UK FCA Test Case on Coronavirus Claims under Business Interruption Insurance.
A large number of small businesses in Ireland and the United Kingdom suffered considerable financial loss due to the Covid-19 pandemic and resultant Government restrictions on public movements. Some were forced to close entirely for a number of months.
Small businesses often purchase an insurance package to cover them against a wide variety of perils – the principal ones being fire, theft and flood. Interruption to business activities is often included in these policies and is known as business interruption insurance (BI). Traditionally, this cover only operated following material damage to the business property caused by one of the principal insured perils, however in recent years this BI coverage has been extended to interruptions resulting from more varied causes by so-called “non-damage extensions”.
Following the financial losses due to Covid-19, many businesses sought to claim against these non-damage extensions and while a minority of insurers paid out on some claims, the vast majority of claims were rejected. There was widespread public dissatisfaction expressed. In order to seek clarification in the issues, the Insurance Regulator in the UK, the Financial Conduct Authority, with the agreement of insurers brought a test-case in the English High Court to examine the principles underpinning the interpretation of a selection of insurance policy wordings in the face of the unprecedented impact of the Covid pandemic.
The case was heard from July 20th to July 30th last by two eminent judges, both of whom had extensive experience in insurance actions and one of whom was a Lord Justice of Appeal. They published their judgment on September 15th.
Subsequently, on September 18th, the FCA issued a “Dear Chief Executive” letter to all insurance companies instructing them to re-examine all BI claims in the light of the judgment and wherever possible expedite a settlement. It is understood that the Insurance companies are likely to appeal some of the detailed legal findings.
In this note, we will consider the following:
- The main issues of principle arising and the Courts findings
- The more nuanced question of the evaluation of different policy wordings between insurers
- The likely outcome for UK policyholders.
- The possible impact for Irish policyholders.
The main issues and the Court findings.
There are three different types of non-damage extension which could apply to Business Interruption claims from the pandemic:
- Disease clauses which provide cover where a business is impacted due to a disease (usually a notifiable disease).
- Restriction of Access clauses which provide cover where a business premises is forced to close – usually due by government or local authority order.
- Hybrid clauses which provide cover for a combination of these perils, for example where a business is forced by disease to close premises or otherwise restrict access.
A number of issues of principle arise from these covers:
- Firstly, in relation to disease clauses, insurers argued that there was no cover for a nationwide pandemic of the Covid-19 type but rather that cover under a disease clause was restricted to a localised outbreak of a specified disease. The Court held that this interpretation was simply wrong and that “the proximate cause of the business interruption was the notifiable disease of which the individual outbreaks form indivisible parts” (§532).
- Secondly, in relation to calculation of the value of loss resulting from the disease, it was agreed that the quantification mechanism (“trends clause”) within the policy should be applied (even if this referred specifically to “damage” it should be extended to non-damage extensions). However, the insurers argued that it was necessary to separate the losses due to closure from those that would have occurred even if the premises had remained open. Such a calculation meant that the claimable losses would be greatly reduced or eliminated. The Court held that in principle this was wrong and that the impact of the pandemic and the resulting restrictions should be regarded as a unity for the purposes of calculating loss. So, the loss suffered by a business should be calculated by reference to a baseline profit assuming that neither the pandemic nor any restrictions had occurred.
- Thirdly, the Court agreed with some of the Insurers that “prevention of access” only occurred where a business was forced to close fully by Government regulation, or at least to forego its mainstream business. For example, where a sit-in restaurant changed its business to perform take-aways, this could be a “prevention of access” but a restaurant with a pre-existing take-away business did not suffer a prevention. There was a clear distinction to be made between “Prevention” and “Hindrance”.
- Fourthly, the Court agreed that a clearly worded exclusion on the policy could restrict or avoid the cover applying to a Covid-19 loss (such as that in the Ecclesiastical Insurance Office policies) but that other exclusion wordings which clearly conflicted with the intended extension of cover could not be effective.
- Fifthly, under a denial of access clause, a common wording was “upon an incident occurring within a radius of x miles/vicinity of the premises”. The Court agreed that the word “incident” connoted a specific individual event and that a general pandemic did not represent such an incident. For these policies, no cover for the pandemic accrued.
Nuanced Evaluation of Policy wordings
The Court continually emphasised that the key task in deciding on issues of coverage and on issues of calculation of loss was closely to follow the wordings of the policies themselves. In short, it was a matter of contract construction. Sadly, in a number of instances, the wording presented in the policies was garbled and sometimes contradictory.
The Court adopted the simple formula of attempting to apply common sense to determine the true intention of the parties to resolve any such conflicts. It eschewed any recourse to the doctrine of contra proferentem questioning whether this had any place in modern contractual interpretation.
Given the varied wordings of the twenty-one policies being reviewed, it is to be expected that further considerable variation will exist across the seven hundred different policy wordings for business interruption policies in the market.
The key element for a claimant, or their adviser, is to carefully parse their own policy wordings and to compare these with the analyses of the twenty-one test cases. Despite the efforts of the Court to draw out general principles, this is likely to be tortuous and contentions exercise. For any claimant, the devil remains in the detail of the policy wording.
Authors: Gavan Carty and Gerard Healy
For further information or to discuss any issues that arise in relation to the above please contact Gavan Carty at Kent Carty solicitors