Business Interruption Policies & COVID-19: Update
Following on from our article on business interruption insurance in April 2020, there has been a significant development in the clarification of Business Interruption (BI) policies and their applicability to circumstances arising out of the Covid-19 Pandemic.
On 9 June 2020 the Financial Conduct Authority (FCA), commenced proceedings in the High Court, on an urgent basis, seeking clarity as to the wording of policy coverage clauses in a cross section of BI policies. Whilst exact policy wording varied significantly, the Court found in favour of the FCA in a number of key areas.
The full Judgment is available here.
Business Interruption Policies
BI policies are often provided as an add-on to ‘standard’ business insurance (i.e. property-based damage for fire, flooding etc). Many provide very basic cover, usually as a consequence of property damage, but some polices extend to proving specific cover for BI or other causes including ‘infectious diseases’ and ‘denial of access.’
Given the impact of the Covid-19 Pandemic and the consequential lockdown a number of claims were instigated by policyholders looking to recoup their losses for such ‘business interruption.’ However, the response of the insurers was significantly variable leading to widespread concern and uncertainty. Accordingly, as regulator of the insurance industry the FCA took the reins in bringing about clarity.
The insurers argued that the wording of such policies meant that they were applicable to the effects of a (broadly) ‘local’ occurrence of Covid-19 (with varied wording as to the definition of ‘local’). The Court determined that this was incorrect. The policies considered did not expressly state that the disease should only be a local occurrence, and that the very nature of infectious/notifiable diseases is such that they are rarely limited to singular local areas.
Denial of Access:
The Court was required to make findings as to a range of specific policy terminology, which varied widely and resulted in a far more restricted interpretation (see Judgment) on a case by case basis. However, subject to such specific policy wording, the Court did find that the ‘interruption’ threshold was not limited to a complete cessation of business, but disruption and interference with the business generally.
The findings in relation to hybrid clauses were also broadly commensurate with the findings above.
The test case has also confirmed that that Covid-19 pandemic and the Government and public response are regarded as a ‘single cause’ of the insured loss, which is a common, basic threshold claims to be paid, even if the relevant BI policy provides cover.
Whilst the findings are significant, much will still turn on the precision of the wording of individual business interruption policies. However, on that basis, businesses with Infectious Disease (or Hybrid) policies are more likely to see an interim benefit from the findings than businesses with Denial of Access policies.
It is still open to the insurers to pursue an Appeal of the decision, and given the wide-ranging effects the possibility of an Appeal remains quite high. In the meantime, this should not stop businesses seeking to settle their claims.
The FCA will continue to provide updates via its dedicated webpage.