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Business Interruption losses due to Covid 19

I have been asked again for my advice on the confusion that has arisen over the coverage provided by Business Interruption policies for Covid 19 losses. I have been providing advice on this subject since March last year and the latest developments require further explanation.

There was good news on Friday 15 January when the Supreme Court ruled in favour of policyholders in the test case brought by the FCA. This final decision to clarify the BI policy wordings has been awaited since the case was started in April. This court decision led to general coverage in the press rejoicing at the fact that policyholders will be able to recover at least some of their loss of profit during the lockdowns since 23 March 2020.

Unfortunately the media coverage has given many small businesses an expectation which in reality is, I believe, misplaced. It is regrettable that the publicity surrounding the FCA test case has not brought out clearly enough the fact that nearly all policyholders will not get the benefit of BI coverage for their lockdown losses. I believe that over 95% of policyholders will have no cover. It is only those 5% who have the good fortune to have insured with one of the few insurers whose policy wording has been found to be ambiguous and therefore, according to the court, does provide the cover.

It has been clear from the start that all general insurers did not intend to cover the effects of pandemic and their policies are silent on the subject – not using the word pandemic to say there is no cover or saying it is excluded. Historically there have been a few specific policies available that provided cover for pandemic, but it was considered a very remote risk only insured by those exposed to a high value occasion such as a concert or sporting event which would be badly disrupted. The typical annual Commercial Combined policy issued by insurers for the vast majority of small and medium sized enterprises does not give specific cover for the effects of a pandemic. For this reason almost all insurers declined policy liability immediately.

The wording of policies that do not specifically exclude pandemic but effectively avoid the possibility of a successful claim being made by a policyholder do this in a variety of ways. I have listed below the ways that policies which do not provide cover achieve this outcome. These policies cover the 95% of policyholder who will not get their claims paid.

1. BI cover only after damage Some policies specify that they only cover Business Interruption if it arises from damage caused to property. This could be the insured’s own property or may be to property in the vicinity that prevents access to the insured’s premises. A disease like Covid does not cause damage to property so there is obviously no cover under these policies.

2. BI cover only for listed diseases Many policies have extensions to the BI cover that apply when there has not been damage to property. Unsurprisingly these are known as the ‘Non-damage BI extensions’. They typically cover closure of the premises due to an event that has occurred that has not caused damage – e.g. a murder or suicide on the premises, but result in closure whilst the police investigate. Other examples are cover if there is a sudden interruption to the power or water supply.

These BI extensions generally include some cover for interruptions caused by disease – but many policies list the diseases the insurers consider they know enough about and can judge the consequences of. Policies that list the notifiable or contagious diseases that they cover do not include Covid 19 on the list principally because it is a new disease. As it is not on the list anyone with such as policy has no cover under this section

You may ask why did the insurers not include Covid on the list – and surely they would have done, had it been discovered before January 2020. The insurers view is that they can only quote premiums based on risks that they know about. They have data on the frequency of fires and flood – and even on the instances of cholera, whopping cough and yellow fever, but not on other notifiable diseases they do not know about. Most insurers did not want to insure the effects of diseases they did not know about and by making a list of the diseases they were insuring, were effectively excluding any other unknown diseases that arose that were new to them.

3. BI cover for notifiable diseases restricted Some insurers have not given a list of diseases they are covering but instead have said they would cover all ‘notifiable diseases’ – and defined what that expression meant. Usually they align with the government’s definition. Covid became a notifiable disease according to the statutory definition in all areas of the UK by 5 March 2020. However even though the policy may cover the effects of a notifiable disease in some circumstances, it may not apply in all. Some insurers only cover closure from notifiable disease if it is proved to have occurred on the insured premises. Some only cover if the outbreak of the notifiable disease in the premises is the cause of the closure that is imposed by the local authority or government that prevents the business trading.

4. BI cover for enforced closure by Government restricted Some policies have another Non-damage BI extension that covers closure imposed by a Public Authority/Local or National Government. It may restrict the cover to situations where there is a life threatening emergency. The wording may require the authorities to impose the closure or prohibit any trading specifically from the insured premises before it will apply.

5. BI cover for inability to trade restricted Policies that cover the inability of customers or staff to reach the premises may only apply if there has been damage in the vicinity. Some non-damage BI extensions require there to have been some sort of event or occurrence ‘in the vicinity’ of the premises that has caused the authorities to reach the decision to prevent or restrict access.

The words ‘in the vicinity’ were interpreted by the High Court in the first judgement in September as meaning that the cause of the restriction must be local and not national – so with widespread outbreaks of Covid and the government taking a national decision to lockdown this was not a cause that was ‘in the vicinity’. This decision was accepted by the FCA and not appealed to the Supreme Court so is a valid restriction.

6. BI cover payments restricted Even those who have not placed any of these restrictions on the cover they are providing, have limited the payments to a smaller sum insured maximum payment as low as £25,000 and/or an indemnity period of only three months.

These are examples of cases where the insurers have successfully avoided providing BI cover for the consequences of a pandemic induced lockdown.

As I have said I believe that over 95% of policyholders will be unable to claim successfully due to these restrictions to their policies. The remaining 5% or so are those who are fortunate because they have unknowingly insured with an insurer that has had an ambiguous wording that the Supreme Court has now ruled means they must pay. The insurers of this 5% – just like the 95% – did not intend to provide the cover for pandemic lockdown – but their wording was not sufficiently clear and so they have to pay the penalty.

Finally, in my opinion it is unfair to criticise brokers whose clients have found that they are not in the lucky 5%. As I have said, all insurers did not intend to cover the effects of pandemic and even those who have now found that they must pay, initially resisted paying claims and fought all the way to the Supreme Court to prove their interpretation of their own policies was correct.

Ultimately a few policyholders will benefit from the court’s decision, but not many – and those that do will not recover all of their losses due to the monetary and time restrictions their policies impose.

It remains to be seen what steps will be taken by the insurers of the 5% to validate the claims and make the payments. I would recommend that independent advice from a loss adjuster is given to all policyholders in the fortunate position of having the cover so that their claim is accurately quantified. It would be naïve to accept the insurer’s quantification without question given the history of this unfortunate disease and its disruption to business.

Roger Topping LLB (Hons) ACII FCILA Director – TM Claims Consultants 21st January 2021

Which Policyholders does the judgment assist?

Policyholders with coverage under those “Non Damage Prevention of Access” and “Hybrid clauses” that the High Court found would respond to Covid-19 BI losses are now likely to have broader coverage in two important respects:

Some policyholders whose coverage would not have been triggered at all under the ruling of the High Court will now be able to claim – in particular businesses that were only partially closed (for example a restaurant that was able to continue to offer takeaways services.)
Policyholders whose coverage would not have been triggered until the coming into force of legal Regulations on 21 or 26 March 2020 may claim from an earlier date, if their business was affected by instructions issued by the Government.
Importantly, no policyholder with a valid claim will now have the value of their claim reduced by virtue of a downturn in business caused by the effects of Covid-19 prior to coverage being triggered, or by taking into account any Covid-19 related factors whatsoever in considering the benchmark performance of the business against which the losses should be measured.

Are there any policyholders whose position is not affected?

Policyholders with coverage under those Prevention of Access clauses which were unsuccessful in the High Court, because of findings that the clauses were intended to respond to specific localised events such as gas leaks, rather than broader circumstances of the pandemic, do not benefit from the Supreme Court’s decision, as the FCA chose not to appeal the High Court’s findings in relation to those policies.

Are there any policyholders who are now worse off?

The Supreme Court dismissed all of the Insurers’ multiple grounds of appeal which, if successful, would have resulted in a less favourable position for policyholders.

What is the effect of the decisions on causation, trends clauses and the Orient Express case?

Complex cases were argued by all the parties before the Supreme Court on the linked issues of causation, trends clauses and the Orient Express v Generali case. Whilst the court’s findings in relation to those issues are of significant importance for the industry and English insurance law going forward, any detailed discussion is beyond the scope of this note.

In overruling Orient Express and taking a ‘concurrent causes’ approach generally to the issue of causation, policyholders whose coverage is triggered will now be entitled to an indemnity for the full extent of their Covid-19 related losses. Whilst there will inevitably be room for significant disagreement as to the correct measure of those losses, the Supreme Court has made it clear that the comparison against which the actual performance of the business must be measured must not take into account any impact of Covid-19 on the business, including any downturn in business prior to the business being closed and Policy coverage being triggered.

Are there issues left unresolved that the Supreme Court does not address?

The Supreme Court decision is final and now represents the settled position under English law as far as coverage, causation and the application of trends clauses is concerned.

There are other issues that will affect the coverage and quantification of business interruption claims which the Supreme Court did not consider, including:

(1) Aggregation

For the purposes of the application of sub-limits of liability and deductibles, how many ‘losses’, ‘events’ or ‘occurrences’ has the policyholder suffered? This is particularly pertinent to policyholders with multiple premises and to consideration of further local and national lockdowns.

(2) Disease at the premises

The Test Case did not consider, and did not therefore make any ruling in relation to Infectious or Notifiable Disease clauses that respond to losses caused by occurrences of disease ‘at the insured premises’ (as opposed to occurrences within a specified radius of the insured premises). The findings of the Supreme Court may now cause coverage under those clauses to be revisited.

(3) Loss of Rent

The Test Case only considered policies providing ‘traditional’ BI coverage i.e. for loss of gross profit and increased cost of working. Policies providing express coverage for loss of rent by landlords were not considered. Different coverage issues arise in relation to those policies, which are not straightforward.

(4) Deduction of government assistance

Many policyholders bringing claims will have benefited from various forms of government assistance since the emergence of the pandemic, and the correct treatment of such financial assistance for the purpose of calculating a BI claim indemnity is unsettled. The FCA issued a ‘Dear CEO’ letter on 18 September 2020 in which it advised insurers “We therefore do not consider the Government’s treatment of the Small Business, Retail, Hospitality and Leisure or Local Authority Discretionary grants for tax purposes is a proper basis for insurers treating those payments as turnover under the policies. Nor do we see that insurers can apply these amounts as savings against fixed business expenses”. As to other forms of government support, there remains ample scope for further disagreement.

(5) Damages for late payment

The Enterprise Act 2016 introduced into law a new right for policyholders to claim damages for late payment of insurance claims, which did not previously exist. The right to claim damages remains untested by the courts, but the present circumstances may well lead to policyholders seeking to recover the additional costs they have incurred as a result of not being paid their claims promptly since notification in March 2020, including additional costs of financing, and in some cases costly corporate re-organisations and administration processes.

What happens next?

The FCA and Insurers will now work with the Supreme Court to agree a set of declarations giving effect to the Supreme Court’s findings. The FCA has also indicated that it intends to issue a Q&A document for policyholders, giving guidance on who is now entitled to claim.

Previous guidance from the FCA required all insurers with ‘potentially affected claims’ to communicate with policyholders on the status of claims already submitted, and to review the coverage status of such claims following the High Court judgment in September 2020. Policyholders who have previously received communications from insurers in this respect should expect further communications following the Supreme Court judgment.

Policyholders that submitted claims earlier but that have not heard from insurers since the commencement of the Test Case, but who believe that their claim may be affected, should contact their broker or insurer to seek clarification on the status of their claim.