Business interruption insurance and the pandemic

It is notorious that many businesses have been losing money hand over fist as the government’s various restrictions designed to manage the outbreak of the Covid-19 pandemic have impacted their profitability. But in the case of business tenants, the problem is even worse, largely because of a mismatch between insurance policies and rent cesser provisions in leases. The insurance litigation In Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2020] EWHC 2448 (Comm), the court (Flaux LJ and Butcher J) faced a battery of lawyers (15 silks and 21 juniors; how glad are we that property law in general involves rather less room for dispute) arguing a test case to determine issues of principle in relation to policy coverage under various specimen wordings underwritten by a range of insurers in respect of claims by policyholders to be indemnified for business interruption losses arising in the context of the pandemic and the advice of and restrictions imposed by the UK government in consequence. The closely reasoned 580-paragraph judgment offered a mix of mainly good but some bad news for the insured, with the result turning in some cases on whether the government had imposed a requirement that businesses should close (as in the case initially of most retail and entertainment uses) or simply given advice that workers should stay at home (as in the case of most office uses). The litigation has further stages to run, and in any event the court gave the insurers permission to appeal to the Supreme Court; but it is not the purpose of this article to pick over the merits of the decision (which seems perfectly sensible); rather it is to§ examine the particular position of businesses carried on by tenants, whose financial position depends not just on the insurance policy their landlords may have in place, but also on the terms of their leases (with which the FCA case was not concerned). As far as insurance is concerned, to the extent that tenants have their own business interruption protection, it will typically be triggered by the occurrence of a notifiable disease within a specified radius of the insured premises, which have then to be closed as a result of government diktat. Even if the notifiable disease provision covers this particular pandemic (which may be in doubt), tenants with such policies may yet fail to recover their business losses if their premises remained legally accessible – as has been the case in relation, for example, to offices throughout this pandemic. Commenting in relation to one of the standard policies before it, the court said: “It is nothing to the point that clients or customers did not visit the offices of their accountant, lawyer or financial adviser because of the restrictions on movement imposed by the Regulations, and conducted their business by Zoom or the like or by telephone.” Their offices were not required to close, and at most there was an impediment or hindrance on the use of the premises, and nothing which amounted to a prevention of access. So, while some tenants of shops, restaurants, pubs and gyms may be able to claim on policies with the right wording, tenants of offices and surgeries will not, unless their policy wording is different. Rent cesser clauses A typical rent cesser clause almost invariably provides words to this effect: “In the event of damage or destruction to the premises caused by an insured risk which renders the Premises unfit for occupation and use and/or inaccessible then the rent shall be suspended.” Unlike the insurance policies considered in the litigation (all of which contained “non-damage” extensions, which applied where the insured risk had not caused any physical damage), rent cesser clauses are nearly always limited by the requirement for there to be actual damage. This has the result that where the premises cannot lawfully be occupied (as a result of the Coronavirus Regulations), the rent cesser provision will not be triggered. What is bizarre about this state of affairs is that landlords’ insurance policies usually include cover against loss of rent following a pandemic even where there is no damage to premises – showing that insurers are not in principle averse to such cover. The position therefore appears to be this: (1) a landlord will have loss of rent cover, which will in principle cover the precise situation which has arisen in this pandemic, despite there being no damage to its premises; (2) the insurer will not therefore “mind” paying out for that sort of loss; (3) the landlord will also have a rent cesser provision, but only where there is damage to its premises; and therefore (4) not only will the tenant not be allowed to cease paying rent; but also (5) the landlord will then have no loss of rent for which to claim. Why has this situation arisen? One possible reason is that landlords are only ultimately concerned about the state of their buildings, leaving it to their tenants to worry about the business. But the standard inclusion of loss of rent provisions in leasehold insurance clauses (for which the tenant of course has to pay) show not only that the parties have at least considered the position that will arise where a tenant cannot pay rent; but also that insurers have provided cover. So why have the parties not provided for the situation in which a tenant should not have to pay, because it cannot use the premises? The current situation hurts not merely tenants, but also landlords, who are increasingly being confronted by defaulting tenants. There may just be provisions out there which resolve this dilemma – but if so, we have not come across any in routine use. This peculiar state of affairs suits nobody, and it is surely time that lease drafters changed their approach to the drafting of rent cesser provisions. Guy Fetherstonhaugh QC and Julia Petrenko are barristers at Falcon Chambers Picture © Hiut Denim/Athena Pictures/Shutterstock