Business Interruption Insurance – Landmark UK Case

The High Court in London delivered judgment¹ this week in the UK Financial Conduct Authority's ("FCA") test case concerning eight insurers, to determine whether certain business interruption insurance policies provide cover to businesses during COVID-19. 

See our article of 26 August, where we analysed the procedural steps undertaken by the FCA as well as the issues to be determined in this judgment.

The Court found in favour of the policyholders’ arguments, presented by the FCA on the majority of the key issues. The judgment provides clarity on some of the contractual uncertainties regarding coverage and causation in respect of non-damage² business interruption policies. The decision has been welcomed by policyholders who would have been compelled to individually resolve disputes regarding the cover provided under their policy with insurers. Certain claims which have been held up pending the outcome of the decision, are expected to be paid out to businesses across the UK.  However, some policyholders will be disappointed that the decision does not favour their particular claim; for example, anything short of a complete business closure would not satisfy a claim under a “prevention of access” clause.  

This decision is not legally binding in Ireland as the positon here is presently informed by the Central Bank of Ireland (“CBI”), Business Interruption Supervisory Framework, as previously analysed in our article of 8 August. Nonetheless, this decision is good news for Irish policyholders. 

ByrneWallace expects this decision to have repercussions for businesses and insurers in Ireland, especially for insurers who write business interruption policies on terms which are similar, if not identical to those ruled upon in the UK this week. 

Coverage

The Court examined a representative sample of policy wordings and in its consideration of coverage, it looked at clauses dealing with disease cover, denial of access cover, as well as hybrid provisions which provide cover when restrictions are imposed on a premises due to the presence of a notifiable disease.

• Disease cover: The Court found that most, not all, of the disease clauses in the sample policies examined provided cover in the circumstances of the COVID-19 pandemic. For policies that purported to limit cover to a certain radius of an insured location, the occurrence of a single case of COVID-19 within that radius-limit could amount to a notifiable disease on an insured policyholder’s premises; i.e. the disease does not necessarily need to occur on the policyholder’s actual premises. Importantly, cover was not limited to outbreaks wholly within the relevant policy area, because the policy wordings in question did not expressly state that the disease should only occur within that area.

• Denial of access cover: The Court found that that cover would be provided in certain denial of access clauses, depending on the wording of the policy and depending on how the business was affected by the Government response to the pandemic. The circumstances of the business closure would be relevant, whether the business was subject to a mandatory closure order, affecting for example, gyms, cinemas and nightclubs and whether the business was ordered to close completely or not. The Court favoured one insurer’s argument, pointing out that “prevention” of access was not the same thing as “hindrance” of access and held that the result of the government action or advice must be the closure of the premises for the purposes of carrying on the business as defined in the policy schedule, not just operating at reduced capacity.  The Court provided guidance to pubs and restaurants, making the distinction between "prevention” of access (which would be covered) and the ability to gain access to a restaurant for the purposes of carrying on part of the business which provides a takeaway service (which would not be covered).

• Hybrid provisions: Again, the court favoured an interpretation of the disease clauses as not being limited to a local outbreak of the disease only. On the prevention of access element, the Court found that the restriction must be mandatory, which will depend on the circumstances of the business closure and the terms of the particular policy.  
  

Causation

The FCA argued that where a policy provides cover, it was triggered by the COVID-19 pandemic, causing the policyholders' losses. In their submissions on causation, the insurers relied heavily on the judgment in Orient Express³ which supported a narrow interpretation of policy wording; for example, a disease clause which would provide cover for a local occurrence only. The Court did not follow that decision and agreed with the FCA, concluding that the proximate cause of the business interruption was the notifiable disease, of which the individual outbreaks form indivisible parts, in other words, the disease in the UK is one indivisable cause. 

The Court also examined trends clauses which provide cover for a business to be restored to the position it would have been in “but for” the occurrence of the insured peril. The insurers argued that the scope of cover ought to be adjusted downwards in light of the prevailing economic environment. This argument was opposed by the FCA and the Court agreed, finding that the effect of the pandemic on the economic community was irrelevant when it came to quantifying loss, as if the COVID-19 pandemic had not occurred at all.   This is an important aspect of the decision and means that businesses that obtain coverage are less likely to now face arguments from insurers that their real losses are negligible as their industries have not been profit making in 2020 due to the Covid-19 restrictions.

What Next?

The decision is complex and it will have different implications for insurers depending on the aspects of the policies which are affected by the judgment. Insurers are presently assessing the impact of the judgment and some have commented⁴ that the decision affirms its policy interpretations. There is some speculation which suggests that the ultimate cost of insurers’ liabilities may be less than originally estimated which may result in insurers paying out and moving on, whilst other insurers may appeal the decision. The FCA expect that any appeals would be taken “in as rapid a manner as possible”⁵. Any such appeals would potentially go straight to the Supreme Court, rather than being heard by the Court of Appeal first.    

ByrneWallace will continue to keep you updated as the impact of the decision is assessed. In the meantime, businesses should review their insurance policies and take advice to establish whether their business interruption claim could be assessed more favourably now.

For further information, please contact Mark O’Shaughnessy or Mary Jane Fegan from the ByrneWallace Litigation & Dispute Resolution Team or your usual ByrneWallace contact.

Please note that the content of this summary does not amount to professional advice. Legal and tax advice should be sought in respect of specific queries. The COVID-19 situation is evolving rapidly and this update is provided on the basis of information available as at 18 September 2020.

[1] https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-judgment.pdf

[2] Policies which cover business interruption from causes other than property damage: for example, policies relating to infectious/notifiable diseases, non-damage denial of access and public authority closures and restrictions. 

[3] Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm); [2010] Lloyd’s Rep IR 531

[4] https://www.insurancejournal.com/news/international/2020/09/15/582673.htm

[5] https://www.fca.org.uk/news/press-releases/result-fca-business-interruption-test-case