This article was first published on Thomson Reuters Regulatory Intelligence – 23 September 2020.
The economic impact of COVID-19, and in particular of the 'lockdown', means that non-damage business interruption insurance has been the unlikely subject of much public debate in 2020. In particular, statements from insurers that there is no, or very limited, coverage under such insurance policies have been met with fierce criticism from policyholders.
This ongoing dispute took a notable step forwards last week, with Judgment handed down on 15 September 2020 by a 'Divisional Court' of Lord Justice Flaux and Mr Justice Butcher in a test case brought by the FCA under the Financial Markets Test Case Scheme. In bringing the test case the FCA's stated intention was to resolve the uncertainty around certain insurance policy wordings in line with its duties to take action in the public interest to advance its consumer protection and market integrity objectives.
Eight insurers - Arch, Argenta, Ecclesiastical, Hiscox, MS Amlin, QBE, RSA and Zurich - participated, with the Court considering a number of representative policy wordings to provide guidance on the proper interpretation of relevant policy wordings. Two 'interveners' were also permitted to make submissions on behalf of policyholders with claims against Hiscox.
The Judgment is binding on the parties to the test case and of guidance in respect of insurance policies with similar wordings. However, it is likely that a number of issues will be appealed to the Supreme Court; a further hearing on 2 October 2020 will provide the first opportunity for the parties to seek leave for such an appeal.
Any appeals notwithstanding, the Judgment has been widely viewed as positive for many policyholders. However, it is nuanced and the implementation of its findings will be a fact-sensitive exercise. Indeed, despite the perception it has 'lost' on many issues, Hiscox has announced that as a result of the Judgment its estimate of additional business interruption claims is less than £100m net of reinsurance; a reduction of £150m from the upper-end of its previously published risk scenario.
Business Interruption Insurance
Business interruption insurance is typically found in property insurance policies or, sometimes, in commercial combined insurance policies. Either way, the main limit of liability for business interruption claims is usually triggered where there has been damage to property insured elsewhere in the policy – for example, in respect of fire or flood.
The test case addressed coverage under 'non-damage' business interruption wordings, commonly found in 'extensions' to cover and therefore with lower limits of liability. For the purpose of the Judgment these wordings were discussed in three categories: (i) 'disease', providing cover for interruption or interference in consequence of an occurrence of a notifiable disease within a radius of the business premises; (ii) 'prevention of access / public authority', providing cover for restrictions on the use of the business premises as a consequence of actions by a relevant authority; and (iii) 'hybrid', providing cover where restrictions are imposed on the business premises in relation to a notifiable disease.
By way of very brief summary, the Judgment held as follows:
- Disease wordings: insurers argued that there was only cover for a local outbreak of COVID-19 and that the interruption or interference had to arise from that local incidence of the disease. The Court disagreed and considered that "anomalous" results would follow from that position. It accepted the FCA's argument that the cause of the interruption or interference was COVID-19, of which the local outbreaks were an indivisible part. In particular, the wordings did not require that COVID-19 only occurred within the specified radius, just that it did occur within that radius. Two of the QBE wordings were treated differently, as they covered loss resulting from interference in consequence of an "event" within a specified mile(s) radius, which has a specific meaning in English insurance law and narrowed the cover to where a localised incident of the disease was the cause of the interruption or interference.
- Prevention of access / public authority: these wordings were found to give narrower coverage in response to localised events, rather than in response to the wider pandemic. The Court also distinguished between coverage for 'prevention' of access and 'hindrance' of use, meaning a detailed consideration of a particular policyholder's circumstances or business would be considered – for example, because different 'categories' of business were subject to different restrictions in the Coronavirus legislation.
- Hybrid: the outcome on these wordings reflects that they combine the facets of the other two categories, with the occurrence of the disease reflecting the broader findings in the Judgment and the restrictions that followed more narrowly applied.
- The case also raised an evidential issue: whether the insured can discharged the burden of proving that the disease occurred or manifested in a certain area. The Court did not make any findings of fact on this point, albeit it is helpful for policyholders that insurers have conceded in principle that certain categories of evidence are capable of demonstrating the presence of the disease in a relevant area (e.g. NHS Deaths Data).
Insurers had argued that even where coverage was triggered, the indemnity payable would be limited in many cases by the application of 'trends' clauses. These clauses are intended to determine the relevant counterfactual scenario to put the insured in the position it would have been in had the insured peril not occurred. If, in the counterfactual scenario, the loss or turnover or profit would have happened anyway, then it is not covered, because the insured peril cannot be said to be the relevant cause of the loss. Insurers' position was that the insured peril for these purposes was a narrow one – for example, in applying a trends clause the counterfactual would involve removing the local occurrence of the disease but not the wider pandemic or government actions. In making this argument insurers relied on the decision in Orient Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm). That case concerned an arbitration award that was upheld on appeal to the Commercial Court and in which it was found that following damage caused by Hurricane Katrina the loss recoverable by a hotel that had been damaged was limited because the wider effects on New Orleans of the hurricane were not removed as part of the counterfactual scenario, merely the damage to the hotel itself.
The Court disagreed and instead found that the insured peril was, for each of the wordings, a composite one. For example, in relation to the disease wordings it was both the effects of COVID-19 inside and outside of the specified radius that should be removed from the counterfactual. In relation to Orient Express, the Court distinguished the case from the wordings before it. However, the Court still proceeded to give its view that Orient Express had been wrongly decided and that, if it had been necessary to do so, it would not have followed it.
As noted above, aspects of the Judgment may be subject to appeal and the parties had previously envisaged this being directly to the Supreme Court. In particular, whether insurers will look to challenge the decision on 'trends' clauses will be crucial.
In the interim, policyholders should ensure they have taken steps to preserve their position and should look to progress their claims. For many this will still require a detailed analysis of the particular circumstances of their business and the application of the Judgment to the terms of their particular policy.