Business Interruption Claims Due to COVID-19

The COVID-19 pandemic has led to many businesses suffering huge losses as a result of the first Government lockdown in the UK. The inevitable question has arisen as to whether businesses that have been affected can make claims against their insurance policies under the business interruption (“BI”) clauses. The interpretation of particular wording of BI clauses in relation to COVID-19 claims has resulted in disputes between insurers and policyholders. As a result, the Financial Conduct Authority (“FCA”) took the unprecedented step of bringing a test case in the High Court in London to clarify the position in relation BI claims for both insurers and policyholders.

Before bringing the case the FCA stated that the variation in the types of cover provided and the wording used could make it difficult to determine whether customers had cover and could make a valid claim. This has led to uncertainty and disputes with many customers who believe they had valid claims and had these rejected by their insurers. The FCA wanted a resolution as quickly as possible.

The High Court was asked to consider 21 sample wordings from policies issued by 8 different insurers as part of the proceedings. The FCA said that the outcome would affect hundreds of thousands of policyholders under 700 policies issued by 60 different insurers. Lord Justice Flaux and Mr Justice Butcher oversaw the proceedings.

As expected, the FCA was looking for the widest interpretation of the policy terms and the judgement includes a number of interesting conclusions.

Legal Issues Associated With The Case

The legal issues that the test case was seeking to resolve were as follows: –

The test case focused on the two common extensions to a business interruption cover:

“infectious disease“ cover where a notifiable disease has occurred in the vicinity of the insured’s premises;

“prevention/denial of access“ cover where access to the business premises was prevented by restrictions imposed by a public authority

“Hybrid“, some hybrid of these extensions

This involved eight days of legal argument

The High Court’s Judgement

The High Court handed down its judgment on 15 September 2020 in favour of the FCA.

Christopher Woolard, the interim chief executive of the FCA, commented: “Our aim throughout 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…We are pleased that the court has substantially found in favour of the arguments we presented.”

The High Court in its judgement considered each of the sample policy wordings. This was in order to establish the meaning of the important provisions within the context of each policy and the implications of the cover specifically for the COVID-19 pandemic. Although the judgement is complicated and lengthy, it is possible to set out the main points. These are set out below.

It was found that most of the sample “disease clauses“ provided cover, as long as at least one case of COVID-19 had occurred within the relevant geographical area set out in the policy. This was for losses that flowed from the incidence of the disease both within and outside that policy area. The insurers had tried to argue that it should be for losses directly flowing from the incidences of the disease within the policy area which would preclude cover for losses caused by the national lockdown. The judges were influenced by the idea that the parties had contemplated cover for widespread disease outbreaks.

The “hybrid“ clauses provided more limited prospects for recovery. Examples were where policies provided cover where it was impossible to use business premises for any of the business normally carried on rather than being hindered. Other policies were found only to provide cover flowing from a local incident and not for a broader issue such as a national pandemic.

In relation to causation, the judge’s approach was that the peril insured was a “composite peril“ which comprised the national outbreak of the pandemic and the resulting response from the UK government.

As a result of the judgement insurers will need to consider how they approach handling any claims. The FCA have written to insurance companies stating, inter alia, that it is ready to use “the full range of regulatory tools and powers” to ensure that insurers meet their expectations to pay under the policies and to take a practical approach in dealing with individual claims and not to create additional barriers or delays in paying valid claims. The letter also asked that they reassess any claims in light of the judgement.

On 2 October, the High Court gave its permission for the appeals process for the test case to “leapfrog” straight to the Supreme Court. However certain insurers have decided not to appeal the ruling as they are not affected by the test case judgement.

The other insurers in the test case have filed for an appeal although the FCA is attempting to reach a settlement with the insurers involved in the test case.

It is likely that the Supreme Court will consider the appeal by the end of this year. This will mean a further delay to payments being made to businesses that are already suffering and will continue to suffer especially in light of the second proposed lockdown commencing at midnight on Thursday 5 November.

It is extremely important for policyholders to carefully review their policy wording with legal advisors to determine their prospects of recovery and how those are affected as a result of the judgement and to be prepared to commence their claims as soon as the Supreme Court hands down judgment.

For More Information Contact DBT & Partners

Find out more about COVID-19 financial support schemes here.

If you require any advice in relation to this article please contact:

Shahid Miah – [email protected].

Tajinder Barring – [email protected].

0207 416 6745