Business Interruption insurance: new ruling spells change for businesses affected by Covid-19 lockdown

On Friday 16 June 2023, the High Court handed down a landmark judgment in a test case set to reignite Business Interruption claims for forced business closures during the pandemic.

London International Exhibition Centre Plc v Royal & Sun Alliance Insurance Plc formed the lead action in a claim incorporating six test cases heard by Mr Justice Jacobs between 24 April and 4 May 2023, in respect of losses allegedly suffered by business owners who sought to rely on Business Interruption (“BI”) insurance due to their businesses being forced to close during the national lockdown.

Business Interruption insurance is written to cover business owners for a loss of income during periods when business cannot be carried out as usual due to an unexpected event, including damage to premises. In most BI policies, the word ‘damage’ is extended to include full or part closure of premises due to contagious or infectious disease.

In each case, all six insureds had a form of disease cover in their BI insurance policies. Although there were differences in the policy wordings, they all referred to occurrences of notifiable diseases ‘at the premises’ (“ATP”). Covid-19 became a notifiable disease in February 2020 in Scotland and March 2020 in England and Wales.

Each insurer initially declined cover on the basis that that the policies only provided BI cover for the premises, not the surrounding area, which is referred to as a radius clause. The argument being that the insureds could not prove there was an outbreak of Covid-19 directly at their premises and were therefore not covered by the ATP clause.

The court was asked to decide whether ATP disease cover entailed the same approach to proximate causation as a previous FCA test case, Financial Conduct Authority v Arch Insurance (UK) Ltd, which concluded with the Supreme Court’s judgment in 2021.

In that case, the Supreme Court found in favour of the claimant, and confirmed that causation is established, and consequently BI losses are covered, where the following criteria are met:

• The policy uses ‘radius’ wording within disease clauses
• Business Interruption losses occurred from the effects of a notifiable disease
• These losses occurred within the specified radius of the insured premises – generally noted as between one and 25 miles.

The FCA test case was seen as a landmark finding, opening the door for further claims against business interruption insurers, including this latest litigation.

The decision

Mr Justice Jacobs held that, although the wording of the six policies only referred to ATP diseases, the insureds were entitled to indemnity under the BI cover.

Applying the FCA test case judgment, the judge ruled that ATP wording should be construed as a very narrow radius policy of the insured premises itself. This was because the Supreme Court determined that ‘radius’ wording could be narrowly applied to cover events which occurred at the insured premises. ‘Radius’ was held to mean anywhere from the ‘vicinity’ to 25 miles from the insured premises.

The judge noted that the function of the radius wording was purely to define the geographical or territorial area in which the loss must occur for contractual certainty. It did not provide for a different application of the caution test depending on the wording of the policy. As the causation tests for both ATP and radius wording were the same, BI coverage applied under the policy.

The judgment provides better clarity for both insurers and policyholders. It is likely to result in a significant number of new BI claims being made and claims which were previously declined being revisited.