Scope of business interruption insurance being tested in court due to COVID-19

Welcome to the first in a series of blogs looking at insurance issues arising from COVID-19. This blog looks at business interruption cover, the next will explore employer and public liability coverage.

Definitely maybe

Back in March we posed the question: “Coronavirus related losses – are you insured?” For the majority of businesses in the UK the answer was a clear “no”. Most business interruption policies do not provide cover for losses resulting from a pandemic.

Some businesses have been in the fortunate position where the answer has been “yes”. A high profile example being the All England Lawn Tennis Club which is widely reported to expect a settlement from its insurers in excess of £100 million following the cancellation of Wimbledon 2020.

For many other businesses the answer has been “maybe”. This is because the policy wording is ambiguous and leaves scope for interpretation. Common examples include where the policy provides cover for ’non-damage denial of access’, ’public authority closure’ or ’notifiable disease outbreak’.

Where there is ambiguity there is, inevitably, litigation. Claims are already working their way through the courts in other jurisdictions including in the US where, for example, the District Court of Pontotoc County, Oklahoma is being asked to determine whether commercial premises have been “damaged” by the coronavirus because the lockdown has meant that they can no longer be used for their intended purpose. There has already been some success in the French courts by restaurant owners in respect of particular policy wording.

Test case in the High Court

In the UK, the FCA has been sufficiently concerned by insurers refusing cover that it has commenced litigation in the High Court in London with the aim of resolving the uncertainty around the validity of many business interruption claims. Eight insurers have been invited to participate in the litigation with 17 different policies to be analysed by the court. This followed the FCA’s review of over 500 policies from 40 different insurers and submissions from 1,200 (presumably disgruntled) policyholders.

The FCA’s view is that for many businesses which have policies focussed on property damage, the answer will remain “no” and insurers are not obliged to pay out. This litigation is not intended to re-write insurance policies but is designed to bring clarity for those businesses who are in the “maybe” category.

Using the test cases, the FCA and the insurers who are involved will ask the High Court to determine a number of key questions which are currently being asked by businesses across the country, such as if the policy wording requires the disease to be “in the vicinity of the premises” what does this mean?

For those businesses who have denial of access cover, and if the policy requires premises to be closed what is required to trigger cover? Is it enough that the business complied with the relevant Regulations and/or Government advice? What if the business was not specifically required to close but was following general advice to stay at home and maintain social distancing?

These may be particularly important question for businesses in Scotland who have been affected by the arguably more cautious guidance issued by the Scottish Government, resulting in re-opening happening at a slower pace than south of the border and, perhaps, resulting in a larger claim for lost revenue.

Implications for businesses

The case in the High Court is due to proceed in the second half of July. The Court’s decision will be binding on those participating in the litigation and may be persuasive when Courts are considering cases with the same or similar policy wording. The FCA’s hope is that it will result in early resolution of disputes-claims will either be paid or policyholders can obtain clearer advice based on the decision taken by the Court.

Regardless of the outcome of the litigation, each claim intimated to insurers under a BI policy will still need to be looked at on its facts. In bringing these cases, the FCA is highlighting that it is by no means a foregone conclusion that insurers are entitled to decline cover. Any business which thinks it may fall into the “maybe” category should carefully consider its position.