Has COVID-19 interrupted or interfered with your business in some way? Are you wondering whether you are able to claim insurance cover for these events? Have you approached your insurer but they have refused to pay out?
The High Court recently handed down judgment in a test case brought by the Financial Conduct Authority that holds some of the answers. If your policy of one of those listed by the FCA as possibly affected this note will be important reading. The FCA’s list of affected policies is here.
Background to the case
Business interruption (BI) insurance can cover non-physical damage in addition to physical damage to the premises. Many policies provide cover in the event that you have been prevented from accessing or using your premises for the purpose of conducting business, and have suffered a subsequent loss or been unable to sustain normal trading.
COVID-19 caused many businesses to close or drastically change their business plans as a result of the Government regulation of economic and social life, by lockdowns, social distancing measures and new health and safety requirements.
In the midst of this fast-evolving situation, the FCA, as market regulator, became aware that BI policy wording could be broad and ambiguous, making it difficult for policyholders to determine whether they held adequate cover or not. The FCA therefore brought a test case in the High Court to advance consumer protection and clarify which BI insurance policies provide cover for business affected by COVID-19 issues.
The policy wording of insurance providers’ BI policy wording, including Arch Insurance (UK) Limited, Argenta Syndicate Management Limited, Ecclesiastical Insurance Office PLC, Hiscox Insurance Company Limited, MS Amlin Underwriting Limited, QBE Limited, Royal & Sun Alliance Insurance PLC and Zurich Insurance PLC.
The Judgment and the current position
The judgment is complex, ranging over 162 pages, but is undoubtedly significant for resolving some of the uncertainty faced by policyholders. It has been estimated that over 370,000 businesses could be impacted and the FCA has instructed insurers to apply the judgment in reassessing all outstanding or previously rejected claims.
However, on 29 September 2020, insurers confirmed that they had filed for permission to appeal the High Court’s judgment, though some of the original eight insurers confirmed they would not participate.
On 2 October 2020, the High Court granted “leapfrog” certificates for an appeal to the Supreme Court to the FCA and some Insurers.
The FCA stated that it is working closely with the insurers to reach an agreement on some of the issues to ensure an appeal process will not be required and that those eligible will pick up their payments as soon as possible. So for the time being it is a case of “watch this space” and this firm will continue to monitor the situation.
In the meantime, we can consider some of the main aspects of the Judgment as follows.
When delivering its judgment, the High Court differentiated between three types of clauses: Disease, Prevention of Access, and Hybrids.
The Court found that cover depended heavily on the detailed wording of each clause and the effect on the insured business. As a result, some policies provide cover to businesses suffering from COVID-19 related developments where others do not.
These clauses provide cover where business interruption was caused by a “notifiable human disease” or similar formulation. COVID-19 was determined in many cases as being one such “notifiable human disease” and many policies stated that the disease had to “occur” within the “vicinity” or in a specified radius (for example, 25 miles) of the insured premises to be covered.
The effect of the judgment is that most insureds with disease clause cover will be able to claim under their policy for any business interruption which they can show resulted from Covid-19, including by reason of the actions, measures and advice of the government, and the reaction of the public in response to the disease, from the date when the disease occurred in their relevant geographical area. Also such claims would of course be subject to any policy limits.
“Prevention of access” clauses
These clauses cover the inability to access insured premises, as a consequence of action taken by the Government. These clauses were interpreted more narrowly than the “Disease” clauses and ultimately depended on the detailed wording of each policy and how the business was affected.
To focus on a few elements:
• Where a business closed due to the “order of a local authority/competent local authority” then the insurance only covered the period for which the business was forcefully closed as a matter of law. This is because “order” was considered to be a mandatory instruction.
• Similarly, where the policyholder was prevented from accessing premises because of “restrictions imposed by a public authority” then “restrictions” in this sense only included mandatory impositions and did not include anything that was less than mandatory.
• Therefore, where an insured’s policy wording contains one of the above phrases, if it was ordered to shut, they were more likely to be covered than one subjected only told to social-distancing requirements.
• The terminology “inability to use” and “prevention” were also considered and contrasted with the wording “hindered”. The judgment used business category examples to illustrate this concept:
Where pubs and restaurants had a takeaway service prior to lockdown, then those premises were not deemed to be sufficiently closed down for the purposes of “prevention” and “inability to use”. They were therefore not covered by this wording.
However, if that business had altered their premises after lockdown to start a takeaway service, then their business model had been sufficiently altered, and for the purposes of an insurance policy, could be covered for the period of that closure.
These clauses contained mixed provisions which related to restrictions for accessing insured premises and the occurrence of a notifiable disease. The judgment analysed parts of the hybrid clauses in line with the explorations considered above.
The High Court did not analyse all possible wordings and policies.
Therefore, whilst many businesses may be affected by the judgment, uncertainty remains and may result in further test cases in the English courts.
Insurers are also likely to rewrite future policies as they refine and narrow the scope of their policy coverage whilst the health emergency continues.