On 15 May 2020, the Financial Conduct Authority (FCA) announced that it would bring a test case against eight insurance companies aimed at resolving contractual uncertainty around the validity of claims made by business owners with business interruption insurance.
The test case commenced before the High Court on 20 July 2020 and concluded on 30 July 2020. Lord Justice Flaux and Mr Justice Butcher have now issued their decision.
What is business interruption insurance?
Business interruption insurance, also known as business income insurance, provides a policy holder with cover for any consequential loss of income during a period when their business is unable to continue due to an unexpected event, such as a flood or fire. Certain policies go beyond physical damage and these policies are referred to as non-damage interruption cover.
The policy itself will determine how losses should be quantified. Typically, policies will contain trend clauses, which allow for business trends that would have impacted the business anyway to be taken into consideration.
Why bring the ‘test case’?
The Covid-19 pandemic has resulted in widespread and unprecedented disruptions and business closures which have resulted in substantial financial losses for businesses. Therefore, many business owners who had the benefit of business interruption insurance sought to claim on their respective insurance policy.
The FCA noted significant concerns regarding the lack of clarity and certainty for some business owners who have made claims and the basis on which some of the insurance providers have made decisions pertaining to those claims.
The ultimate aim of the test case was to examine a sample of common non-damage business interruption insurance policy clauses and their respective wording and determine how the clauses should be interpreted.
The parties agreed the sample of policies to be considered and the provisions within those policies was split up into the following:
- Disease clauses: provisions which provide cover in consequence of or following or arising from the occurrence of a notifiable disease
- Prevention of access/public authority clauses: provisions which provide cover where there has been a prevention or hindrance of access to or use of business premises as a consequence of a government restriction
- Hybrid clauses: provisions which are a mix of the two above, covering restrictions imposed on access to business premises as a result of the occurrence of a notifiable disease
The insurers argued that a business owner would only be covered under this clause for a local occurrence of a notifiable disease. However, on all but two of the policies, the court agreed with the FCA who argued that this approach was incorrect. Critically, those policies did not include wording which expressly stated that the disease should only occur within the policy area. The court concluded that the proximate cause of the business interruption was the Covid-19 outbreak and the individual local area outbreaks formed an indivisible part of the disease. Moreover, each of the individual occurrences was a separate but effective cause of the national action (i.e. the lockdown and subsequent closure of the business). As such, those insured with policy wording in line with those cases considered would be able to claim on their policy.
However, the court took a different approach with two of the other policies and found that the cover on those policies was limited to matters occurring at a particular time, in a particular place and in a particular way. The precise wording of those policies meant that the parties has contemplated limiting the policy to specific and localised events. Therefore, business owners would only be covered if they could show that the business interruption was caused by the number of Covid-19 cases within that particular place, as opposed to the number of cases nationwide.
Prevention of access/public authority clauses
The Court outlined that the decision as to whether cover would be available under this particular clause will turn upon the precise terms of the policy, the application of the government advice and whether the business was required to close under government regulations. For instance, if the business was a restaurant which was required to close at the end of March and did not offer a takeaway service, the requirement to close could amount to a prevention of access. However, in circumstances where a restaurant offered a takeaway service in addition to their dine-in services, the business would only be partially impaired and as such, there may not be a prevention of access as required under the terms of the policy.
The court took a similar approach to that adopted when considering the disease clauses, rejecting the assertion made by the insurer’s that cover would only be available in respect of losses following a local outbreak. However, the court considered that “restrictions imposed” under the policy would require a mandatory requirement, such as the mandatory requirement to close issued by the government. Moreover, an “inability to use” was construed as meaning something moe than just an impairment of normal use.
Trends clauses relate to how the value of the damages paid under the policy are calculated and are intended to put those who benefit from an insurance policy in the same position as it would have been had the insured peril not occurred. However they will limit the sum payable by adjusting the claim value to take account of the trends of the business before and after the loss occurred.
In this case, Insurers contended the insured peril should be narrowly defined. It was argued that the local occurrence of the disease alone was the insured peril. The other effects of the Covid-19 pandemic i.e. the reduction in people wanting to go out to a restaurant due to the risk of infection and the measures taken by the government could be used as a business trend to reduce the claim (i.e. the nationwide lockdown). The court disagreed with this position as the application of the trends clause in this way would effectively negate the value of any insurance cover available to the business owner.
Implications of the decision
The judgment will be welcomed by a significant number of policyholders whose business has been impacted by Covid-19 in particular those with disease or hybrid clauses within their policies. However, it is important that the precise wording of each of the clauses is considered to determine how the clause is ultimately to be construed and whether the particular circumstances of the business satisfy the requisite criteria.
Insurers have the right of appeal against the court’s decision. It is likely that they will be carefully examining the implication of the decision on the trends clause, since that has a significant impact of the amount of damages they have to pay out to each business. It has been agreed between the FCA and the Insurers involved in the test case that any appeal will leapfrog the normal process and be heard directly by the Supreme Court. A decision on that is awaited but in the meantime, policy holders should be looking carefully at the wording of their business interruption insurance policies to determine whether their policies fall within the judgment of the court enabling them to make full claims. If in doubt, we recommend taking professional advice on the policy wording at the earliest opportunity.