Business Interruption Insurance & the FCA test case

The High Court handed down judgment in the FCA Test Case in September regarding business interruption insurance (BII). However, elements of the judgment have been subject to appeal in the Supreme Court during the week commencing 16 November 2020. It is likely to be early January before the Supreme Court gives judgment.

Given the current position, what should you be looking for in your policies to ascertain if you possibly have a claim as a result of the Covid-19 pandemic?

What did the FCA test case cover?

The court focused upon the following:

• Notifiable disease clauses
• Prevention of access to premises clauses
• Hybrid clauses.

Notifiable disease

The High Court considered eight of these clauses and took a general view on the appropriate approach, which was modelled upon the Royal Sun Alliance’s third policy (RSA 3) 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 was infected; it was not necessary for a person to be diagnosed
• 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 court also considered what was meant by “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:

• “Vicinity” could be very extensive, and indeed nationwide.

The court took a slightly different stance in respect of two QBE policy wordings (QBE 2 and 3). 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 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.

Prevention of access

In general, the court concluded that the business interruption policies were related to specific, localised events rather than the national government response to Covid-19.

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 were ordered to close that there would be a qualifying prevention of access
• If businesses were not required to close, there is no question of access being ‘prevented’
• It is important not to confuse prevention with hindrance – regarding prevention, only if it was impossible for people to access premises, rather it simply being made difficult, would cover be available.
• 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 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. 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.

Hybrid clauses

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.
• 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 by reason 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.

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?

On the subject of what caused policyholders’ losses, the court found 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.

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 court found that the decision in Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm) (the Orient Express Case) was wrongly decided).

The Appeal

The FCA and six of the eight insurers have appealed to the Supreme Court. The hearing took place during the week commencing 16 November 2020.

What is the Supreme Court being asked to determine?

The insurers and the FCA has sought clarity regarding elements of the three key clauses above i.e. the notifiable disease, prevention of access and hybrid clauses.

The FCA’s appeal focuses upon the following:

• Whether an insurer can reduce the indemnity if Covid-19 caused a reduction in revenue prior to the policy being triggered
• What amounts to an ‘action’ of a public authority – does it need to have the force of law, or will advice/recommendations from the government suffice
• Whether ‘prevention of access’ clauses are satisfied by partial rather than total closure
• Whether the QBE disease policies were only intended to cover local outbreaks, in contrast to all the other disease clauses.

The insurers are asking the Supreme Court to consider the issue of what caused the loss. The insurers are challenging the High Court ruling that the pandemic and the government’s response is a single cause of loss. In the insurers’ view, this treats the financial effects of the pandemic and all the action taken in response, as being covered by the insurer.

The insurers are, unsurprisingly, of the view that cover should not be provided where the policyholder would have suffered a loss in any event. Therefore, the Supreme Court will conclude whether the Covid-19 pandemic and the UK government’s response to it can be considered an interconnected cause of loss.

The insurers are also asking the Supreme Court to consider whether the High Court was correct in its ruling that the Orient Express Case was wrongly decided.

Conclusion

The FCA has set out its expectation; following judgment from the Supreme Court, insurers are to consider all outstanding and rejected claims and complaints, which may be affected by the test case. Therefore, it is worthwhile checking your BII policies at this stage to see if you have any of the clauses detailed above, as well as speaking to your broker.