Independent schools are facing unprecedented financial difficulties as a result of the coronavirus pandemic. Many reduced their fees for the Summer Term 2020 to reflect the different ways in which they are now having to educate their pupils. Many also face the loss of other sources of income such as the rental of sports and other facilities and fees for courses and programmes that would have run in the Easter and Summer holidays.
Most schools carry some form of Business Interruption (BI) insurance. However, many insurers in the independent school market have denied cover, in some cases claiming that BI insurance was never intended to respond to a global pandemic such as the one we now face. The widespread denial of BI cover across the insurance market is so significant that the Financial Conduct Authority (FCA) is starting a test case to try to give some certainty to both policyholders and insurers.
How can schools establish whether they are covered and how can they put themselves in the best position to pursue a successful insurance claim?
1. What is Business Interruption insurance?
BI insurance is usually provided in combination with property insurance. Cover under standard wordings is triggered where physical damage to the insured property causes a loss of revenue or increases operating costs. For example, if a school cannot operate because its main building is damaged by fire, the resulting loss of income or increased costs may be covered. This type of standard wording is unlikely to respond where losses are caused by an infectious disease or by actions taken to combat it. However, many insurance policies for schools include “extensions” that widen the scope of the events that will trigger BI cover.
2. What extensions might be relevant?
There are two main types of extension to look out for:
- Specified or notifiable disease extensions provide cover for losses caused by infectious diseases, usually where there have been cases of the disease at the school’s premises or within a specified distance of them. Some policies set out a fixed list of specified diseases that are covered. Since COVID-19 was only identified in early 2020 it is unlikely to be included in those lists. Other policies provide cover for losses caused by “notifiable diseases”. On 5 March 2020 the Government formally designated COVID-19 as a notifiable disease, in part to facilitate insurance claims by businesses affected by the virus.
- “Denial of access” extensions provide cover when access to, or use of, a school’s premises is hindered or prevented. The policy will set out what events causing the prevention of access will trigger the cover. For example, many policies include cover where access to premises is prevented on the order or advice of the Government, the police or other statutory authority.
Schools should scrutinise the wording of any relevant extensions particularly closely and try to anticipate the arguments insurers may rely on in seeking to deny cover including, for example, arguments about exactly what has caused the loss being claimed.
3. What other parts of the policy should schools look at?
It is important to establish at an early stage what level of cover will be available if the policy does respond. Many policies set out the basis on which loss of revenue, loss of profit and/or increased costs of working will be calculated. The details of those calculations can have a significant impact on the level of cover available.
BI insurance schedules typically record a school’s annual revenue under a column headed “Sum Insured” or similar. It can appear, therefore, that losses up to that level are covered. However, the level of BI cover available is usually sub-limited to a significantly lower level, either by reference to a specific sum or to loss of income arising for a specified period, or both. The policy may also contain endorsements or exclusions which limit the cover available in some circumstances.
4. What practical steps should schools take?
Most insurance policies oblige the insured to notify their insurer immediately of any event that may give rise to a claim. Schools should therefore speak to their broker as soon as possible, if they have not already done so, to ensure that insurers are put on notice of a potential claim. Schools should notify their intention to make a claim even if they are not sure whether their policy will provide cover or if it is not yet possible to quantify the losses suffered.
Schools should also ensure that they create and maintain the documentary evidence they will need to support any claim. The evidence required will depend on the part of the policy under which a claim is made and the types of losses that are covered, but the necessary evidence is likely to include: (i) records of any decision to reduce fees for the summer term 2020 and the reasons for that decision; (ii) financial records showing the effect of any fee reduction on the school’s income; (iii) evidence of other income that has been lost and the level of such income in previous years; and (iv) evidence of any additional expenditure incurred as a result of COVID-19.
Insured parties are also obliged to take steps to mitigate the losses they suffer as a result of an insured event. Schools should also keep records of costs they have saved while their premises have been closed such as reduced salary costs for staff who have been furloughed, any savings in relation to catering or other contracts and reduced consumption of utilities.
Finally, if a policy is coming up to renewal, schools should be alert to any changes their insurer might seek to make to limit or exclude cover for infectious diseases. Some changes in the level of cover available are probably inevitable in the circumstances, but insurers should highlight any changes well in advance of renewal. If you are in any doubt about the terms of a renewal policy then discuss them with your broker as soon as possible.
5. What can you do if your insurer refuses cover?
If your claim has been refused, it is often worth pushing back on the basis of the policy wording to explain why you believe the policy does provide cover and ought to respond.
Ultimately, if you and your insurer cannot agree about the scope of cover provided by the policy, the issue may need to be determined by an independent third party. An insurance policy is a contract like any other and the Courts (or an arbitral tribunal if the policy contains an arbitration clause) ultimately have jurisdiction to determine the obligations of the parties under the contract.
As an alternative to litigation, the Financial Ombudsman Service for Small Businesses (FOS) has the power to settle disputes between small businesses or charities and providers of financial services, including insurers. The FOS can help organisations with a turnover of less than £6.5 million or a balance sheet of less than £5 million and fewer than 50 employees. The FOS is already warning that it is experiencing high demand in the current situation and that complaints may take longer than usual to resolve. However, this route could still be faster - and cheaper - than litigation. It is important to note that in most cases a complaint to the FOS must be made within six months of a final response from the insurer.
6. The FCA’s test case
It is worth bearing in mind that schools will not, in all likelihood, have to decide whether to pursue a legal claim or a complaint to the FOS immediately. It should be possible, for example, to await the outcome of the court case being prepared by the FCA, announced on 1 May 2020. The FCA’s objective is to provide clarity for both insurers and policyholders by asking the Court to determine whether a representative sample of BI insurance policy wordings from across the market should respond to claims arising out of COVID-19. At the time of writing the FCA’s aim is for the test case to be heard in mid-July 2020. That is an ambitious timetable, and there may be some slippage, but the test case is still likely to provide some guidance on whether particular schools are covered more quickly than through taking individual legal action or through a complaint to the FOS. We are also aware that some insurers are now saying they are not prepared to settle any BI claims until the outcome of the test case is known. The FCA has set up a dedicated page to provide updates on the progress of this action.
The margins between a successful and an unsuccessful claim for BI cover can be fine. Ultimately, the devil is in the detail and the wording of the relevant insurance policy will be crucial. There are significant differences between the policy wordings offered by insurers in the market. Schools should therefore review their insurance policies carefully with their brokers and lawyers to establish whether their policy should respond and, if necessary, be prepared to pursue claims robustly.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, June 2020