The COVID-19 outbreak and ensuing government restrictions caused widespread businesses disruption and forced closures for some.
The impact of this has left some business, particularly those small and medium-sized enterprises, with a significant level of financial loss. Many have sought to claim for these losses under their business interruption insurance (“BI Insurance”), only to be told they aren’t covered in this respect.
In May 2020, these widespread concerns led to the Financial Conduct Authority (“FCA’s”) announcement of its intention to bring its Business Interruption Test Case (the “Test Case”) in the High Court to seek clarity on a representative sample of wording most frequently used in BI Insurance, in the context of COVID 19.
It was not intended that the Test Case would cover all possible disputes but the FCA did seek to resolve some important uncertainties regarding causation and coverage of business interruption losses in circumstances where there was no physical damage to the insured property.
What is the test case?
The FCA reviewed over 500 BI Insurance policy wordings and over 1000 submissions from insurers and insurance intermediaries.
They identified 19 examples of BI Insurance wording that they believed captured most of the characteristics which resulted in disputes (the “Representative Sample Wording”) and invited insurers to review their policies. The FCA brought the Test Case on behalf of over 300,000 policyholders that were thought to have been affected.
In addition, the Hospitality Insurance Group Action and Hiscox Group Action were permitted to intervene, arguing in line with the FCA, that BI Insurance policies do cover the events of the Covid-19 pandemic. A total of 8 insurers were invited to be involved and made up the defence.
The High Court Judgement
The High Court handed down its Judgement on 15 September 2020. Spanning over 150 pages, it considers BI Insurance in the context of 3 broad categories of non-damage cover; disease wording, prevention of access/public authority closure and hybrid wording. The Judgement is binding on all parties to the test case and is useful guidance for those holding policies with similar wordings.
In most (but not all) cases the court favoured the FCA’s arguments put forward and generally agreed with their broader interpretation of the policy wordings.
The wording of the BI Insurance disease clauses provides cover for losses suffered in consequence of a notifiable disease within a specified radius of the business premises. The Defendant Insurers argued that the notifiable disease has to arise from a local outbreak of the disease and if there was a wider outbreak of the disease, then the cover was only provided in respect of interruption from the local outbreak interruption provided two could be distinguished.
However, the Court found in favour of the FCA, who argued that the cause of the business interruption was Covid-19 in the relevant policy area which forms an indivisible part of the disease. Ultimately, the court found that the FCA’s construction of the policy wording was in keeping with the nature of insurance cover provided, in respect of notifiable disease.
The relevant prevention of access/public authority closure clauses broadly provide business interruption cover for loss as a result of government or local authority action restricting the use of the premises. The court preferred a more narrow interpretation of the wording used. Whether cover is available will ultimately fall on the specific policy wording and the particular circumstances/business category a policyholder finds themselves in.
The Hybrid clauses provide cover for prevention of access/ public authority closure as a result of a notifiable disease. With regard to the ‘disease’ part, again the parties focussed on the location of the disease outbreak and the court took a similar view to above; cover is not limited to loss flowing from local outbreaks. The court’s interpretation of the ‘denial of access’ part was more strict, again requiring close examination of the wording and application of the policy.
What’s Next?
This judgment will undoubtedly be welcome news for many policyholders, especially as we head into a second national lockdown. The Judgement does not prevent a policyholder from pursuing their own private issues through negotiation with the insurer or court proceedings or from making legitimate complaints to the Financial Ombudsman Service. However, the effect and success of any claim or negotiation in this respect will ultimately turn on the specific wording of each policy.
The Defendant Insurers were granted an expiated ‘leapfrog appeal’ to the Supreme Court which was concluded on 19 November 2020. However, we still await the Judgement. The Supreme Court has confirmed they are unable to guarantee that the Judgement will be available before Christmas.
Our top tip
The Test Case has confirmed that payment should be made in a broader range of circumstances than insurers initially hoped. If you have previously been refused cover or were unsure whether you might be covered, now is the time to look at your policies again!
A full copy of the High Court Judgement can be found at https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-judgment.pdf
For more information on this or any commercial dispute, please contact a member of our Dispute Resolution team directly or click here to send an email.
Posted on December 7, 2020