Victoria Leslie

The Association of British Insurers has said that its members expect to pay £900million in business interruption insurance claims this year due to the coronavirus pandemic.

However, a potential Supreme Court case, which could be heard over the next few months could see that amount increase significantly.

This test case, brought by the Financial Conduct Authority (FCA) and heard in the English High Court recently, is seen as a big step in the right direction for businesses that paid for enhanced business interruption insurance, but had their claims rejected.

Standard business interruption insurance deals with physical damage to premises that means a business can’t trade.

Some organisations will have extended policies that cover being forced to shut because, for example, authorities have told them to or due to infectious diseases.

In some cases, insurers have accepted liability under these policies while others have been disputed. This has led to widespread concern about the lack of certainty and clarity.

In the FCA’s test case, the English High Court found in favour of the policyholders on a number of key issues.

In its original announcement, the FCA said most policies in the London market do not cover pandemics, and so most insurers will have no obligation to pay in relation to coronavirus.

Many policies, however, contain extensions of cover for business interruption which do not include damage.

The test case (and its judgment) only covers certain commonly used policy wording in non-damage business interruption policies — essentially what’s covered under extended policies — where there is uncertainty as to whether pandemic coverage exists.

In its judgment, the High Court found for the FCA and the policyholders on a number of key points, including when it came to causation and trends clauses.

There were several legal issues under consideration:

Causation — The court dismissed the insurers’ argument that the widespread nature of COVID-19 and the government restrictions and advice should be deemed competing causes of loss. For cover to be triggered, that combined insured threat must have caused the interruption or interference with the relevant business. The court found that the presence of COVID-19 in the UK constituted “one indivisible cause”

Business trends — These clauses look at whether any business trends affected the policyholder’s business before or after the ‘insured peril’, in this case, the coronavirus outbreak. The insurers argued the insured peril was the disease and other related effects of the outbreak, such as government mandated closures and, as such, losses because of these restrictions should be disregarded as this was not what parties had agreed to in their cover.

The court rejected this argument, agreeing with the FCA that classifying government restrictions in this way would make coverage “illusory”

Exclusion Clauses — Some of the policies before the court included exclusion clauses. The court found that on the proper construction of the individual clauses, these were not applicable to losses caused by COVID-19

Prevention of Access — There were competing arguments about whether social distancing measures amounted to “prevention of access”, including for businesses that remained open or partially open for some of lockdown

The court found that if lockdown meant a fundamental business changed, compared with what’s described in the policy schedule, then this amounted to prevention of access.

For example, a restaurant that started providing a takeaway service that hadn’t before the lockdown order came into effect on 26 March 2020 would have experienced prevention of access. Conversely, a restaurant that already had a takeaway service as a significant part of its business before lockdown did not experience a prevention of access, even though in-house dining would have been affected.

The insurance industry has been awaiting the judgment, seeing it as an important step in determining insurer responsibility for losses triggered by the pandemic.

Insurers have until October to make declarations relating to the judgment, but press reports imply that the insurers have asked for more time to lodge an application to appeal.

They also indicate insurers have been given the right to appeal directly to the Supreme Court, basically ‘leapfrogging’ the Court of Appeal. Given the accelerated timetable to date, it is possible that this matter could be fast-tracked to the Supreme Court, in which case it is possible that the appeal could be heard either before Christmas or in early 2021.

With estimates that some 700 types of policies across 60 different insurers and 370,000 policyholders could potentially be affected, the financial consequences ultimately could be considerable.

If the FCA wins in the Supreme Court, the UK insurance market will be forced to pay claims it did not expect.

It is likely to take time for the insurers to properly adjust all the claims they would receive. There is also scope for disputes between policyholders and the insurers over the quantum of loss, not being determined by the English courts in the test case. In any event, policyholders may be waiting a long time for any payment.

Meantime, there’s some light at the end of the tunnel for these businesses at least.