Does business interruption insurance cover Covid-19?

Stuart Pemble considers the implications of the High Court’s decision in the test case brought by the Financial Conduct Authority. Key point The High Court has given hope to parties with common extensions to business interruption policies that they will be compensated for losses caused by the pandemic The judgment of Flaux LJ and Butcher J in Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2020] EWHC 2448 (Comm) – a decision of such importance that it was awarded Divisional Court status (meaning it was heard by a Lord Justice of appeal in addition to a High Court judge) – highlights a tension that is at the heart of the insurance business. Put perhaps rather bluntly, insurance companies need to receive more money in premiums than they pay out in claims. Events like the current pandemic mean insurers face a potentially large number of claims arising out of an unforeseen event for which they might not have received sufficient premiums, putting their business model under some financial strain. Arch was a test case brought by the FCA in its capacity as the insurance industry’s regulator regarding 21 separate business interruption policies issued by eight different insurers, although the FCA estimates that the decision could affect 700 types of policy issued by 60 different insurers to 370,000 policyholders. The court was asked to decide, effectively, whether losses arising from the interruption to businesses caused by the pandemic was covered by the policies in question. To adopt the language of the policies, was the pandemic an “insured peril”? Business interruption insurance Most business interruption insurance policies cover loss of profits and expenses suffered by an insured party as a result of damage (such as a fire or flood) to physical property. The pandemic is not caught by these policies. However, it is possible to take out policy extensions. The wording used in three such extensions were considered by the judges in Arch. Disease extensions potentially cover business interruption in consequence of, following or arising from the occurrence of a disease declared by the government to be “notifiable” within a specified radius of the insured’s premises. Prevention of access/public authority extensions provide cover where the insured is prevented from accessing and using its premises (or its access or use is hindered or restricted) as a result of government or other relevant authority actions or restrictions. Finally, there are hybrid wordings which relate to restrictions imposed on the insured’s premises as a result of a notifiable disease. The decision in context It should be stressed that the individual conclusions reached in relation to the 21 policy wordings are detailed, nuanced and depend on the specific words used. This note can only consider the general points of interest to be drawn from those conclusions. The judges and the parties also acknowledged that the government’s lockdown announcements of 16, 20 and 23 March 2020 (and the statutory instrument regulations giving the latter two legal force), all of which followed Covid-19 being declared a notifiable disease in England and Wales and the World Health Organisation declaring Covid-19 to be a pandemic, did not affect all businesses to the same extent. Supermarkets and pharmacies (which stayed open) suffered less disruption than restaurants (which had to close). Disease extensions In relation to the disease wordings, insurers argued that the linking of the policy to diseases occurring within a specific radius of the insured’s premises meant that cover was only provided in relation to local outbreaks of a notifiable disease. So far as the pandemic was concerned, this meant that cover only extended to the effects of a local outbreak and only where those effects could be distinguished from those of the wider pandemic as a whole. The judges disagreed, preferring the FCA’s argument that the cause of the business interruption was the notifiable disease, of which the individual outbreaks formed indivisible parts. Alternatively, the court agreed that each local outbreak was a separate but effective cause of the government’s actions nationally. Prevention of access/public authority extensions The judges felt that these clauses should be construed more restrictively than the disease extensions, although they did decide that some clauses provided cover to some insureds. The decisions rested on the precise wording of the clause and the application of the government’s advice and regulations to the insured’s business. For example, a restaurant which only offered eat-in meals could well argue that access had been prevented because its premises had been closed for the purposes of its business. However, a restaurant which was still able to offer takeaway services may have found its business only partially affected such that there may not be a prevention of access for the purpose of the policy extension. Hybrid extensions The court interpreted the two parts of the cover as summarised above: the disease element was more likely to be effective than the prevention of access part. Trends clauses Another issue for the judges to consider was the effect of trends clauses. These are intended to modify any claim to reflect changes which would have happened to the business had the insured peril not occurred. The insurers wanted to give the insured peril as narrow a meaning as possible. In relation to the disease extensions, for example, they argued that the peril was only the local outbreak of the disease. This would have meant that the consequences of the wider pandemic would reduce the amount of compensation recoverable. The court rejected the argument on the basis that it would effectively make a large part of the cover illusory rather than actual. What next? A certificate has been issued for a potential leapfrog appeal to the Supreme Court. We await to hear if permission to appeal will be granted. In the meantime, insured beneficiaries will no doubt be making claims under their business interruption extensions. Stuart Pemble is a partner at Mills & Reeve Photo by Kaique Rocha from Pexels