As a result of the COVID-19 pandemic, the government brought in restrictions to try to slow the spread of the virus, which included the mandatory closure of many businesses, including much of the hospitality industry.
Given the financial losses caused by such closures, many businesses sought to claim from their business interruption insurance. However, many insurers took the stance that these policies were not designed nor intended to deal with the COVID-19 pandemic, and rejected the claims. This approach was brought to the attention of the Financial Conduct Authority (FCA) who brought a test case to the High Court to trial this approach.
Judgment has now been handed down in the COVID-19 Business Interruption insurance test case, The Financial Conduct Authority v Arch and Others  EWHC 2448 (Comm). This ruling offers hope to potential claimants who are seeking coverage, or have previously been denied coverage, for losses as a result of the pandemic, under their business interruption insurance.
This case concerned a number of sample wordings of business interruption policies from eight leading insurers (Arch, Argenta, Ecclesiastical, Hiscox, Ms Amlin, QBE, RSA and Zurich). The case focused on business interruption claims by policy holders as a result of the COVID-19 pandemic and the advice and restrictions imposed by the UK government.
Sample Policy Wording
The case centred on 21 sample policy wordings, to determine issues of principle regarding whether they were likely to respond to the losses caused by business interruption as a result of COVID-19. The sample policy wordings fell into three categories:
- Disease wording: cover following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises;
- Prevention of access wording: cover where there has been a prevention or hindrance of access to or use of the premises; and
- Hybrid wording: a combination of the two above.
The court found in favour of the FCA on the majority of issues. Of particular note were the following points:
- Disease wording: the court considered that claims should be accepted where the pandemic itself was the cause of the loss suffered by the business, within the meaning of the policy. Importantly, the court held that COVID-19 amounted to an “occurrence” meaning policyholders do not have to show the virus was the only cause of business interruption, just that it was present in their local area.Examples of evidence that policy holders can provide, include reported cases of the virus in a particular area, NHS published statistics or data published by the Office of National Statistics.
- Prevention of access: where denial of access to a premises was a trigger for cover, the majority of policies considered should provide cover. There needed to have been an actual closure of the premises, unless “interruption” of the business is provided for in the policy.For example, if a restaurant was forced to close because of the government’s COVID-19 rules but then started operating as takeaway, this would be considered a “prevention of access”. This is because the new takeaway business is fundamentally different to that of the insured business.
This outcome might differ if the restaurant was also a takeaway, prior to the COVID-19 regulations. While diners would be prevented from eating inside, the policyholder could continue to run the takeaway part of the business. Therefore, access has not been “prevented”.
While the court found in favour of the FCA on the majority of issues, they produced a lengthy nuanced judgment. For the 21 separate policies submitted, they reached different conclusions. Therefore, any policy you may have will need to be considered against the judgment.
Trends clauses consider whether there are business trends which affected the business before or after the COVID-19 pandemic. If there is such a business trend, which would have affected the business insured, the quantum of the insurance award will be reduced.
The insurance companies argued that the incidence of COVID-19 was insured, however, the mandatory closure of businesses was a business trend and, therefore, losses from closure should be disregarded. This would have ultimately had the effect of significantly reducing the level of recovery that a business would receive under its policy. The court rejected this argument, as by labelling the government’s mandatory restrictions as “business trends”, the business interruption policy would be largely a mirage, which could not have been the parties’ intention.
The court found that loss flowed from the comparison between the actual performance of a business against how the business would have performed but for the outbreak.
The court distinguished from Orient Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comms) as a result of the difference in the type of insured perils in both cases.
Effects of the judgment
The judgment binds the eight insurers involved in respect of the specific policies that were considered. While the insurers are likely to appeal and “leapfrog” to the Supreme Court, in the fast changing and developing landscape of business during COVID-19, this ruling works towards providing certainty to policyholders.
What does this mean for your business?
COVID-19 has caused substantial losses to many businesses and this judgment has removed a number of roadblocks in making a claim under your business interruption policy. The FCA has called this case a “significant step” in resolving policyholders’ current uncertainty. The effects of this judgment are potentially far reaching. The FCA estimated that, in addition to the 21 sample wordings that were considered from the eight defendant insurers, there could be some 700 types of policies across 60 different insurers and 370,000 policyholders that could potentially be affected by the test case.
In the FCA’s letter of 18 September 2020, they asked insurers to pay all valid claims “in full at the earliest possible date to support business and consumers during the current situation” and where they do not, the FCA “will use the full range of our regulatory tools and powers to ensure they do so”. In the same letter, the FCA reiterated the importance of insurers reassessing claims, settling quickly and making interim payments so to avoid financial pressure.
It may be the case that your insurer was not involved in the test case, or your policy has different wording. Assessing the effect of your business interruption policy will depend on the wording of the policy and the circumstances of each case. However, if you have a business interruption policy, and have previously been rejected by your insurer, there is possibility of having your claim reassessed.