Are you insured for your business losses caused by the COVID-19 lockdown?

The ongoing COVID-19 pandemic has caused numerous issues around the world; by midway through September 2020, it is estimated that there have been nearly 30 million positive infections from the disease.

The pandemic has also had far-reaching economic consequences. It has set the globe into a recession that will take years to come back from and it has potentially ruined many businesses that were trying to make ends meet. Although, a recent ruling from the High Court, may have given some of those businesses a ray of light.

Many businesses have insurance that covers incidents that cause loss and damage to business and property. This could include things such as the destruction of business premises through fire or explosion, health and safety failings, product liability, or incidental exposure to professional negligence claims. However, many policies will also provide cover for, what is known as, business interruption. In other words, the losses a business suffers when it is unable to properly trade due to an insured event occurring.

A layperson may assume that the COVID-19 pandemic would fall into that category. After all, the restrictions imposed by the Government and caused by a global pandemic brought many a business to an absolute standstill. You cannot trade, for example, as a hairdresser if you are not allowed to open your shop or even visit your clients.

However, as the pandemic took hold, it became evident that some insurers were going to seek to avoid paying out for business interruption caused by the pandemic restrictions by relying on the wording of their policies. This caused the Financial Conduct Authority (FCA) to instigate a test case (on behalf of policyholders generally) in the High Court for a declaration that the insurers could not maintain a blanket refusal to pay out for such instances. A decision has recently been made which rules out an attempt by the insurers to completely wash their hands of their policyholder’s claims.

The FCA -v- Arch and Others

The High Court looked at 21 different samples of policy writing when making their decision. However, the court felt that the findings could be applied to hundreds of different policies across dozens of insurers and a huge number of policyholders. The judgment transcript was extremely long and complex, running to some 164 pages; this article sets out a brief overview.

The court considered three different types of sample policy wordings related to:

1. Disease wordings
2. Prevention of access wordings
3. Hybrid wordings

Disease

This relates to incidents where an insurer seeks to provide cover for business interruption caused by an outbreak of disease; although these types of wording normally only provide cover where the disease can be proved to within a distance of the business. Broadly speaking, they envisage a localised outbreak of an infectious disease.

Of course, the issue with COVID-19 is that, although we have a pandemic, the disease is rifer in certain areas than others and it is generally hard to prove that it definitely is in a certain area. If the clause has a vicinity of one mile from the business, how does a policyholder show that the disease was within that boundary?

Insurers sought to argue to the court that these types of wordings only applied to localised outbreaks and not nationwide ones. The FCA and the court disagreed. In essence, they said that as the outbreak was across the country, it satisfied the test for each locality.

Prevention of Access

These wordings generally focussed on cover for incidences where the insured’s business interruption claim was based on the prevention of access to their business by the Government/Local Authority etc. due to an emergency likely to endanger lives.

These wordings were viewed a little more strictly by the court. The court had to consider what was an ‘order’ by the Government and what was ‘advice’. For example, some restaurants could not provide sit down service but could offer takeaways. If the business before lockdown included takeaway service, it could be argued that the business had not been interrupted.

The court did not rule out that losses could be paid, but it largely depended on the factual background to the claim, such as what period is the business interruption sought from? What was the advice/order at that time? What was the actual impact on business etc?

Hybrid

These clauses considered wordings that provided cover for losses to, for example, interruption to business due to an inability to use the premises as a result of restrictions imposed by a public authority following an occurrence of disease. In other words, a mix and match approach of disease and prevention of access clauses.

The court took a similar approach to the disease element of the wording but was narrower in its approach to ‘prevention of access’. Largely, again, it would be very fact-specific looking at what happened at the relevant time and how a policy is worded.

Consequences of judgment

The judgment by the High Court does not mean that a policyholder will automatically be paid all of their business interruption losses as a result of the pandemic. They will still need to put in a claim and prove their case on the facts and terms of the policy.

However, it does mean that an insurer cannot maintain a blanket refusal to even consider the claim, which is a breakthrough for policyholders everywhere. It should allow businesses with appropriate cover to approach a claim with cautious optimism; the worst-case scenario could have been an almost complete denial of cover across all regions and sectors.

It also goes to show that the courts will probably side with a degree of common sense when interpreting policy wording, though it must be said that every claim is fact-specific based on what the policy actually says and what has actually happened in respect of the business making the claim.

Businesses will welcome the ruling as most will remain in the game. But insurers are far from defeated just yet. 

Please note, the information included in this update is correct at the date of publishing.