28 September 2020

Judgment handed down in FCA’s business interruption Covid 19 test case – What are my chances of making a claim?

Last week the High Court released its judgment supporting a number of the arguments put forward on behalf of insured businesses in the Financial Conduct Authority’s (FCAs) landmark test case over business interruption (BI) coverage and cover for disruption due to the coronavirus pandemic.

While this judgement will be good news for some businesses who are desperate to receive support in order to survive this crisis our advice to clients is that it is best to proceed with extreme caution.

Some insurers are indicating that they may decide to appeal the judgement and others have already said that their wording has been confirmed as not providing cover.

The judgement ran to 150 pages and if you wish to see this detail please have a look at the FCA website and related links.

As in all these things the devil is in the detail. Headlines that generalise are not always helpful. Ultimately, whether a claim can successfully be made will depend on many factors including down to the individual insurer and their wording and how cover is specifically given or not in their wording. There were just eight insurers and 21 wordings looked at and not all were found to give cover. Please ask us for specific advise and support if you believe you may have a valid claim.

There are broadly three areas to consider and the comments below are for general guidance only:

1. Disease Extensions
a. Many policies do not have Disease Extensions – they were generally automatic for certain  package” policies but not on all commercial policies and thus there is no cover if no extension
b. Many extensions were limited to a specified list of diseases – so no cover if Covid 19 not in there (which it will not be)
c. Many policies that give cover are sub-limited to a small value per claim – often £25k – £250K.
d. Some extensions referred to Notifiable Diseases on a more general basis so would be OK once Covid 19 was so designated though once again we have to caveat as below
e. There is a further barrier relating to whether the policy required an actual occurrence of the Notifiable Disease specifically at the Insured Premises. The High Court recognised the importance of particular language in the policy which gave emphasis to local “events” and so it is unlikely that a test of Covid 19 at the Insured Premises would be satisfied just by premises being affected by the wider lockdown.
f. However, limitations in some policies relating to damage having to occur within a certain radius of the premises (fairly common) are unlikely now to allow insurers to avoid claims as the Court concluded that the individual outbreaks are indivisible from the general pandemic, meaning that cover was not limited to outbreaks wholly within the area specified in the policy.

The above points mean it is important to be cautious but there is good news that some reluctant insurers could now have to pay where they have been resisting.

2. Denial of Access/Public Authorities (restrictions) extensions
a. These extensions cover business interruption loss resulting from a prevention or hindrance of access to or use of premises.
b. Some will be limited to cover due to an insured peril such as fire or flood and thus would not give cover.
c. Those that include losses as a consequence of government or other authority action or restrictions could now offer some cover but the Court’s approach was more restrictive compared to that for disease wordings. Claims based on these clauses will be more difficult to prove and will depend heavily on the exact policy wording and upon the application of the government advice and regulations to the insured’s particular business. The emphasis was on a localised event giving rise to the BI losses rather than just a response to the national pandemic. In particular whether a business for example was specifically required to close.

In conclusion in the absence of disease cover, claims under these extensions could be an option for some businesses but they will be harder to prove.

3. Causation and Trends Clauses
a. There was a principal established around “Wide Area Damage” in Orient Express Hotels v Assicurazioni Generali SpA [201] EWHC 1186 (the previous leading authority on this issue) that was a key argument by insurers. This case involved a hotel that lost business post the Katrina hurricane and insurers avoided the bulk of the claim on the basis that regardless of damage the hotel suffered that the business would have been affected anyway as trade would have been massively down post the hurricane as no one was visiting the area. Insurers argued that the broader impact of the pandemic due to lockdown and “home working” could then be taken into account as a ‘trend’ which would otherwise have affected the policyholder’s business (effectively negating the cover). One of the important decisions of this court case was essentially to prevent insurers from relying on the broader impact of the pandemic to reduce claimable loss and the Court criticised the past court decision.

This is good news on covered losses. The is also a future benefit for claims where there is “Wide Area Damage” such as major floods across a wide area.

There is a good deal of complexity here and how many businesses who were being refused cover by their insurers will now have their claim paid is really difficult to predict. Not least because only a small number of policies were reviewed.

Please let us know if we can provide any further help or guidance and we will be delighted to assist.

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