In depth

An update to Business Interruption Cover for losses caused by COVID-19

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Businesses should look again at their insurance policies, now that judgment has been given in the FCA’s test case on business interruption losses arising in the COVID-19 pandemic.

The 162-page judgment handed down on 15 September 2020 by Lord Justice Flaux and Mr Justice Butcher considered cover for such business interruption losses under 21 sample policy wordings of 8 insurers. The FCA has identified 370,000 policyholders as holding policies that may be affected by the outcome of the test case. Your business might be one of them!

The FCA website contains a link to the judgment and to an excellent summary provided by its legal team.

The test case was brought by the FCA in order to bring clarity on certain keys issues relating to the operation of cover under certain “non-damage” business interruption extensions of cover. It does not assist the thousands of businesses whose business interruption cover is only triggered when there is material damage to the property insured. 

Relevant business interruption extension categories

The relevant business interruption extensions considered in the test case fell into three categories, summarised as follows by the FCA’s legal team:-  

"Disease wordings: provisions which provide cover for business interruption in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises.

Prevention of access / public authority wordings: provisions which provide cover where there has been a prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restrictions.

Hybrid wordings: provisions which are engaged by restrictions imposed on the premises in relation to a notifiable disease."

The court’s decision is favourable to policyholders on the majority of the key issues and the majority of the sample wordings. It is particularly good news for policyholders with a disease wording or hybrid wording like many of the sample wordings considered in the judgment. However, if your disease wording is only triggered if the relevant disease appears in a list set out in the policy, the list is very unlikely to include COVID-19, so it will not provide cover.

The court held that the prevention of access / public authority wordings they reviewed were generally to be construed more restrictively than most of the disease wordings. It found that many of these wordings provided narrow, localised cover and that the action of the relevant authority would have to be in response to the localised occurrence of the disease, not in response to the pandemic at a national level. Close attention must be paid to the exact words used in these clauses – for example, do they refer to "action" or is there a reference to "advice", does there have to be a "prevention" of access or can there be a  "hindrance" of access, is it  prevention of "access" or of "use", is the cover for complete cessation of the business or does it include disruption and interference with the business? The effect of government action on different businesses and at different times during the pandemic depends on which one of 7 Categories the business falls into. For example, Category 5 businesses were "not mentioned in the 21 March Regulations or the 26 March Regulations at all, including professional service firms such as accountants and lawyers, as well as construction and manufacturing businesses. They were not expressly required to close, nor expressly permitted to stay open."

The judgment contains useful clarification on the "trends" clauses in the various sample wordings. These clauses are key to working out the amount to be paid for business interruption losses. The general purpose of business interruption cover (subject always to policy limits) is to put the insured in the same position as it would have been had the insured peril not occurred.   This involves comparing the business when it has suffered the insured peril with the “counterfactual” (which means the business once the insured peril is removed). The court’s decision about the “counterfactual” in the sample wordings was helpful to policyholders.

The judgment also contains a useful section called "Prevalence", discussing the sort of evidence that policyholders might submit to insurers to prove the existence of COVID-19 in particular locations at particular dates. Numerous sources of evidence were identified, but there will be instances in which it may not be easy to obtain sufficient evidence.

It is likely that the judgment will be appealed. If that occurs, it is likely to be an expedited appeal, possibly straight to the Supreme Court.

The FCA says on its website:  "Although the judgment will bring welcome news for many policyholders, the judgment did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the court.  Each policy needs to be considered against the detailed judgment to work out what it means for that policy.  Policyholders with affected claims can expect to hear from their insurer within the next 7 days." That 7 day period expires on 22 September, so we would expect brokers to get in touch with policyholders by then. If you hear nothing by then, do get in touch with your brokers. 

Further guidance

For more information regarding this update, please contact our expert listed below and visit our previous article on Business Interruption Cover.

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