Business Interruption Insurance - How Your Business May Benefit

Back in June, the Financial Conduct Authority (‘FCA’) brought a test case in the High Court against 8 insurers (the ‘Insurers’). The purpose of the test case was to obtain clarity on the proper interpretation of wording typically used in ‘non-damage’ business interruption (‘BI’) insurance policies.

Generally, BI insurance policies only provide cover for losses resulting from damage to property (for example, following a fire or flood). However, it is possible to obtain extensions to BI insurance to cover losses resulting from events such as a notifiable disease in the area of an insured property (‘Disease Cover’) or situations where business owners are prevented from accessing insured premises as a result of action taken by the police, government or another authority (‘Prevention of Access Cover’).

In the wake of the COVID-19 pandemic, many businesses who had sought to recover losses under their Disease Cover and/or Prevention of Access Cover had had their claims refused by their insurers. In doing so, insurers relied upon certain common interpretations of the wording used in their policies and also exacting requirements regarding proof of loss by policyholders.

The FCA’s test case sought to determine whether the approach the insurers were taking was correct. It did this by asking the High Court to consider the wording of 21 sample non-damage BI insurance policies used by the Insurers.

What Did The High Court Decide?

The High Court’s decision is complex (amounting to over 150 pages). However, it provides clarity in relation to a number of key points:

• In relation to Disease Cover, the Insurers had claimed that their policies should be interpreted in such a way that losses suffered by a business were only insured if there was a local occurrence of a notifiable disease (the wording of Disease Cover usually refers to a notifiable disease within the vicinity or a specified radius of insured premises). As COVID-19 affected the country as a whole, the Insurers argued that the Disease Cover did not apply.The High Court held that this approach was wrong. Cover was not limited to outbreaks wholly within a particular locality. In particular, there was nothing in the policies reviewed which expressly stated that cover was limited to situations where a notifiable disease only occurred within the relevant policy area.
• Also in relation to Disease Cover, policyholders were not required to prove that the losses they suffered were caused by a local occurrence of COVID–19 as opposed to the wider outbreak. This was essentially because there was one overall cause – the outbreak of the disease in the UK generally.
• In relation to Prevention of Access Cover, the High Court’s findings were less favourable to policyholders. Such policies often include wording which limit the cover to prevention/denial/hindrance of access to the insured premises caused by actions taken by the police/government/another authority due to an incident/emergency within a specified area. The conclusions reached by the High Court in relation to such policies included that:
  • Where the wording of the Prevention of Access Cover was along the lines referred to above, in order for losses to be recoverable, the action which prevented or hindered access needed to be in response to a localised occurrence of COVID-19. Action taken by the government in response to the general outbreak of the pandemic would not suffice.
  • Where the specific wording used in Prevention of Access Cover referred to action by the government/an authority which prevents access to premises, this should be interpreted as meaning an action which has force of law. Consequently, a policyholder would not be able to recover losses incurred as a result of closing a business in response to government advice or recommendations (rather than legislation which mandated closure).
  • Where a policy required there to have been prevention of access (as opposed simply to the hindrance of access), the government etc. action needed to have led to the full closure of the premises.
  • Whether Prevention of Access Cover applies in any case will very much depend on the exact wording of the policy and the way in which a particular business was affected by government advice or regulations relating to the COVID-19 pandemic.

What Happens Next?

It is very likely that the Insurers will appeal some, if not all, parts of the High Court’s decision. This leaves things up in the air for the time being. However, the FCA has issued a statement which urges insurers to ‘reflect on the clarity provide by the High Court and consider what steps they can take now to progress claims of the type that the judgment says should be paid’. The FCA has also urged insurers to communicate directly and quickly with their policyholders.

What Steps Should Businesses Take?

If your business is one of the many which has had a claim under Disease Cover refused, it is well worth contacting your insurer to ensure that they are reconsidering your claim in the light of the High Court’s judgment. Alternatively, if you have Prevention of Access Cover, it may be worth obtaining legal advice as to whether the specific wording of your policy enables you to make a claim for COVID-19 losses.