Business Interruption Insurance – good news for policyholders
Posted:25th January 2021
Many small businesses hold, as a matter of routine, insurance against business losses caused by an inability to carry on the business for a variety of reasons. Not surprisingly, the circumstances of the pandemic in 2020 led many SMEs to make claims on that business interruption insurance. Disputes arose, however, when some insurers interpreted the insurance clauses in a narrow way so as to try to disqualify the business from claiming, or to reduce the sum payable.
Because this was such an important point of principle, the Financial Conduct Authority brought a test case against a representative sample of insurers, asking the Court to determine the correct approach. The insurers were largely successful in the High Court. In order to obtain certainty for businesses and insurers alike, the Court allowed the FCA’s appeal to leapfrog the Court of Appeal, and be heard directly by the Supreme Court.
The Supreme Court principally found in favour of the FCA’s appeal. Sheldon Mills, Executive Director, Consumers and Competition at the FCA, has commented:
‘Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. This test case involved complex legal issues. Our aim throughout this test case has been to get clarity for as wide a range of parties as possible, as quickly as possible, and today’s judgment decisively removes many of the roadblocks to claims by policyholders.
‘We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible.’
The Court’s judgment is lengthy and complicated, and both the FCA and insurers will be working over the coming weeks to apply the ruling to existing insurance claims. FAQs and advice will be published as soon as possible. The important point to bear in mind is that the Court made rulings in principle on the basis of sample insurance policy clauses. However, each policy is different and there will be no substitute for looking at the exact policy wording, now that we have guidance from the Court as to how to interpret it. The Court’s judgment deals with the following policy types and arguments:
1. Disease claims
This covers policies allowing compensation where there is an outbreak of one of a list of notifiable diseases, normally within a geographical limit such as 25 miles from the business premises. The insurers’ case was that the policyholders had to show that their losses resulted from the effects of Covid-19 specifically within the 25 mile radius, rather than the nationwide pandemic. The Supreme Court said that whilst there had to be illness within a 25 mile radius, the loss did not have to result only from that illness, and it was important to take into account also the wider picture.
2. Prevention of access
This is to do with cases where access to premises is prevented by an “intervention” by a public authority. The insurers said that this was only a valid claim if the intervention, i.e. the lockdown, had the force of law. For example, the Prime Minister briefing that everyone should stay at home, before the legal regulations had been made, might not have had the full force of law. The second question under this heading was whether access had to have been completely prevented: for example if a restaurant was allowed to do takeaways, did that mean that the claim failed?
The Supreme Court agreed with the FCA that instructions to close issued by the government could trigger a claim, even before the formal legal regulations were issued. On the question of part-time opening or partial use, the Court agreed that the clause would be satisfied if either the policyholder could not use its premises for a specific part of its operation, or if it could only use part of its physical premises.
The Court made important findings about how the legal principle of causation – i.e. how you tell whether a loss has been caused by the insured event, and not some other thing entirely. This is a technical legal argument, which is too complex to deal with in this short article, except to say that the Court allowed causation to be interpreted in a broad way which was helpful to policyholders, rather than the narrow sense the insurers had been holding out for.
Trends clauses are a way insurers can have a second bite of the cherry in reducing the amount of a policyholder’s claim. The idea is that you have to look at the general economic climate and see whether that would also have made a difference to the business’ income. If the answer is that everyone’s income would have been down because of the pandemic, the insurers said they were entitled to take that into account. The Court, however, said that the gross turnover used to calculate the claim should only be reduced because of factors which were not to do with the insured peril (i.e. non-Covid factors).
The Court also made decisions about what is called a “pre-trigger loss”, in this context – e.g., suppose a pub lost business in a given week as a result of Covid, but didn’t close until the week after, could the insurer take the earlier week into account in calculating turnover, so as to reduce the sum paid out? The Court said no.
Finally, a case called Orient Express from 2010, concerning losses incurred in the aftermath of Hurricane Katrina, has been held to have wrongly decided. Orient Express had been strongly relied on by insurers in their arguments in this case.
This decision gives support and confidence to small business owners in their claims for losses caused by the pandemic. Don’t hesitate to contact us if we can help with advice on the terms of your particular insurance policy.
To speak with one of our Disputes & Litigation Solicitors please call us on 0191 500 6989 or email [email protected]
*This is not meant as legal advice and should be viewed as information.*