In a hotly anticipated decision, the High Court yesterday (15 September 2020) ruled largely in favour of policyholders in a test case about whether losses resulting from the coronavirus pandemic are covered by business interruption (BI) insurance policies (The Financial Conduct Authority v Arch Insurance (UK) Limited and Others). The judgment removes a number of barriers to successful insurance claims. However, the Court has made specific findings about different policy wordings, so policyholders will need to assess carefully what the judgment means for their own policies. It is also likely that at least some of the insurers who participated in the case will appeal.
The judgment is the result of a test case brought by the Financial Conduct Authority (FCA) on behalf of BI policyholders. Many insurers had denied that their policies covered losses caused by the coronavirus pandemic. Their approach prompted widespread concern about the impact of these denials of cover, particularly on small and medium-sized businesses that had been seriously affected by the pandemic.
This note summarises the key elements of the case and provides guidance on how policyholders should now pursue BI claims or have previously denied claims reassessed.
What insurance policies are affected by the judgment?
BI insurance provides cover for loss of profits or additional expenses caused by an insured event which interferes with the normal operation of a business. The test case centred on the interpretation of common “extensions” included in BI policies which provide cover for losses caused by the occurrence of specific diseases at or near a business’s premises and/or losses caused by Government or Local Authority actions that prevent or hinder access to business premises.
What was the test case?
The test case was brought on behalf of policyholders by the FCA, which regulates insurers, to try to provide clarity about which BI policies provide cover for losses arising out of coronavirus and about what policyholders need to prove to make good a BI claim.
The case centred on two issues:
- Whether certain common BI policy wordings provide cover for losses resulting from the coronavirus pandemic (the Coverage Issue); and
- How policyholders can establish the necessary causal link between the insured event and the loss suffered (the Causation Issue).
The judgment runs to over 160 pages. It deals with the cover provided by a representative sample of 21 different policy wordings, as well as significant issues applying across policy types such as causation and how policyholders can demonstrate that coronavirus occurred in a particular area. Each policyholder will need to review their own policy carefully in the light of the judgment and to consider pressing their insurer to review any earlier denial of cover. We summarise below the key trends which emerge.
The Coverage Issue
As we explained in our previous briefing, there are two main types of BI cover that may be triggered by coronavirus. The first (Disease Cover) provides cover for losses caused by the occurrence of specific infectious diseases at the insured’s premises or within a specified distance. The second (Denial of Access Cover) provides cover where access to a business’s premises is hindered or prevented by something other than physical damage, most commonly by action of the Government or Local Authority.
The Court decided that many (but not all) policies that include Disease Cover will respond.
Insurers had argued that policies were only designed to respond to local outbreaks of a disease and that there was no cover where losses were caused by a wider national pandemic rather than a local outbreak. The Court disagreed. Disease Cover is generally triggered when there was an occurrence of coronavirus in the relevant policy area. The cause of the business interruption was the notifiable disease of which any local outbreaks were indivisible parts of the broader pandemic. Since policies do not state that cover is only available if there are cases in the vicinity of a business’s premises but not outside it, it would be an “anomalous” outcome if policyholders were prevented from making a claim simply because it was difficult or impossible to distinguish between the effects of local, as opposed to national, cases.
Denial of Access Cover
The Court took a more restrictive approach to Denial of Access policies, concluding that many wordings were intended to provide only narrow, localised cover. Many wordings will therefore require policyholders to show that the action of a relevant authority that has disrupted the business was in response to the local occurrence of the disease and not the broader national pandemic. The court also found that where a policy requires that an authority has prevented access to premises, the action of the authority must have the force of law, guidance or advice from the Government would not suffice. Finally, where the policy requires the prevention of access (rather than mere hindrance) the policyholder must show that the premises were completely closed for the purposes of carrying on the business.
Claims under Denial of Access policies will therefore be highly dependent on the specific wording of the policy.
The Causation Issue
A key element of the arguments run by many of the insurers in the case was that their policies did not respond because, properly analysed, any losses suffered by policyholders were caused by the pandemic more broadly, or the Government’s response to it, and not by the specific insured perils that were covered by their policy wordings.
Insurers relied heavily on the decision in Orient Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm) which dealt with a business interruption claim arising out of the damage caused to a hotel in New Orleans by hurricane Katrina in 2005. In that case the Court held that even if the hotel had not been damaged, it would have suffered significant losses in any event as a result of the ruinous effect of the hurricane on the surrounding area. The hotel could not therefore show that its losses were caused by the damage to its premises rather than the wider damage to New Orleans.
The Court in the current case distinguished Orient Express, noting that it had reached the necessary conclusions on causation issues as part of the process of construing the meaning of the policies it looked at. However, the Court was clear that if the judgment in Orient Express had somehow dictated the result of this case, it would have concluded that it was wrongly decided and declined to follow it. The consequence flowing from Orient Express would be that the worse the incident that befalls the policyholder’s premises and its vicinity, the less the insurance responds, and that cannot have been the intention.
What the judgment means for policyholders
Press reports suggest that insurers have asked for more time to apply for permission to appeal the judgment and that they have been given permission to appeal directly to the Supreme Court (“leapfrogging” the Court of Appeal). The final determination of the legal issues may still be several months away.
However, in the meantime the judgment is binding on the insurers that are parties to the case in respect of the policy wordings considered by the Court. It will also be strongly persuasive in interpreting similar BI policy wordings. Its impact will be significant - the FCA has published guidance in which it estimates that around 700 types of policy, held by around 370,000 policyholders, will be affected.
The FCA guidance also makes it clear that insurers should not delay the progression of business interruption claims until the outcome of any appeal is known. The FCA expects insurers to reassess claims that may be affected by the judgment and to write to the relevant policyholders within seven days to set out their position.
Policyholders will need to consider any communications from their insurers and look at their BI policy wordings carefully in the light of the judgment. Where the Court has found that a policy should respond, policyholders are free to pursue their claims.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, September 2020