Businesses with business interruption insurance (BII) policies should review those immediately to see if the High Court’s judgment on the BII test case brought by the Financial Conduct Authority (FCA) has had an impact on their cover for losses suffered as a result of the Covid-19 pandemic.
Jenny Raymond looks in detail at the clause wordings examined in the case and at the court’s rulings on them.
What did the FCA test case cover?
The FCA issued proceedings seeking clarity on the policy wording of eight insurers, amounting to a total of 21 lead policies, covering BII in the context of the pandemic.
The court focussed upon the construction of specific non-damage extensions to BII to consider whether insurers should indemnify policyholders who had suffered losses as a result of their businesses being interrupted by Covid-19. The clauses considered can be broken down as follows:
- Notifiable disease clauses
- Prevention of access to premises clauses
- Hybrid clauses.
The High Court considered eight of these clauses, each slightly different, and took a general view on the appropriate approach. For instance, the clause considered within the Royal Sun Alliance’s third policy (RSA 3) was as follows:
“interruption of or interference with the Business during the Indemnity Period following … any occurrence of a Notifiable Disease within a radius of 25 miles of the Premises”.
The court concluded:
- Covid-19 became a notifiable disease on 5 March 2020
- There will be an occurrence of Covid-19 within an area when at least one person who was infected with Covid-19 was in the relevant area. It was not necessary for a person to be diagnosed
- The insured peril is the business interruption arising from a notifiable disease of which there was an occurrence within the relevant policy area
- There is cover for any business interruption which a policyholder can show resulted from Covid-19, including by reason of the actions, measures, and advice of the government, and the reaction of the public in response to the disease. This cover applies from the date when the disease occurred in the relevant 25 mile radius
- The use of the word “following” involves a requirement that the notifiable disease should have a causal connection to the business interruption, but it does not necessarily need to be proximate causation. What this means is that it can be the reaction by the public/local authorities to the notifiable disease which has caused interruption or interference with the business, rather than the notifiable disease itself
- The 16 March government advice and recommendations were capable of causing an interruption to many businesses, including those operating holiday accommodation. The 21 March Regulations were likely to have caused an interruption to businesses of policyholders that operated a bar/restaurant.
The court also considered what was meant by an “initial outbreak” as well as the “Vicinity of an Insured Location”. The RSA 4 clause stated as follows:
“In the event of interruption or interference to the Insured’s Business as a result of…viii. Notifiable Diseases & Other Incidents…..d) occurring within the Vicinity of an Insured Location…
The court concluded:
- The “initial outbreak” was on 31 December 2019, when the first cases in Wuhan were confirmed
- “Vicinity” is to mean an area the extent of which would depend in part on the nature of the relevant “event”, but which could be very extensive, and indeed nationwide. When Covid-19 occurred, it was such that any occurrence in England and Wales would reasonably be expected to have an impact on policyholders and their businesses, and therefore that all occurrences of Covid-19 were within the relevant “vicinity”
- “As a result of” requires that Covid-19 should be an effective cause of the interruption or interference to the insured’s business.
Therefore, in general terms, the court agreed with the arguments of the FCA and sided with policyholders in respect of the specific notifiable disease clauses. The only exception was in respect of two QBE policy wordings (QBE 2 and 3), which required an “event” to have caused the business interruption. An example of the clause is as follows:
“Loss resulting from interruption of or interference with the business in consequence of any of the following events… c) any occurrence of a notifiable disease within a radius of 25 miles of the premises… provided that that the (h) insurer shall only be liable for loss arising at the premises which are directly subject to the incident.”
Here the policy required the loss to have been caused by the particular occurrences within the radius. Policyholders need to show that the cases within the radius, as opposed to elsewhere, were the cause of the interruption i.e. the relevant ‘event’ should have caused the business interruption. Occurrences of the disease at different times and in different places would not constitute the same event. In the circumstances, this will be extremely difficult to demonstrate.
Prevention of access
In general, the court concluded, on the prevention of access clauses, that the business interruption policies were related to specific, localised events rather than the national government response to Covid-19. Consequently, policyholders are likely to face greater difficulties succeeding with a claim pursuant to prevention of access clauses in their policies.
Taking the Arch policy wording as an example, we summarise the key themes as follows:
“We will also indemnify You in respect of reduction in Turnover and increase in cost of working as insured under this Section resulting from…
7) Government or Local Authority Action
Prevention of access to The Premises due to the actions or advice of a government or local authority due to an emergency which is likely to endanger life or property…..
- The ‘insured peril’ is the prevention of access to the premises as a result of government actions in respect of an emergency likely to endanger life or property
- It is only where the premises closed, i.e. pursuant to the 21 or 26 March Regulations, that there would be a qualifying prevention of access – the requirement to close needed to have the force of law
- If businesses were not required to close, there is no question of access being ‘prevented’
- What has to result from the government action or advice, is closure of the premises for the purposes of carrying on the business, as defined in the policy schedule
- If a pub or restaurant, which was forced to close, started a takeaway service in lockdown, which entails a fundamental change from the business as described in the policy schedule, this would still amount to a prevention of access. However, if the pub or restaurant already provided a takeaway service, which formed a substantial part of the business, and this continued through lockdown, there would be no prevention of access
- It is important not to confuse prevention with hindrance – regarding prevention, cover would only be available if it was impossible for people to access premises, rather it simply being difficult. Therefore, anything short of complete closure will not constitute a prevention of access.
- If there is reference in the clause to ‘hindrance’, this is a lower test and policyholders will only need to show access was made difficult, rather than impossible.
- In determining the loss suffered, policyholders can seek to claim what the business’ performance would have been if there had been no emergency i.e. no pandemic and no government actions to prevent access. However, the losses can only be claimed from the date that access to the premises was prevented.
In the case of Ecclesiastical, it was entitled to deny prevention of access cover on the basis that the clause had an infectious disease ‘carve out’ i.e. an indemnity would not be provided in circumstances where closure or restrictive use of premises was due to the “order or advice of the competent local authority as a result of an occurrence of infectious disease …”
In respect of the MS Amblin (MSA) policy wordings, reference was made to “loss resulting from interruption or interference with the business following action by the police or other competent local, civil or military authority following a danger or disturbance in the vicinity of the premises where access will be prevented.” Similar wording is reflected in the other policies considered by the court.
The court concluded that the use of the words “danger or disturbance in the vicinity” demonstrates that the cover is a narrow, localised form of cover. The court did not consider that the entire country can be described as being in the vicinity of the premises. Therefore, the government action in imposing the Regulations in response to the national pandemic cannot be said to be following a “danger in the vicinity”, in the sense of the neighbourhood of the insured premises. Even if there was a total closure, there could only be cover if the insured could demonstrate that it was the risk of Covid-19 in the vicinity i.e. the neighbourhood (rather than the country as a whole) which led to the government action imposing the Regulations. This may be a possibility for those subject to local lockdowns.
However, in the context of the Resilience wording (described in the test case as RSA 4), the prevention of access clauses are not limited to a “danger or disturbance”. In these circumstance, the actions of the government are not ‘following’ or ‘due to’ an ‘emergency’ or ‘danger’ in the vicinity of, or within a radius of the insured premises. Consequently, if actions are taken nationally and affect all insured businesses, they will inevitably be in the vicinity of the insured premises if they lead to prevention or hindrance of use of access of the insured premises.
In summary, and in respect of denial of access clauses, much depends on the terms of the policy. Consideration needs to be given to the precise wording in the clause and whether or not the business was ‘prevented’ or ‘hindered’ from accessing its premises. In relation to the term “vicinity”, if the clause is limited to action by a local authority following a “threat or risk of damage or injury in the vicinity”, there may well be no BII cover – the policyholder will need to show that the government action was as a result of the emergency in the vicinity rather than the country as a whole. However, if no such limitation is made i.e. the clause does not state there needs to be a ‘threat or risk of damage or injury in the vicinity’, the prospects for policyholders are better.
The hybrid clauses which were considered were mainly Hiscox policies and are called hybrid because they link the cover for business interruption to a combination of disease and denial of access cover.
The court found:
- Reference to “restrictions imposed” within the clause requires mandatory action such as Regulation 2 of the 21 March Regulations and Regulations 4 and 5 of the 26 March Regulations. Guidance, exhortation and advice given by the government, including by the Prime Minister, do not count as “restrictions imposed” by a public authority
- Reference to an “inability to use” premises does not apply just because the insured cannot use all of the premises. Equally, there will not be an “inability to use” premises because of any and every departure from their normal use. Whether merely partial use would be sufficient to amount to an inability to use will depend on the facts of each case
- However, the restrictions imposed did not have to be directed specifically at the insured or the insured’s use of the premises
- The Covid-19 outbreak in the UK could qualify as “an occurrence” of a notifiable disease
- “Interruption” means “business interruption” generally, including disruption or interference, not just complete cessation.
Causation and the trends clauses
The court found, on the subject of what caused policyholders’ losses, that those arguments could mostly be answered by the correct construction of the policy wording, and the court’s finding on the prevalence of Covid-19.
The court’s judgment was based on what a reasonable person, with all the generally available background knowledge, would understand the contracts/policies to mean. The court expressly stated that this means “disregarding evidence about the subjective intentions of the parties”.
The court preferred the FCA’s case which was principally that the nationwide epidemic, and the response to it, represented a single indivisible insured cause.
So, what losses will policyholders be able to claim? Will the losses be limited due to the general impact of the pandemic on the economy and policyholders’ businesses?
When considering the question of loss, the court stated that the existence of coronavirus must be removed in its entirety. Insurers are not allowed to discount a policyholder’s losses to account for the fact the business would have suffered a loss in any event, as a result of the pandemic.
The insurers may yet appeal – a hearing has been listed for 2 October at which the insurers will need to set out their position if they are seeking permission to appeal.