COVID-19 and Business Interruption – FCA Test Case

The COVID-19 Pandemic has brought about significant disruption across the majority of UK industries, with businesses facing substantial financial losses and in certain instances has led to insolvency. Policyholders have looked to their insurers and brokers in order to understand whether claims can be made for losses suffered, primarily under their Business Interruption policies. Insurers have, generally speaking, declined these claims for various reasons in the first instance, dependent on the particular Policy Wordings which are operative. This has caused extensive uncertainty and ambiguity among Policyholders, and as a result the FCA (Financial Conduct Authority) has stepped in to obtain urgent clarity on the appropriate interpretation of certain Policy Wordings.

The starting point for insurers has been to insist that Business Interruption claims require a Material Damage trigger. In order for loss of profits or increased expenditure to constitute a valid claim, there is a requirement of physical damage affecting the premises. For instance, a flooding event which has rendered a commercial premises uninhabitable, will act as a Material Damage trigger and will therefore satisfy the pre-requisite to a Business Interruption COVID-19 claim. Given that in the vast majority of Business Interruption claims which Policyholders may submit, there will be no Material Damage trigger, the argument put forward by insurers is that there can be no Business Interruption claim.  

That said, over time insurers have included certain Business Interruption extensions – so called ‘Non-Damage Extensions’ within their Policy Wordings. Two such extensions which have been brought into the spotlight are Denial of Access or Notifiable Disease extensions. As the names suggest, these covers may provide for increased costs incurred by Policyholders, due to the outbreak of a disease on or near commercial premises. There are currently hundreds of Policy Wordings which have the potential to provide cover under these extensions, and as such it would be impractical to provide a detailed interpretation on any one of these here.

Instead, the FCA has initiated proceedings in the High Court in order to seek clarity around the correct interpretation of a number of words, phrases and clauses which appear throughout Business Interruption Policy Wordings, and therefore underpin any claim. Acting on behalf of Policyholders, the FCA has taken a representative sample of Policy Wordings across a range of policies and industries, and have asked the High Court to make a ruling on the fundamental points which sit behind any potential COVID-19 Business Interruption claim. The Court’s judgment will be legally binding on insurers, and while it will not determine the amount that may be payable under a claim, it will provide the fundamental basis for doing so.

The High Court is expected to rule on a number of general principles, including but not limited to:

• Whether the Prime Minister’s advice to close certain businesses falls within the definition of a Public Authority, and moreover whether that advice constituted a decree or a recommendation for the purposes of the Policy Wordings;
• Whether businesses who have closed of their own volition would fall under the scope of the wording – i.e is voluntary closure sufficient;
• Impact of the Health Protection (Coronavirus, Business Closure) (England) Regulations 2020 on insurance policies;
• Do the policies require actual discovery of COVID-19 / employees or public showing COVID-19 symptoms / someone testing positive for COVID-19 etc. The proximity and/or prevalence of the virus will be analysed;
• Do the policies provide cover if the premises have not been closed and remain open, albeit with the majority/all staff working from home;
• Whether Pandemics constitute an exclusion under Policy Wordings generally, and if so whether they are the responsibility of the UK Government to insure, much the same way as Terrorism currently.

Given the urgency in providing a clear and coherent understanding for both Policyholders and Insurers, the FCA have fast-tracked proceedings which are expected to follow the below timetable:

Kingsbridge will continue to maintain a watching brief over proceedings, in addition to any interim declarations released by the FCA and/or UK insurers. Kingsbridge will comment further once the High Court have released their judgment, anticipated before the end of July.

For further information, please contact your broker via their usual contact details.

Written by John Clarke