The FCA was seeking legal clarity on whether and how particular business interruption insurance wordings should respond to the COVID-19 pandemic and subsequent national lockdown, starting with the Prime Minister’s statement to the public on 16th March 2020.
In summary, the court dismissed the appeals made by the insurers involved and found in favour of the arguments advanced for policyholders by the FCA on the majority of the key issues which is a positive claims outcome for many policyholders.
This communication aims to summarise Gallagher’s current understanding of the case and its judgment. However the judgment is complex and deals with many issues and our legal and claims teams are working through the detail.
Insurers are responsible for updating clients regarding next steps, and how they will be processing any claims. We are also liaising with insurers to help get the claims process started ASAP.
Of property damage insurance policies, many include cover for a period of business interruption following insured physical damage. Some policies went further and included certain provisions to pay some indemnity where there was non-damage business interruption.
These extensions were provided by insurers under many different wordings. Following the emergence of COVID-19 and the UK national lockdown in March 2020, most insurers took the views that the extensions were not intended to nor did they provide a policy response to the resultant disruption. Consequentially, the FCA gathered data from the insurance market, selected twenty-one sample wordings representative of what it saw as the most important issues, and with the eight insurers of those sample wordings sought clarity from the Court as to the meaning of the relevant clauses.
The High Court heard the case in July 2020, issued its judgment in mid-September. The FCA and insurers then appealed some of the High Court’s findings. The appeal was heard by the Supreme Court in November 2020, and the Supreme Court judgment was handed down last Friday 15th January 2021.
In a letter to insurers on 22nd January 2021, the FCA set out that “It remains the case that most SME BI policies are focused on property damage and only have basic cover for BI as a consequence of property damage, so are unlikely to pay out in relation to the Covid-19 pandemic and its effects. However, some policies providing cover for BI from other causes, in particular infectious or notifiable diseases and non-damage denial of access and public authority closures or restrictions, do provide cover for these events”. Those latter cases were within those considered in the Test Case.
What did the Courts decide in the Test Case and its Appeal:
The Courts divided the non-damage business interruption wordings into three groups: Disease Clauses, Prevention of Access Clauses, and Hybrid Clauses. There are assorted wordings in each group, but broadly:
Disease Clauses are clauses triggered by the occurrence of a disease alone, often within a certain distance of the insured premises. Typically, these refer to covering business interruption or interference as a result of or arising from or following an occurrence of a relevant disease ‘within the vicinity of the insured premises’ or within some defined radius or perimeter of the insured premises (e.g. 25 miles). Where the disease is defined to include a “Notifiable Disease” (as opposed to a restrictive, closed list of diseases), these clauses have broadly been held to be triggered.
Prevention of Access Clauses are clauses triggered by public authority intervention or action, which prevents or hinders access to or use of the insured premises. The Supreme Court decided that these clauses could be triggered not only by regulations having the force of law, but also by advice and guidance promulgated by e.g. the Prime Minister, which was in mandatory and clear terms. The Lord Justices of Appeal also concluded that an “inability to use” could mean something less than a total inability to use the premises, including an inability to use part of an insured’s premises, or use of the premises for part of its intended use. While it is good news that some of the Prevention of Access clauses will be triggered, that unfortunately may not be true in many cases where the clause refers to some incident, event, danger or emergency in the locality or vicinity of the premises.
Hybrid Clauses are a blend of the two above, and contain elements of disease clauses and prevention of access clauses. They refer to some imposed prevention of access, but imposed due to the occurrence or manifestation of a notifiable disease. Coverage under those reflects a convergence of relevant issues above.
So, while every client’s case will depend on its wording, definitions and any relevant exclusions – as well as the particular facts – for some clients whose cover includes a Disease Clause, Hybrid Clause or in limited cases Prevention of Access clause, the outcome of the Court case is positive.
Trend Clauses: The Supreme Court also made findings relevant to assessment of losses – especially as to the operation of trend clauses. The Supreme Court was clear that relevant trends would exclude those related to the insured peril – so typically COVID-19 and the March national lockdown.
Pre-trigger losses: The Supreme Court also decided that any pre-trigger losses should be disregarded: the indemnity is calculated by reference to what would have been earned had there been no COVID-19, disregarding any demonstrable revenue drop prior to the policy being triggered.
There remain some points which the Supreme Court was not asked to consider and which the judgments do not directly address. For example, the Test Case was first heard just after the end of the March national lockdown and so neither the High Court judgment nor that from the Supreme Court considered how policies would deal with subsequent or successive lockdowns. There therefore remain various issues (e.g. quantification; aggregation) that will still need to be addressed as part of the claims process.
Some of the practical ‘implementation’ of the judgment will be set out in some ‘declarations’ being discussed between the FCA and interested insurers, to be approved by the Court.
Nevertheless, at the time it announced the start of the Test Case, the FCA issued guidance to insurers that it expected them to keep all affected policyholders updated in a timely way.
In order to assist policyholders and other stakeholders to understand the outcome of the test case, the FCA has published a table setting out the outcome of the test case and key paragraphs of the judgments according to policy type in the representative sample of 21 policy wordings. In addition the FCA has issued a Dear CEO letter outlining its expectations of insurers.
More details, including the FCA’s recent letter to insurers are available on the FCA’s website at Business interruption insurance | FCA
We hope that the above summary assists you ahead of a more detailed position from insurers. Of course, should you have any particular questions or concerns we encourage you to speak to your usual contact at Gallagher.
This note is not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing this note we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at 25 January 2021, but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information in this note nor determine not to act, without first seeking specific legal and/or specialist advice. Our advice to our clients is as an insurance broker and is provided subject to specific terms and conditions, the terms of which take precedence over any representations in this document. No third party to whom this is passed can rely on it. We and our officers, employees or agents shall not be responsible for any loss whatsoever arising from the recipient’s reliance upon any information we provide herein and exclude liability for the content to fullest extent permitted by law.