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Richard Harris

The coronavirus pandemic has caused substantial loss and distress to businesses throughout the country leaving many under incredible financial strain to stay afloat.  This financial pressure was brought about by the national lockdown and the effects of this are still being felt today. Businesses in some areas are now also facing further local lockdowns meaning some could be forced to close again.

Many businesses have business interruption cover as part of their insurance policies, and this protects them from loss of profit and additional expenses that the business may suffer as a result of damage to a property following a fire or flood, for example.  Many of these policies also include specific protection for matters other than physical damage.  It was hoped by a lot of businesses that these non-damage business interruption clauses would provide them with cover for the losses they have been suffering as a result of coronavirus related closures, however, this has not been the case.

Not only have their businesses been severely crippled by the Covid-19 pandemic itself, they’ve also then been hit by refusals to cover their businesses when they have made claims to their insurance companies.

Clarity and reassurance to policyholders

As a result of this, the Financial Conduct Authority (“FCA”) started a test case in court with a view to bringing clarity and reassurance to policyholders.  The FCA involved leading insurers in the test case that provide a large majority of the types of business interruption policies that required clarification.  The FCA chose 21 different policy wordings with a view to covering most issues that could be in dispute between the insurers and their policyholders.  The FCA sought guidance from the court as to whether these policies would cover businesses impacted because of the coronavirus pandemic.

The recent judgment has brought some much-needed clarity and reassurance to many businesses.  The FCA estimated that there were approximately 700 types of policies, across 60 different insurers and 370,000 policyholders that would potentially be impacted by the judgment.  Many of the policyholders which could benefit from the ruling are small to medium sized enterprises who are in desperate need of such support following the pandemic’s impact.

Below is a short overview of some of the key aspects of the judgment.  The judgment only serves to act as guidance and each policy will need to be considered on its own terms and the facts of a particular claim.

The policy wordings that the court considered were split into three broad categories.  Each of these are set out below with a short comment on the court’s findings:

  1. Disease wordings

These policies seek to provide business interruption cover following the occurrence of a notifiable disease within a specified radius of a businesses premises or within the vicinity of that businesses premises.

Prior to the test case, the government had declared Covid-19 a notifiable disease with a view to it being covered under business interruption policies.  However, this did not always happen, and it was often the case that policyholders were unable to claim.

The insurance companies argued that the policy wordings provided only for a local occurrence of a disease.  They sought to argue that this meant it was restricted to the cause of the business’ loss being a local event rather than the wider national spread of the disease.

The court, however, agreed with the FCA that the cover was not limited to the effect on the business of a local outbreak.  A local occurrence could not be separated from the wider coronavirus pandemic.

A national response to a widespread outbreak of a disease was caught by the disease policy wordings requiring an interruption to the business and a notifiable disease in the businesses area. In other words, it was sufficient that the national response to the coronavirus pandemic caused a businesses losses.

It should be noted, however, that in relation to two of the policy wordings relating to QBE cover, the court considered these to be more restricted and contemplated cover being provided in response to a more specific localised event rather than a national response.  In such policies it would only be possible to recover if it could be shown that the cases of disease within the relevant policy area, as opposed to elsewhere, were the cause of the business interruption.    Such policies may be more difficult for a business to claim following the national lockdown, albeit each claim will be specific to its own circumstances, this could become particularly important to businesses as a result of the local lockdown situations that are currently ongoing.

  1. Prevention of access/public authority wordings

These policy wordings are designed to provide cover in circumstances where access to the business premises had been hindered or prevented because of government or other public authority action.

In general, the court took the view that these types of clauses are more restrictive than most of the disease clauses considered above.  This does not mean that these types of clauses will not provide cover but rather it is a more narrow and restrictive set of circumstances to determine whether cover is available to a business. It will depend very much on the precise terms of the policy and how the government’s advice and regulations have applied to that business.  For example, some businesses such as gyms and theatres were required to close completely.  Other businesses were required to work from home whereas some, such as restaurants, were still able to offer takeaway services.   It should be noted for restaurants it would be relevant as to whether or not the takeaway service formed part of its existing business at the time.

Whilst the court’s rulings on these types of clauses do not provide the same comfort to businesses that the disease wordings may provide, there is still the potential for businesses to be able to make claims under policies such as these and each case will need to be considered closely on its own particular policy wording and facts.

Given the current local lockdown restrictions coming into place and the Government changing some requirements from merely advice to law, it may open the door for more businesses being able to claim under these types of policy wordings.

  1. Hybrid wordings

These types of policies are a hybrid of the above two and involve restrictions being imposed on a business premises in relation to a notifiable disease.

As might be expected, based on the court’s approach to the above two types of policy wordings, the court have allowed the wider interpretation of the disease element of such policies but a more restrictive application of the prevention of access requirements.

The court took a similar approach in that it rejected the insurers’ argument that cover was only in relation to losses occurring from a local outbreak and took the view that it would cover the national outbreak.  However, the court then followed its more restrictive interpretation in relation to the prevention of access wordings requiring something mandatory, such as the mandatory requirements of regulations, and also required something more than just an impairment of normal use.

Does your business have the right wording in the insurance policy for a claim?

A business should give close examination of any business interruption terms their policies and the particular facts relating to its own business to decide whether it can make a claim. The new lock lockdown restrictions may also open the door for further claims on policies containing the hybrid wording.

As stated, the above is a brief overview of some key aspects of the judgment.   Each insurance policy will need to be considered on its own wording and the facts relating to each business.

The judgment has overall provided encouraging findings for policyholders and should offer some comfort, particularly for those businesses with policies which include the disease wording.

Business Interruption policy may cover your business

It is important for a business to consider its insurance policies and whether it may have any relevant business interruption cover.   A business should consider its policy wording carefully and should seek advice at the earliest opportunity so that the policy wording and facts of the particular business can be considered alongside the guidance given by the court in its judgment to put the business in the best position to make a successful claim. The importance of being able to make a claim under such a policy has been brought back into focus by the new local lockdown restrictions and some businesses again being forced to close.

It may be that businesses which have suffered and / or are continuing to suffer because of the pandemic may have a lifeline through their insurance policy.

For any advice in relation to claims under your business interruption policies, please contact Richard Harris DTM Legal or call him on 0151 230 1215

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