine that is presently set to be lifted only at the end of this month unless otherwise extended. All mass public transport services and domestic flights have been suspended. Strict movement limitations have been imposed on consumer households. Private establishments or businesses, except hospitals, pharmacies, banks and those involved in providing basic necessities and activities related to food and medicine production, have been physically closed.
As of 19 March 2020, the National Economic Development Authority estimated that the Enhanced Community Quarantine in Luzon, which was then set to be lifted by 13 April 2020 before being subsequently extended by the Philippine Government, would result in a loss of gross value added of Php298 Billion-Php1.1 Trillion (roughly USD5.93 Billion – USD22 Billion). While the quarantine continues, questions have emerged as to whether the revenue losses resulting from the closure or suspension of services and establishments may be covered by existing insurance policies that include coverage for business interruption risks.
Business interruption coverage as a component of property insurance
Business interruption insurance in the Philippines is typically offered in combination with or as an additional cover in property insurance. Insurance policies which provide for business interruption cover would, in general, require a direct physical loss or damage to insured commercial property for the insurer to be liable to indemnify the insured for income losses resulting from the business interruption. Under such an insurance policy, loss of income due to a business interruption would not be covered if there was no corresponding physical loss or damage to insured property which was the proximate cause of the business interruption.
So far, the pandemic and the Enhanced Community Quarantine may be observed to have given rise to at least two distinct classes of business interruptions, resulting from either of the following:
Contamination of business premises - where the business premises and property is deemed unfit for immediate use as a result of the confirmed exposure of the premises or property to the coronavirus. Such interruptions, which were more common prior to the Enhanced Community Quarantine, took place when businesses, companies and several government offices effected temporary closures to facilitate thorough disinfection of the property premises following discovery of a confirmed case of infection within the premises.
Government-decreed restrictions – where the physical closure of the business premises and property, or the suspension of business services, result solely from the directive of the government for purposes of effecting the Enhanced Community Quarantine.
Between the two classes of business interruptions noted above, it is the first class of interruption – that arising from contamination of business premises – which could arguably approximate the concept of physical damage to property. However, Philippine courts have not yet passed upon the question of whether such a condition would constitute physical damage for purposes of triggering property insurance coverage. Neither have Philippines courts determined whether, in the absence of an express provision in the policy including or excluding such risk, a business interruption arising from such contamination would qualify as a business interruption arising from physical damage to the insured property.
Several legal principles on the interpretation of insurance contracts under Philippine Law will ultimately guide a determination of whether or not losses sustained from a business interruption would be covered by an existing insurance policy.
The literal meaning of contractual stipulations govern the contract
Under Philippine law, the literal meaning of a contractual stipulation shall apply where the terms of such contract are clear and leave no doubt upon the intention of the parties [Article 2011, Civil Code]. Thus, when the terms of the insurance policy are clear and explicit that they do not justify an attempt to read into it any alleged intention of the parties, the terms are to be understood literally just as they appear on the face of the contract. This has been applied by Philippine courts to hold that in interpreting the exclusions in an insurance contract, the terms used specifying the excluded classes therein are to be given their meaning as understood in common speech. [Fortune Insurance and Surety Co., Inc. v. Court of Appeals, 314 Phil. 184, 196 (1995)]
It should be stressed that, absent any ambiguity, the provision in an insurance policy will be read as it is written and treated as the binding law of the contract, and courts are barred from considering any extrinsic aids, such as testimony or other evidence purporting to show that a different meaning was intended or agreed upon by the parties. It is only when there is an ambiguity in the language of the contract that resort to extrinsic aids may be made to interpret the intent of the parties to the contract.
Ambiguities in the insurance contract are to be construed liberally in favor of the insured
Under Philippine law, a policy or contract of insurance is to be construed liberally in favor of the insured and strictly against the insurer company. An insurance contract is treated as a contract of adhesion, referring to a contract in a ready-made form where one party prepares the stipulations in the contract while the other party merely affixes his signature. While such contracts are valid, any ambiguity should be resolved against the party who caused the ambiguity or prepared the contract. Thus, it has been held that when the terms of the insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with its obligation. [Alpha Insurance & Surety Co. v. Arsenia Santos Castor, 717 Phil. 131 (2013)]
Provisions of the insurance contract are to be interpreted in consonance with each other
Article 1374 of the Philippine Civil Code mandates that the various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. Provisions in the insurance policy should not be read in isolation but in relation to each other and in their entirety. Thus, if there is ambiguity in the meaning of a particular provision which may be similarly read to admit of more than one meaning, an interpretation that does not conflict with any other provision in the entire contract will be preferred.
US Jurisprudence as credible authority in judicial interpretation of insurance contracts
Finally, the Philippine Supreme Court has specifically recognized that Philippine law on insurance is mostly taken from the insurance statutes of California, and American legal authorities may be relied upon in interpreting the provisions of Philippine law. As a result, American jurisprudence have traditionally been suppletorily resorted to by the Philippine Supreme Court in deciding cases involving insurance transactions on matters not previously settled by Philippine courts. Thus, the rulings of US courts, particularly in California, on the matter of business interruption coverage under similar circumstances, may reasonably be expected to be considered in future rulings of Philippine courts on the same matter.
Ultimately, the question of coverage would have to be determined on a case-to-case basis. The language and wording of each insurance policy must be examined to determine whether or not business interruption coverage under the insurance policy is triggered by the circumstances surrounding the business interruption.
This article is intended for informational purposes only and should not be construed as legal advice.