Business Interruption Insurance: an unexpected judgment

By Stephanie Reeves and Ted Powell, Commercial Dispute Resolution 

On 15 September 2020, the High Court handed down its highly-anticipated judgment in the Financial Conduct Authority’s (“FCA”) business interruption (“BI”) test case. Contrary to what many had anticipated, the Court found largely in favour of insured businesses in a judgment which will be welcomed by the thousands of policyholders impacted by Covid-19-related business interruption losses.

As a reminder, the case was brought to consider whether various BI policy wordings should cover losses arising out of Covid-19 and the resulting Government measures. The FCA represented insured businesses and argued that the BI policies in question should cover Covid-19 related losses, whilst eight major insurance firms argued that cover does not extend to such losses. It is important to note that the test case looked only at non-damage BI insurance policies, and not those policies which cover for physical damage to premises.

The Court ruled that the majority of businesses who hold BI insurance policies and were forced to close due to the Covid-19 pandemic are entitled to be compensated by their insurers and that, subject to the limits of their policies, this compensation should return policyholders to the position that they would have been in had the pandemic not happened.

In this respect, the judgment provides clarity on the policy wordings which are most likely to provide cover for losses caused by Covid-19, and also sets out how issues such as causation and trend clauses should be approached. We consider these key aspects of the judgment and discuss the implications for businesses below.

Do “Disease Policies” cover Covid-19 losses? 

The Court considered policy wordings that focus on loss caused by a disease (“Disease Policies”). Generally, these policies cover losses resulting from:

• interruption with the business;
• arising from a notifiable or infectious disease;
• within a certain distance of the business’ premises.

The insurers argued that this wording meant the interruption must have been caused by a local occurrence of a disease and, as a result, the policy would only cover the effects of a local outbreak of Covid-19. This would require businesses to distinguish the effects of the national pandemic from the effects of a local outbreak and prove that it was the local outbreak that resulted in their loss. As a wider point, insurers argued that pandemic cover is separate to BI insurance and the premiums are generally expensive.

The Court disagreed with the insurers and found that the cause of loss was Covid-19 as a notifiable disease as a whole, of which the local outbreaks form indivisible parts. This is significant for businesses as it means they will not need to point to specific local outbreaks as the cause of their loss before their insurers will pay out under this type of policy.

However, a note of caution is needed. Two of the sample policies considered by the Court specifically required the business interruption to be “in consequence of” an “event” within a certain radius of the business’ premises. The Court found that this wording did require the loss to result from specific cases of Covid-19 occurring within the relevant radius. Businesses holding policies with such wording will presumably therefore be required to show that local occurrences of Covid-19 caused their loss, rather than the national pandemic. This will be a difficult distinction for businesses forced to close as a result of national government measures rather than local restrictions.

Do “Denial of Access Policies” cover Covid-19 losses? 

The Court also considered policy wordings that focus on loss caused by denial of access to the business’ premises due to an emergency or incident (“Denial of Access Policies”). Generally, these policies provide cover for loss resulting from:

• denial of access to the business’ premises;
• due to actions, advice or restrictions imposed by the Government or some other body;
• as a result of an emergency or incident within a certain distance of the business’ premises.

Overall, the Court interpreted Denial of Access Policies more restrictively than Disease Policies and therefore it will be more difficult for business with Denial of Access Policies to establish cover. The Court’s findings on the key elements of these policies are set out below.

What amounts to denial of access and business interruption?

Some of the sample Denial of Access Policies required there to be a “prevention” of access to the business’ premises. The Court found that this means the premises must have been closed for the purpose of carrying on the business. In contrast, policies requiring there to be a “hindrance” to access do not require complete closure. This distinction is particularly relevant for businesses that were able to partially open despite Covid-19 and the resulting restrictions. For example, a restaurant business that was forced to stop its sit-in service, but could access the premises and maintain a take-away service, may struggle to show that there was “prevention” of access.

The Court found that “interruption” does not require a complete cessation of business. This is significant for businesses whose trade was adversely affected, but not prevented entirely, by the pandemic. However, the Court did make clear that factors such as lower footfall or warnings against using public transport were insufficient to demonstrate prevention of access.

The nature of actions, advice or restrictions of the authority

The Court found that the announcements given by the Government on 16, 20 and 23 March 2020 constituted “advice” rather than mandatory instructions. These announcements included: the advice to the public avoid pubs and restaurants; the instruction that restaurants, pubs, cinemas, gyms and theatres must close; and restrictions on people leaving home for anything other than shopping, exercise and essential travel. In contrast, the regulations issued by the Government on 21 and 26 March 2020 were held as forming mandatory instructions. These regulations gave legal force to the requirements for many businesses to close.

This means that policies with the “advice” wording may provide cover for loss resulting from the Government announcements on 16, 20 or 23 March 2020. However, businesses may only be covered for loss resulting from the 21 and 26 March 2020 regulations if their policy requires Government “action” or “restrictions” to have “prevented” access. Clearly, the time lag between the first government “advice” and the mandatory restrictions obtaining legal force (which could be up to 10 days) may be significant for businesses seeking to particularise their lost profits over that period.

Where must Covid-19 have occurred?

In Denial of Access Policies, the Court narrowly interpreted the requirements for the incident or emergency to occur within a certain radius of the business’ premises. As a result, loss will only be covered if the action of the relevant authority was in response to an outbreak of Covid-19 within the specific radius.

Recently, the Government have announced localised restrictions in areas such as Leicester and Birmingham following local outbreaks of Covid-19. Such local restrictions may trigger cover under the narrowly interpreted Denial of Access Policies. Businesses should therefore carefully monitor the introduction of localised restrictions and collect information that shows that localised restrictions have resulted in loss.

Will “Hybrid Policies” cover Covid-19 losses? 

The Court also looked at sample policy wordings that focus on loss caused by denial of access to the business’ premises due to the occurrence of a disease (“Hybrid Policies”). Generally, these policies provide cover for loss resulting from:

• inability to use the business’ premises;
• due to actions, advice or restrictions imposed by the Government or some other body;
• as a result of a notifiable or infectious disease within a certain distance of the business’ premises.

The Court interpreted the “disease” part of Hybrid Policies broadly, finding that the restrictions imposed by the authority did not have to result from a local outbreak. As a result, the restrictions imposed as a result of the national Covid-19 outbreak should be enough to trigger cover.

However, the Court narrowly interpreted the “restrictions” and “denial of access” parts of the sample Hybrid Policies. As a result, Hybrid Policies that require Government “action” or “restrictions” to have “prevented access” may only be trigged by the 21 and 26 March 2020 regulations. In addition, businesses that were able to access and operate part of their premises may struggle to show that they were prevented access. 

What caused the insured’s losses? 

Causation was one of the key battlegrounds in the case. Insurers argued that in reality there were multiple causes of loss, such as the virus itself, its impact on public confidence and economic activity, and the other measures imposed by the UK Government aside from its order to close premises. Insurers therefore argued that it cannot be shown that a business would not have suffered loss but for the occurrence of Covid-19 near the premises or, alternatively, but for the Government restrictions. The insurers suggested that businesses may still have been adversely impacted by, for example, consumer concerns about entering into shops. 

The Court dismissed the insurers’ arguments and agreed with the FCA’s construction of causation. It held that the Covid-19 pandemic, the actions, measures and advice of the Government, and the reaction of the public in response to the disease should all be treated as one composite cause.

This is a crucial decision for businesses as it should make it significantly easier for businesses to show that Covid-19 caused the losses which they have suffered. Businesses pursuing claims through their insurers should keep full records and be prepared to demonstrate how their business activities were affected by the pandemic itself, the resulting government measures and the public reaction. As well as lost revenue figures, information demonstrating how consumers and suppliers were adversely affected by Covid-19, and the resulting impact this had on the business, will help show that Covid-19 caused the loss.

How will trends clauses impact the level of recoverable losses? 

Trends clauses operate to adjust the amount paid out under policies in light of what would have been achieved if the insured peril had not occurred. Put simply, the starting point is that compensation should put the insured back in to the position it would have been had the insured peril not occurred. There was therefore a lot of argument around the definition of “insured peril” and what factors can be taken in to consideration when determining the position that the policyholder would have been in. Insurers argued that the insured peril should be narrowly defined as the Covid-19 pandemic itself, meaning the consequential Government restrictions and public response should be considered when calculating the sums to be paid out. This would mean that sums paid out would be reduced by the loss caused by the Government restrictions and public response.

The Court found that:

• For Disease Policies, the insurers insured the effects of Covid-19 both within the specified radius and outside it. Therefore, when looking at the position that the policyholder would have been in but for the “insured peril”, insurers should discount the Covid-19 pandemic, the Government restrictions and the public response both inside and outside the relevant radius.
• For Denial of Access Policies, the insurer insures the prevention of access to premises by the action of an authority due to an emergency or incident. Therefore, when looking at the position that the policyholder would have been in but for the “insured peril”, insurers must discount all of these factors.
• For Hybrid Policies, the insurer insures the inability to use the premises by restrictions posed by an authority due to an infectious or contagious disease. Therefore, when looking at the position that the policyholder would have been in but for the “insured peril”, insurers must discount all of these factors.

How can the occurrence of Covid-19 be proven?

The Court did not make any findings about the actual prevalence of Covid-19 at particular dates or in particular locations. Instead, proving that the disease occurred or manifested in a certain area will need to be determined on a case by case basis. The Court accepted that many forms of evidence could be used to demonstrate the presence of Covid-19. These include specific evidence, NHS deaths data, ONS deaths data and reported cases. Further, a distribution based analysis or an undercounting analysis (to address there being more cases than reported cases) could be used, in principle, to prove the occurrence of Covid-19.

This is helpful for businesses as it allows them to rely on a range of information to show, where policies require them to, that Covid-19 was present within a certain distance of their premises. It is important for businesses to gather evidence which could be used to show this. For example, subject to compliance with data protection laws, businesses could keep records of staff and customers that tested positive for the virus and who live within a certain radius of the premises.

COMMENT

This judgment has already sent shock waves through the insurance industry, and will undoubtedly lead to significant payments being made by insurers to affected businesses. That compensation will help to remedy damage suffered by businesses in some of the hardest-hit industries such as retail and hospitality. To give an idea of the potential scale, it is estimated that around 370,000 businesses hold some sort of BI insurance policies, and that there are at least 700 policies in existence which are similar to the sample considered by the Court.

Whilst each claim will be considered on its merits, the judgment makes clear that businesses with Disease Policies not requiring the occurrence of an “event” within a certain radius are likely to be covered for loss caused by Covid-19, subject to the limits of the policy. Businesses with Denial of Access Policies will have a harder time establishing cover, but the judgment does give much-needed clarity to such businesses as to what they will need to demonstrate in order to recover their losses, and the limitations on the losses which will be recoverable.

It won’t come as a surprise that we expect the judgment to be appealed by insurers (likely to the Supreme Court), and given the significance of the case and the speed at which the case was progressed through the Court to trial, we expect any appeal to be commenced in short order and likely before the end of the year. Affected policyholders should therefore act quickly with pursuing their claims against insurers. That said, an ongoing appeal should not prevent policyholders from settling their claims before the appeal is determined.

If you would like any further information or would like to discuss the impact of the judgment on your business, please get in touch with Stephanie.reeves@irwinmitchell.com”

‘We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market. We are pleased that the Court has substantially found in favour of the arguments we presented on the majority of the key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders. We are grateful to the court for delivering the judgment quickly and the speed with which it was reached reflects well on all parties.
‘Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.”