COVID-19: Business Interruption Insurance, Supreme Court Judgment
January 2021
Business Interruption Insurance Test Action
At the end of May and again in September 2020 we reported on the difficulties that many businesses were experiencing in successfully claiming business interruption (BI) insurance in the wake of COVID-19.
Many policyholders had been told by their insurers that their policies did not cover pandemics and as such many were left unable to access funds that they so desperately needed.
Further Update
On Friday 15 January the Supreme Court published its ruling in the Financial Conduct Authority (FCA) test case against eight of the big insurance companies including Hiscox, Royal & Sun Alliance and Zurich. The Supreme Court is the highest Court in the country and its decision is final.
The result has been described as a convincing victory for policyholders who had wrongly (now that the case has been decided) been denied cover by their insurers. In addition the judgment on coverage issues, the Supreme Court’s ruling also seeks to remove a number of other roadblocks by means of which insurers might have been tempted to obstruct otherwise viable claims. In this sense the Supreme Court has gone further than the decisions of the lower Courts whose decisions were under appeal.
The case was heard over four days in November 2020 and the lead judgment was given with the approval of the Court’s president, Lord Reed. The full judgment extends to 114 pages in length and can be read in full on the Supreme Court’s website.
As in the cases presented to the lower Courts, the Supreme Court looked at a representative sample of the standard forms of BI insurance policies issued by the insurers to SMEs.
What issues did the judgment address?
The Court examined the various insurers’ policies against an assumed (but typical) set of facts giving rise to a COVID-linked business interruption claim. It then tested the policies against those facts and insurers’ typical defences to claims that might be made by policyholders. In so doing the decision also provides a valuable reminder of the way in which insurers approach the assessment of any insurance claim.
The starting point as always is to give the words of the insurance contract their ordinary meaning, in the context of the agreement as a whole. The Court examined disease clauses to consider whether COVID-19 was a disease within the relevant definitions. It also considered restriction of access clauses in the context of the impact of the lockdown rules on potential claimant businesses
Next the Court looked at causation. Did COVID-19 cause the business interruption? Were the ensuing lockdown restrictions caused by the disease?
Lastly the Court examined the quantification of policyholders’ losses payable under trends clauses and pre-trigger loss provisions.
Decision points
The Court decided COVID-19 was a disease within the scope and interpretation of the policies. It did not have to have been a previously recognised disease. It did not have to afflict the policyholder or any particular individual e.g. the policyholder’s customers.
Restrictions of access did not have to be directed to the policyholder. The Court cited the example of a police cordon imposed in the area of a policyholder’s business and which prevented access by customers. This was an example of a restriction imposed generally to which a policy would be expected to respond. The lockdown restrictions were akin.
A broad common-sense view of causation of loss is to be applied. Causation is to be understood as the man in the street would understand it. Cause means what a business would take to be the cause on a broad view[1].
Trends and loss clauses should not be interpreted as taking away from the scope of the indemnity. They are not exclusion or limitation clauses and should not be interpreted as such. Their purpose is to enable a comparison to be made between the normal and the abnormal, to arrive at an accurate estimation of loss[2].
The following example[3] illustrates this. The abnormal is, in this case, the restricted business activity during COVID-19. The normal might be the performance of a particular business in prior trading periods, adjusted to reflect projected growth (or decline) of the business due to the reasons such as the popularity of its products e.g. a butchery business might be expected to suffer some long-term decline as more people adopt a vegan lifestyle. However a previous temporary decline in the fortunes of that business (e.g. due to a strike at the local abattoir) would not be considered in the reckoning because this is not part of the normal.
Caveats
The Court only considered a sample of typical policies from a limited number of insurers[4]. Each case will still turn on the particular words of the relevant policy.
Whilst the Court has opined on the principles of calculation of loss claims, individual policyholders’ losses must still be proved. This may be expensive and require expert support, particularly for businesses on a growth trend making claims based on future projections. Conversely businesses with inadequate levels of record-keeping will still struggle to prove their claims.
Practical considerations
In the first instance, businesses should consider if their insurance clauses are sufficiently similar to those examined in the Supreme Court, in order to be able to rely on the precedent value of the Supreme Court’s decision.
Good claims presentation remains vital. Insurers will still be looking for reasons not to pay and view poorly presented claims with scepticism. Professionally presented/negotiated claims via a broker or solicitor will increase the chances of success. The burden of proof of loss remains with the policyholder.
If you are still unable to reach an acceptable settlement, use the insurer’s complaints mechanism. This is the key to being able to make a complaint to the Financial Conduct Authority. Although not quick, this is still likely to be quicker and cheaper that bringing formal legal proceedings.
If you still need to resort to legal action but are concerned about costs, your solicitor will be able to advise on alternative funding options that may be available to you.
New policies i.e. those beginning after the COVID-19 outbreak are unlikely to respond because either the loss will have fallen outside the policy period or because insurers have now changed their policy wording specifically to exclude COVID-19 cover.
[1] Lord Hamblen quoting with approval from Yorkshire Dale Steamship Company Limited v. Ministry of War Transport [1942]AC691
[2] Per Riley on Business Interruption Insurance
[3] Not part of the Court’s judgment
[4] Hiscox, Argenta, Amlin, QBE, Arch, Zurich and RSA