The FCA and business insurance: Are Covid-19 interruptions covered?

Following disputes and disagreement over whether business insurance companies were required to pay out on business interruption policies following the Covid-19 outbreak, the Supreme Court has made a ruling which will help many businesses make successful insurance claims.

On 15 January 2021, the Supreme Court gave its verdict in the business insurance interruption test case arising from the pandemic, Financial Conduct Authority v Arch Insurance UK) Ltd and others [2021] UKSC1.

Background

Businesses who had to close their premises because of restrictions announced by the government during the coronavirus outbreak and who could not otherwise trade looked to their insurers to make payments.

Claims were made under disease clauses and prevention of access clauses in business interruption policies.

With a large range of policies written by a number of different insurers, confusion and uncertainty was widespread. Some insurers paid, while others claimed that policyholders were not covered.

In June 2020, the Financial Conduct Authority (FCA) brought a test case against eight insurers looking at the wording of 21 sample policies.

The FCA estimates the total number of policies in existence to be around 700, issued by 60 different insurers, but the test case has provided detailed guidance which will be applicable to many.

The High Court heard the case originally but on appeal the case was allowed to leapfrog the Appeal Court, moving straight to the Supreme Court.

The issues considered by the Supreme Court

The Supreme Court looked at business interruption cover that included disease clauses, where a notifiable disease occurs, and at prevention of access clauses where the authorities prohibited the use of premises.

Hybrid clauses combining both of the above were also considered as well as the calculation of losses under trends clauses and pre-trigger losses.

The Supreme Court’s decision

The Supreme Court unanimously dismissed the insurers’ appeals and allowed all four of the FCA’s appeals (two being qualified).

This means that all of the business insurance policy clauses that were considered by the Supreme Court will provide cover for business interruption attributable to Covid-19.

The judgment was particularly lengthy and the case complex. The following are the key points:

Disease clauses

Disease clauses will provide cover where there was at least one Covid-19 case within the relevant geographical radius, to be decided using government data. If the cases are outside of the geographical area, business interruption is not covered under a disease clause.

Insurers cannot claim that it was the UK/worldwide pandemic and not a local incident that caused the loss.

Prevention of access and hybrid clauses

Even though government and local authority requests for certain businesses to close were not backed by legislation, and so were only guidance and not law, a prevention of access clause would be enforceable.

By announcing that certain businesses must close, both the businesses in question and the public reasonably understood that this guidance was to be complied with without enquiring into the legal basis.

A government instruction of this nature could be classed as a ‘restriction imposed’, whether or not it was legally enforceable. The court did not go so far as to rule on each individual government announcement and regulation.

It was also held that a policyholder would have the ‘inability to use’ premises if they could not use premises for a discrete business activity or were unable to use a discrete part of the premises for business activities. For example, a department store that had to close all departments except its pharmacy would potentially be able to claim for its inability to use the rest of its premises. Claims can only be made for losses in respect of the part of the premises that is closed.

Trends clauses and pre-trigger losses

A trends clause also referred to as the ‘other circumstances clause’ or the ‘new business clause’, looks at the rate of gross profit, annual turnover and standard turnover and is the machinery by which the insurer quantifies the cover.

Insurers tried to argue that they were not liable to indemnify policyholders for losses which would have arisen but for the insured perils, ie. the wider effect of the pandemic meant that there would have been losses anyway, even if businesses had not been closed as the effect of Covid-19 was a trend.

The Supreme Court found this argument to be a form of exclusion. The trends clauses should be construed along with the insuring clauses, rather than excluding them. The aim was to arrive at results that would have been achieved but for the insured peril and the circumstances which arose from the same originating cause.

This means that, unless there is specific wording to the contrary, insurers cannot reduce a payment on the basis that losses arose partly because of other perils that were not insured where those perils were also caused by Covid-19. Covid-19 was not a trend.

The same reasoning was applied to pre-trigger losses, for example, where a pub which suffered a 30 per cent downturn in the week ending 20 March because of the pandemic but was not instructed by the government to close until 20 March should not have its payment calculated by reference to the reduced turnover figure.

The aim of a trends clause was to seek to ensure that the figures are as close as possible to what would have been achieved had the insured peril not occurred. This means that the sum payable should be calculated by reference to what would have been made if there had been no Covid-19.

Making a business interruption insurance claim

The outcome is good news for insured businesses, with those who have previously had claims rejected facing the possibility of receiving a payout after all.

More information will be forthcoming from the FCA in due course, to include a set of questions and answers for policyholders to assist them in making a claim.

If your business has been adversely affected by the pandemic and you believe you may have a valid insurance claim, we will be happy to advise you on your rights and put together the necessary evidence in support of your application.

This will include details of government guidance for your area of operation, information about the number and location of cases in your geographical location and financial information supporting your reduction in profitability.

Get in touch with us

At Lincoln & Rowe we understand the importance of helping our clients keep their businesses running smoothly. As well as in-depth commercial expertise we provide an excellent service to our clients and practical advice and guidance.

We have wide-ranging experience in litigation and corporate law, and were named as the ‘Commercial Disputes Specialists of the Year” in the Corporate Livewire Innovation & Excellence Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5. 

If you would like to talk to one of our expert legal team about any queries you may have, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030 and we’ll be happy to help.

The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.