COVID-19 and business interruption insurance

Wednesday 23 September 2020

A major shock to the insurance sector was received on 15 September 2020 when the High Court handed down judgment in the test case brought by the Financial Conduct Authority (the FCA) in relation to business interruption insurance.

The FCA represented those businesses who claimed to be entitled to a pay-out. Opposing the FCA, eight insurance companies argued that the policies did not entitle the policy holders to cover.

Broadly speaking, the Court found in favour of most policy holders meaning that thousands of businesses will now be entitled to payments in respect of losses caused by COVID-19.

The full judgment is available here.

The Court broke down the various policies and issues into a number of categories. Please note that what follows is a summary only. For more detail, please see the full judgment or contact the Commercial Dispute Resolution team.

Disease clauses

Disease clauses give the policyholder cover for losses:

• following interruption/interference with a business;
• following/arising/as a result of a notifiable disease, or occurrence of a notifiable disease;
• within a set distance or vicinity of the policyholder’s premises/insured location.

The insurers argued that the interruption/interference with the business must have been as a result of a localised occurrence of the disease.

The Court disagreed and found that the cause of the interruption was a national notifiable disease and that local outbreaks could not be separated to form divisible parts. As such, disease clauses were found to provide cover and pay-outs s should be made.

Prevention of access clauses

Prevention of access clauses focus on losses caused by a business being denied access to premises and provide for cover where loss is:

• Caused by prevention/hindrance/denial of access to premises;
• due to the actions/advice or restrictions imposed by the government/local authority/police/other body;
• due to an emergency/incident within a specified area.

The Court found that, on the whole, clauses of this nature should be viewed much more restrictively than disease clauses.

If the relevant clause refers to ‘prevention’ of access the premises must have been closed for the purpose of carrying on business. If the clause refers to a hindrance, it does not require a complete closure (for example, if a restaurant could then maintain a take-away service instead of table-service) in order to be eligible for cover.

There is also an important distinction to be made depending whether the clause referred to ‘advice’ as opposed to actions/restrictions.  In short, if action or restrictions are referred to, then the prevention/hindrance must have been as a result of mandatory instructions made by a relevant authority and not merely advice.

As regards the locality of the emergency/incident, the Court adopted a much more stringent approach than it did for disease clauses, ruling that the emergency/incident could not be viewed as the nationwide outbreak and must instead be a specific emergency/incident within the relevant area.

Hybrid clauses

Hybrid clauses cover losses caused by a prevention/denial of access to a business premises as a result of disease.  This could be:

• an interruption to the business due to an inability to use the premises;

• due to actions, advice or restrictions imposed by government/local authority/policy/other body;

• as a result of an outbreak of a notifiable or infectious disease within a certain distance of the business premises.

The Court interpreted the third situation broadly and found that, in common with disease clauses, the restrictions imposed did not have to result from a local occurrence. Therefore, the national outbreak and the regulations which followed, were enough to activate cover.

The court found that when the question of access to premises arose in relation to hybrid clauses its earlier comments about the distinction between ‘hindrance’ and ‘prevention’ should be followed.

Causation

Whilst it would seem obvious that losses must be shown to have been caused by the pandemic, the insurers argued that there were a number of different factors at play which contributed to the losses, including (but not limited to) the actions of the public and the general state of the economy.

The insurers were trying to argue that there were a number of factors unrelated to a specific incident/outbreak which could lead to losses.

The Court rejected the insurer’s arguments and found that the effects of the pandemic, the subsequent rules/regulations and advice, and the effect on public confidence (to name but a few factors) must be treated as stemming from the same cause. Therefore, losses should be covered, provided the policy wording otherwise allowed for this.

Trends clauses

Trends clauses are applied when assessing damages/losses to try to put the policyholder in the same position as though the insured ‘peril’ had not occurred.  When assessing that loss, it is vital to consider the definition of the peril and whether there are any reasons falling outside the definition which should be used to limit the sums paid out.

For example, it was argued by the insurers that in respect of disease clauses, the insured peril was simply the local outbreak of the disease and not the nationwide situation. Therefore, any award should be reduced so as to reflect only the losses caused by the localised outbreak.

The Court did not agree with this argument and instead found:

• disease clauses covered the effects the ‘peril’ both within the specified area and beyond.  Insurers should therefore discount the entire pandemic, government actions and public response both inside and outside the specified area.
• prevention of access policies cover requires (i) the prevention/hindrance of access (ii) by the action of an authority (iii) due to an emergency/incident within a specified area.  All three factors should be regarded as forming part of the peril.  Therefore, none of those three factors should be considered when looking at any reasons why the sums to be paid should be reduced.
• hybrid policies cover requires (i) an interruption to the business due to an inability to use the premises (ii) arising from actions, advice or restrictions imposed by government/local authority/policy/other body (iii) as a result of a notifiable or infectious disease occurring within a certain distance of the business premises. Again, all three factors should be regarded as forming part of the peril.  Therefore, once again, none of these factors should be considered when looking for reasons why the sums to be paid should be reduced.

Moving Forward 

The judgment is welcome news to policy holders. However, it should be noted that a further hearing has already been fixed at the High Court for 2 October 2020, when it is expected that an application for permission to appeal will be made on behalf of the insurers.

In the meantime, all policyholders who believe they may have a claim under a business interruption insurance policy should consider the wording of the policy closely and act quickly to pursue claims.

Whilst the guidance given by the Court is extremely helpful, ultimately each policy and claim will be considered on its own wording when a claim is made.  Generally, disease clauses are likely to be covered, prevention of access clauses have a higher evidential bar to prove entitlement to cover and hybrid clauses will have to be considered carefully.

If you believe you have a claim for business interruption insurance and require assistance, please email or call us on 0113 227 9355.