Business interruption insurance: do insurers need to pay for COVID-19 related losses?
06 NOV 2020
In the recent case of FCA v Arch Insurance (UK) and Others the High Court decided a number of key issues surrounding whether insurers should be liable to pay business interruption claims by policyholders who have suffered loss as a result of the COVID-19-19 (‘COVID-19’) pandemic. This article details the background as to why the Financial Conduct Authority (‘FCA’) brought proceedings, the key issues in the case and how they were decided by the court. Finally, we will explore some implications for both policyholders and insurers.
Since March 2020 the UK government has introduced a number of measures in response to the outbreak of COVID-19. The measures have affected businesses in different ways but many have suffered significant financial losses as a result. Naturally, a number of these have looked to their business interruption insurance to seek recompense for some of this loss.
It became apparent to the FCA that a number of policyholders, in particular small and medium sized businesses (‘SME’s’) were in dispute with their insurers as to whether their business interruption policies provided cover for COVID-19 related losses. Therefore, in order to reduce uncertainty for both policyholders and insurers, the FCA brought declaratory proceedings in the High Court. The court’s analysis was based on a representative sample of policy wordings supplied by 16 insurers following a consultation with the market. Of the 16 insurers that supplied their policy wordings 8 agreed to be defendants in the declaratory action including Hiscox, Amlin and Zurich.
The key issues
The relevant policy wordings identified by the FCA covered two main types of business interruption extension, namely the Notifiable Disease Extension and the Government/Public Authority Denial/Hindrance to Access Extension. The FCA sought to establish that these provided cover for losses suffered as a result of the COVID-19 pandemic.
A Notifiable Disease Extension provides cover where there is an interruption to the Insured’s business as a result of an infectious or notifiable disease either at the Insured’s Premises or within a certain radius e.g. 15 miles. Under the Health Protection (Notification) Regulations 2010 COVID-19 is a notifiable disease. However, the difficulty policyholders were having was proving that COVID-19 had occurred within the location requirement e.g 15 miles. Whilst some could use evidence of admissions into hospitals or deaths, a number of policyholders could not provide the necessary proof because individuals had been self treated at home without testing or were asymptomatic. It was the contention of the FCA that it can be assumed that COVID-19 had occurred within the location requirement because of its widespread prevalence.
This extension covers situations where access to a Premises is affected by government action. The FCA argued that all action whether it be advice, guidance or mandatory instructions by way of statute constituted a single body of public authority intervention sufficient to trigger cover. Moreover, they stipulated that it was not necessary for businesses to have to close completely as a result of the UK Government’s measures; it is sufficient that businesses were not able to operate normally. However, insurers denied liability on the basis that cover is only triggered if there is a total closure.
For cover to be triggered the Insured Peril (i.e the incidence of COVID-19 19 within a certain radius) must have caused the loss suffered by the business. Some insurers have denied claims on the basis that the Insured Peril was not a proximate cause of the businesses loss since that loss would have been suffered irrespective of a local incidence of the disease as a result of its omnipresent nature. In support of this insurers have noted the experience of the Sicily Isles who had no confirmed cases as of 30th April, yet restrictions were still imposed and business therefore suffered similar financial hardship.
The High Court dealt with these contentions in its 150 page judgement handed down on 15th September 2020 in the test case of FCA v Arch Insurance (UK) and Others. The decision was complex but a number of key issues were concluded in favour of the FCA and policyholders.
The court found that most (but not all) of these clauses provided cover. Importantly, it was held that cover under these wordings is not limited to losses resulting from local outbreaks of COVID-19.
These clauses were interpreted more narrowly than the Notification of Disease clauses and whether cover is available to businesses that can remain open or partially open will ultimately depend on how the measure affected the business. If there is some fundamental change to the business (as described in the policy schedule) as a result of the measures in place then there would be cover. For example a restaurant that started to provide a takeaway service that had not previously done so prior to the lockdown imposed on 26th March would be covered but a restaurant that already provided a takeaway service would not.
The court denied the insurers argument surrounding causation. This means that insurers will not be able to deny claims for example under Notifiable Disease Extension on the basis that COVID-19 did not cause these losses.
Press reports have indicated that the insurers have been given the right to appeal to the Supreme Court bypassing the Court of Appeal as a result of the desire to resolve these uncertainties expediently. Should the Supreme Court affirm the judgement a significant financial burden would be placed on insurers who will be required to pay claims under business interruption extensions that they would argue they did not undertake to pay and reserve for. The Association of British Insurers (‘ABI’) suggests that insurers have paid over £900 million in business interruption claims already as a result of COVID-19 and a requirement to pay significantly more claims than expected may have drastic consequences on the solvency of some insurers. Similar financial hardship is likely to be felt by businesses as even if a policy covers the pandemic, indemnity may be delayed as it will take time for insurers to adjust these claims and there may be further dispute over quantum.
To conclude, the decision in FCA v Arch Insurance (UK) and Others is significant in determining the liability of insurers in business interruption claims. It provides welcome guidance for businesses in dispute with their insurers and it will be important to track the case as it goes through its accelerated appeal process should the Defendants decide to appeal to the Supreme Court.
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