The Supreme Court has spoken: Business Interruption & the COVID-19 pandemic
The COVID-19 Pandemic
The COVID-19 pandemic has undoubtedly had devastating effects on so many of our businesses in England and worldwide. We have seen many industries on their knees with continued closures, diminished custom and empty shop windows that won’t again be filled. The arts, entertainment, theatres, music events, shows, have all been a distant memory until recently. Those in the hospitality industry have only recently been able to fully open their doors. The devastating effects will ultimately be felt for a long time as those businesses that have survived try to claw back their losses.
We have seen different survival strategies employed by businesses in England which have included downsizing and redundancies, buy-outs, alternative methods of sales, reliance on government assistance and insurance pay-outs to name some of the more pertinent ones.
As businesses apply different methods and call upon all sources of income that they can at this challenging time, it is of course in the insurance claims arena that we have seen the most activity at Indemnity Legal. Most businesses hold insurance for various eventualities that might occur during the life of the business. It is business interruption insurance upon which businesses have sought to rely to recover their trading losses suffered as a result of the COVID-19 pandemic.
Business Interruption Insurance
Business interruption insurance cover (“BI Cover”) comes in all shapes and sizes. That said, there are generally two main heads of cover: (i) BI Cover for losses suffered as a result of damage to the business premises; and (ii) extensions to that cover which include BI Cover for losses suffered as a result of other eventualities that range from bomb scares to contamination and disease.
The FCA Test Case
Given the variety of BI cover available and the significant number of claims made/anticipated, clarity as to the correct interpretation of BI Cover was needed (and to some extent still is – see below). Enter the Financial Conduct Authority (the “FCA”).
In June 2020 the FCA took a sample of 21 policy wordings and sought declarations from the High Court as to the correct interpretation of certain insuring clauses within those wordings in response to a claim for business interruption loss suffered as a result of the COVID-19 pandemic (the “FCA Test Case”).
The High Court handed down its judgment on 15 November 2020 and, following a leapfrog appeal to the Supreme Court, the “final word” was handed down on 15 January 2021 (with the Supreme Court’s final declarations released on 14 July 2021).
What was within the scope of the FCA Test Case?
If you are a policyholder with wording that was considered in the FCA Test Case, its outcome will tell you if you have a valid claim or not.
The Courts considered the following types of extensions of BI Cover:
- an occurrence/manifestation of a notifiable disease within a specific area (ranging from 1 to 25 miles from the business premises) – in these cases, the Courts generally found cover existed;
- prevention/denial of access, i.e., whether the closure orders made by the government amounted to prevention/denial of access to a business’ premises – in these cases, the High Court found some wordings responded to a national pandemic but some provided cover for localised events only; and
- clauses which were a hybrid of the two - i.e., prevention of access to business premises as a result of disease/a notifiable disease within a certain radius of the Premises – in these cases, the Courts generally found that localised cover was intended by insurers based on the wordings tested.
What was out?
For those policyholders where the insuring clauses in their policies were outside of the above issues, either by distinguishing factors in otherwise similar wordings, or by virtue of wholly different clauses, the uncertainty remains as to whether those untested clauses respond to business interruption losses suffered as a result of the COVID-19 pandemic.
There are plenty of those issues left unresolved, in respect of which we continue to see business’ seeking clarity. We set out some of these below.
Named Diseases – no Alice in Wonderland Results!
We have reviewed a huge number of disease and hybrid insuring clauses which define “notifiable disease” by reference to a specific list of diseases which naturally do not contain COVID-19.
Rockliffe Hall Ltd v Travelers Insurance Company Ltd considered one such clause, wherein the Claimant sought a declaration that COVID-19 should be implied into a “closed” list of diseases or within the definition of “plague”. The High Court made it clear it will not read COVID-19 into a closed list which would produce “Alice in Wonderland" results that were never intended by the parties.[1]
What remains unresolved is the correct interpretation of clauses that are not tied to strictly “closed” lists. These clauses might contain reference to specific regulations, followed by lists of diseases ostensibly mirroring those regulations which might be argued to be “open” (say, by the use of the word “namely” rather than “limited to”). These clauses are un-tested and the position as to correct interpretation remains disputed. Insurers continue to decline cover claimed under such clauses in our experience.
Damage – take colour from context!
The High Court has also confirmed that BI Cover for losses suffered as a result of damage are not triggered by the COVID-19 pandemic. Where the damage is defined as relating to accidental loss or destruction of or damage to the Premises, in its proper context physical loss is contemplated and not economic loss. BI Cover should be read in the context within which it is written.[2]
At the Premises Wordings – sickness at work?
Some policies contain disease or hybrid insuring clauses which require the disease be at the premises in order to trigger (rather than within a particular radius of it).
Insurers generally argue that to trigger cover under these clauses, the business interruption should be caused by the specific case of COVID-19 occurring at the premises. The only distinction between the untested “at the premises” wordings and those disease and hybrid clauses tested in the FCA Test Case is the fact that, in order to trigger, the latter required that the case of COVID-19 be within a wider radius (1 mile/25 miles from the business premises). In those cases the Supreme Court held that all was required was the occurrence of COVID-19 within that particular radius. It mattered not that there might also be cases outside of that radius that also led to government restrictions/business interruption (unless those other cases triggered an applicable exclusion).
What remains unclear is as follows: if the Court’s same reasoning is applied to the “at the premises” wording (such that it is simply treated as a very small radius) should there be cover, even if there are other cases of COVID-19 beyond the premises? The FCA, it seems to us, appears to envisage that being the case.[3] Nevertheless, the position remains widely disputed.
Prevention of Access – the unfinished story
The Courts took different approaches to the interpretation of these clauses depending on their exact wording. What has emerged has become a tug of war between (i) clauses where cover was intended for localised events (not for a national pandemic); and (ii) cover that could be construed as intended to cover wider, national events such as the pandemic.
In camp (i) fall clauses which use the word “incident” which the High Court held was something that happened at a particular time and place (not a national pandemic). Wording referring to the “vicinity” also, in the High Court’s view, indicated cover for something “local” (like a bomb scare, or gas leak).
In camp (ii) fall insuring clauses with no geographical scope (i.e., where prevention of access is not tied to something within close proximity to the business premises).
Two principal unresolved areas arise here:
- First, there are many different varieties of insuring clause which were not tested in the FCA Test Case, some of which contain elements of those clauses where no cover was found in the FCA Test Case and elements of those clauses for which cover was found. Cover under these clauses remains disputed and will be a matter for interpretation on a clause-by-clause basis; and
- Second, the High Court’s findings in relation to the “event” and “incident” wordings were not appealed to the Supreme Court. Given the Supreme Court’s findings on causation, the question remains whether the Supreme Court might have found differently had these findings of the High Court been appealed.
Evidential Issues – proof of COVID
The Courts made no findings as to what evidence is required to show that a case of COVID-19 occurred within a certain radius. However, it was agreed by the parties to the FCA Test Case that absolute precision is not and cannot be required.
In our experience Insurers do not seem to be challenging claims based on insuring clauses that were within the scope of the FCA Test Case (and where the Courts found for cover) due to lack of evidence of COVID-19.
That has not, however, been the case in relation to other insuring clauses such as those requiring COVID-19 “at the premises”. Insurers frequently require specific evidence of COVID-19 at the premises. That evidence is challenging to produce due to lack of testing/knowledge about the disease in early 2020.
Aggregation – multiple closures for multiple premises?
Business insurance policies might contain sub-limits of indemnity and/or shorter indemnity periods attached to the BI Cover. Two questions arise:
- where a business has multiple premises can multiple sub-limits apply?; and
- where business interruption is suffered as a result of the numerous and varied closures/restrictions does each one trigger a new sub-limit and indemnity period?
These points have not yet been formally tested in the Courts. The answers will be specific to each policyholder and policy wording as there are a significant number of variations to the policy wordings that will affect whether multiple limits/periods apply.
Late payment – damages for delay?
Under section 13A of the Insurance Act 2015 a policyholder may make a claim against Insurers for damages for late payment of insurance claims if those claims are not paid within a reasonable time. What constitutes a reasonable time will include considerations such as time to investigate/assess the claims, type of insurance, size and complexity of the claim, and factors outside of Insurers’ control.
No doubt the time taken awaiting the outcome of the FCA Test Case will be considered reasonable for those policyholders who have wording which was tested (and arguably for those policyholders where the principles derived from the FCA Test Case will/might apply).
Ultimately whether a policyholder has a claim for late payment will be specific to its individual circumstances.
Contact Indemnity Legal
There are many issues left unresolved for policyholders following the FCA Test Case. If your business is affected by any of the issues set out in the categories above or you are facing any other dispute with Insurers arising from your business interruption claim as a result of the COVID-19 pandemic, please do not hesitate to contact James Morris (Managing Partner) or Rosemary Hort (Associate) of Indemnity Legal for specific advice as to whether/how you or your client’s business interruption policy is affected by the judgment in the FCA Test Case, the prospects of getting your business interruption claim paid and the merits and methods of doing so.
[1] Rockcliffe Hall Limited v Travellers Insurance Company Limited [2021] EWHC 412 (Comm).
[2] TKC London Ltd v Allianz [2020] EWHC 2710 (Comm)).
[3] The FCA have now issued guidance that states “where the policy contains a disease clause responding to COVID-19 ‘at the premises’ and does not also include cover for COVID-19 occurring within a radius of the premises, a policyholder will need to prove (as a minimum) that COVID-19 occurred at their premises at the relevant point in time to have a potentially valid claim.” List of business interruption insurance policies capable of responding to the Covid-19 pandemic (fca.org.uk)
Rosemary Hort
Indemnity Legal
16 August 2021