Business interruption claims and COVID-19: Good news for SMEs but what happens now?
On Friday 15 January 2021 the Supreme Court delivered its eagerly awaited judgment in the test case between the Financial Conduct Authority (FCA) and various insurers. The FCA was acting on behalf of policyholder businesses disrupted by COVID-19.
To the relief of SMEs awaiting the decision, the court found heavily in favour of the policyholders.
It is estimated that 370,000 policyholders could be directly affected.
This followed appeals by the insurers and also by the FCA against September’s High Court judgment. We wrote about that judgment at the time, https://www.bermans.co.uk/business-interruption-claims-and-covid-19-good-news-for-smes/. The insurers’ appeals were largely unsuccessful and the FCA’s appeals mostly succeeded.
As ever, the outcome of any individual claim will always hinge on the wording of the policy and the circumstances of the particular business.
The test case originally involved 21 sample forms of policy wording taken from 8 different insurers’ policies. 6 insurers appealed the High Court decision.
Some of the policy clauses related to business interruption caused by disease; some to interruption caused by the denial of access to trading premises by Government regulations (due to the pandemic); and some were a hybrid of both types.
In each case the court interpreted the wording according to normal principles of contract law.
There were 6 main groups of issues considered by the court, based on the sample policy clauses. These were:
- For “disease” cover, whether any outbreak of the virus within a given area (typically a 25 mile radius) was sufficient to trigger a right to claim. It was decided that it was not. The trigger was a case of illness arising from COVID-19 within the area causing interruption to the business. Cases arising outside the area could not be taken into account. However the business interruption did not have to arise only from cases of the disease within that area, as opposed to other cases outside it. That would naturally have been very difficult to prove in many cases.
- For “denial of access” cover, whether an instruction given by Government or a public authority, without having the force of law, could be sufficient to trigger the right to claim (it could be); and whether hindrance in using premises, short of a complete inability to use them, is sufficient (it is not, but inability to use a specific part of the premises, or to use them for a specific part of a business, can be).
- What connection needed to be shown between the occurrence of a notifiable disease and business interruption losses. The court decided that all stipulated elements needed to be among the causes of the loss (usually these will consist of the occurrence of the disease within the specified area, and the denial of access) but it was not necessary to show that these were the only causes, nor to take account of occurrences of the disease outside the area. This is important since in any given case of Government restrictions, especially at a national level, the main cause could nearly always be argued to be cases of COVID-19 occurring outside the area.
- Whether insurers could rely on “trends clauses” (providing for the adjustment of profit/revenue figures to reflect underlying trends of the business when calculating loss) to adjust such figures downwards due to other aspects of the pandemic. It was decided that they could; but only to reflect circumstances that are unconnected with the particular insured peril. For example, for a fashion retailer with a shop which has been closed due to COVID-19, but also a website which remains fully operational, a claim for the loss in turnover of the shop will involve provision of a comparison with a previous period (generally a year) of trading. However, any adjustment made by the insurers to reflect prior loss of business (which may have shown in the preceding weeks’ turnover figures) can only relate to factors unrelated to the pandemic. Reduced demand in the preceding weeks due to people going out less, caused by COVID-19, cannot therefore be taken into account as regards the shop. There would however be no claim for lost business via the website.
- Linked to number 4 above, whether pre-trigger losses which arose from the pandemic, but which are not sufficient to trigger a claim, should be taken into account in calculating losses (e.g. where a pub’s turnover immediately before the closure announced in March 2020 was already well down on the previous year due to public safety concerns about COVID-19). The court found in favour of the businesses and decided, as in the case of the “trends clauses”, that any adjustments should only relate to factors unconnected with COVID-19.
- Whether insurers could argue that the business interruption losses would have been suffered anyway due to external factors not directly related to the particular business (e.g. if the closure of an entire town centre due to COVID-19 would itself have caused loss of business even if the particular business had not had to close). It was decided they could not, and an earlier High Court case relating to damage caused by Hurricane Katrina, in New Orleans, where the policy was subject to English law, was overturned!
Undoubtedly the case is good news for SMEs with pending business interruption claims. It is likely that the survival of many of them will have been safeguarded after months of uncertainty. However, further doubts remain as to how proactive insurers will be in resolving individual claims.
The case may also have a bearing on business insurance claims relating to perils other than COVID-19.
All affected policyholders are expected to receive an update from their insurers within 7 days of the judgment. Where cases have been referred to the Ombudsman (FOS), the FOS will be in touch as to the implications.
As always, the particular policy wording will be crucial.
If in doubt, legal advice should be taken.
If you a have a business interruption claim and your insurer is disputing liability or loss we will be pleased to discuss it with you:
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