Business interruption insurance test case – what we know so far
By Stephanie Reeves and Ted Powell
On 28 July 2020, the hearing in the Financial Conduct Authority’s (“FCA”) business interruption (“BI”) test case came to a close.
The purpose of the case was for the High Court to consider whether various BI policy wordings should cover losses arising out of Covid-19 and the resulting government measures. The FCA represented insured businesses and argued that the BI policies in question should cover Covid-19 related losses, whilst eight major insurance firms argued that their cover does not extend to losses caused by the pandemic.
Whilst judgment is not expected until September, we look at some of the key points raised and what the implications could be for businesses.
What actually caused the insured’s losses?
This emerged as a key battleground in the test case. Broadly speaking, the policies considered require the cause of the business’s losses to be either: (a) an occurrence of Covid-19 within a certain radius; or (b) the closure of the business following government restrictions due to Covid-19, in order for cover to be triggered.
The insurers argued that in reality there were multiple causes of loss, such as the virus itself, its impact on public confidence and economic activity, and the other measures imposed by the UK government aside from its order to close premises. The insurers therefore argued that it cannot be shown that a business would not have suffered losses but for the occurrence of Covid-19 near the premises or, alternatively, but for the government restrictions. The insurers suggested that businesses may still have been adversely impacted by, for example, consumer concerns about entering into shops.
The FCA argued that these multiple causes are inextricably linked and should be treated as one single cause. Following this, the single proximate cause of loss should be seen to be the nationwide disease, its impact on the public and the economy and the resulting restrictions.
This is a crucial decision for businesses, as all policy holders will have to demonstrate causation in order to be covered. Businesses should keep full records of how their business activities have been affected at each stage of the pandemic. As well as lost revenue figures, information demonstrating how consumers and suppliers were adversely affected by Covid-19, and the resulting impact this had on the business, will also be useful when proving causation.
Does the government action have to be targeted?
It was argued by the insurers that the instruction for a business to close must have been targeted specifically at the business’s premises due a localised occurrence of Covid-19 in order for cover to be triggered. In contrast, the FCA argued that Covid-19 was a danger everywhere in the country and the restrictions imposed by the UK government were in response to this nationwide threat. As a result, the FCA argued that nationwide instructions related to localised occurrences of Covid-19 in every region and the actions were, therefore, targeted at every affected business in the country.
Most businesses seeking to recover BI losses will be affected by the decision on this point, as very few were specifically ordered to close following specific local outbreaks and instead had to close, or otherwise change their practices, as a result of the nationwide government restrictions. If the Court does side with the insurers on this point, businesses would need to point to specific, targeted orders (for example, where we have seen specific localised lockdowns in areas such as Leicester) in order to recover their losses.
What amounts to interruption or denial of access?
The insurers argued that the business’s premises must have been entirely closed with a complete cessation of all business activity in order for cover to be triggered as a result of a business interruption or denial of access. In contrast, the FCA stated that an interruption of part of the business’s activities is sufficient to qualify and that partial closure can amount to “closure”.
This decision will be particularly important for businesses that managed to maintain some form of business activities but still suffered losses during the government shutdown. For example, many restaurants offered take away services but still experienced significant drops in revenue. Such businesses are unlikely to be covered if they have this wording in their policies and the Court finds that a complete closure or cessation of all business is necessary.
How can businesses prove Covid-19 occurred with a given radius?
Many policies require the disease to have occurred within a certain radius of the insured premises to trigger cover. The FCA argued that an actuarial model should be used to increase the amount of confirmed cases in an area by the amount of untested cases. This model could then be used determine how likely it is that a case of Covid-19 occurred within the relevant proximity of the business’s premises.
Regardless of whether the actuarial model is approved by the Court, it is important for businesses with this type of policy wording to gather evidence which could be used to show that Covid-19 occurred on or near the premises. For example, subject to compliance with data protection laws, businesses could keep records of staff and customers that tested positive for the virus and who live within a certain radius of the premises.
How will trends clauses impact cover?
It was argued by the insurers that “trends” clauses operate to adjust the amount paid out under policies in light of what would have been achieved if the insured peril had not occurred, and that this would include factoring in losses caused by drops in consumer confidence and economic activity in the calculation of sums paid out. In contrast, the FCA argued that trends clauses are intended to look at matters that are outside of the policy and to remove those matters from the cover, such as economic trends independent of Covid-19. The FCA argued that such clauses should not be used to exclude the natural result of the insured peril.
If the Court agrees with the insurers, the impact that Covid-19 had on economic activity and confidence generally would be considered when assessing how much an insured business lost. This could significantly reduce the recoverable losses under policies which have these clauses included.
What steps taken by the UK government or other bodies constitute “actions”, “advice” or “restrictions”?
This point is relevant to the period for which businesses can recover losses. The insurers argued the “action” taken by the government or body must have had legal force, or at least have been compulsory, for cover containing this wording to be triggered. The FCA responded that “action” does not require legislation and that pronouncements, advice or guidance given by the government are, in fact, compulsory.
If the insurers succeed on this point, it is possible that only losses caused by the restrictions introduced on 26 March 2020 will be covered, as this was the date when the restrictions in the UK were given legal force. However, many businesses began to suffer losses much earlier than this; for example as a result of government advice issued on 16 March 2020 that people should avoid visiting social venues such as pubs, clubs or theatres. Businesses in the hospitality sector will therefore be particularly affected if the Court agrees with the insurers on this point.
Without the certainty of the Court’s decision in the test case, it is difficult to predict the exact implications it will have on BI policies and the ability for businesses to recover Covid-19 related losses. And even once judgment is given, that decision may not be final as the FCA or the insurers could choose to appeal it.
It is worth noting how the Irish government has dealt with the issue of BI. It has published a framework overseen by the Central Bank of Ireland setting out its position, and stating in particular that where there is doubt as to the meaning of a term in a policy, the interpretation most favourable to the policyholder must prevail. Interestingly, the framework also includes a confirmation that, where a policy provides that cover is dependent on an imposed closure of a business due to a government order, the government communication should be treated as an order, direction or mandate for the purposes of determining the issue of cover. It remains to be seen whether the Courts of England and Wales will apply the same reasoning on this issue.
What is certain is that the judgment will have a significant impact. Whilst the judgment will only be binding on the eight insurers that are parties to the test case, it will be used as persuasive guidance when assessing any BI policy with wording similar to the policies considered by the Court. Consequently, it has the potential to affect over 60 insurers with 700 types of policy and roughly 370,000 policyholders.
Whilst we wait with baited breath for the Court’s decision, policyholders and insurers are advised to review their policies and gather any relevant information and evidence required to establish their own positions in light of the arguments raised in the test case. For example, as well as ensuring that any notification requirements have been properly complied with, businesses should:
(1) determine whether their policy expressly requires the “action” taken to have legal force or be compulsory, and confirm who must the “action” be taken by;
(2) determine whether their policy expressly defines what will amount to “closure”;
(3) determine whether their policy requires Covid-19 to have occurred within a certain radius and, if so, whether any staff member or customer living within that radius tested positive for Covid-19;
(4) gather evidence that shows the business was directly affected by Covid-19 and/or the government restrictions, such as data and information showing the adverse impact on the business’s consumers and suppliers along with reduction of revenue figures; and
(5) check their policies for trend clauses and understand how these clauses operate.
If a business considers that its policy wording will not be directly impacted by the judgment, it may wish to begin the process of challenging its insurer’s decision not to pay out now, before the judgment is given. Once the judgment is given, insurers will no doubt receive an influx of claims and their response times may increase even further.
The test case is not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers. It will not determine how much is payable under individual policies, but will provide the basis for doing so.”