Wednesday, 18 November 2020

Business Interruption Insurance and COVID-19

Updated 15 January 2021

In recent years, many businesses have taken out Business Interruption Insurance - Association of British Insurers (ABI).

Essentially, this is a type of insurance that is designed to protect businesses against the financial loss suffered as the result of a property claim. As an example, suppose that an event such as a fire or a flood results in the business being unable to continue to use the business premises. Property insurance might cover the physical damage to the premises but not the loss of income. Typically, a policy will include an Indemnity Period - e.g. covering financial loss from the date of the claim for a period of (say) 12 months.

Even a quite cursory look at this area of insurance is to unearth a far from straightforward subject. Expert advice

can be essential in the process of selecting an appropriate policy as well as in making a claim under the policy. Even if the insurer accepts liability, questions can then arise as to the amount of loss actually suffered.

High Court:

In September 2020, the High Court decided the case of Financial Conduct Authority v Arch Inusrance (UK) Ltd and others [2020] EWHC 2448 (Comm) - Flaux LJ and Butcher J. There were actually 8 defendants and 2 interveners (Hospitality Group Action and Hiscox Action Group).  Legal representation included 15 Queens Counsel. The court's judgment is lengthy - 580 paragraphs.  The reason for there being two judges is explained at paragraph 3 of the judgment.

The FCA (the regulatory body for the insurers) brought a test case to decide issues of principle in relation to various specimen wordings in policies for business interruption losses arising in the context of the COVID-19 pandemic and the advice of and restrictions imposed by the UK Government in consequence.

The court was asked to rule on the correct construction of the policy terms and as to whether cover was available in principle by reference to a set of agreed facts (summarised in the judgment at paras 9 to 60 ).  Those paragraphs provide a useful summary of the events, including government action, from the onset of the pandemic up to 4 July 2020.

The court set out General Principles of Construction at paras. 61 to 79 and then went on to examine various types of clause -

Disease clauses - paras. 80 to 241.

Hybrid clauses - paras. 242 to 305 - i.e. those clauses which refer both to restrictions imposed on the premises and to the occurrence or manifestation of a notifiable disease.

Prevention of access clauses - paras. 306 to 502 - i.e. clauses dealing with prevention or hindrance of access to or use of the premises as a consequence of government or local authority action or restriction.

Then the question of causation of loss was addressed - paras. 503 to 535.

Finally, the issue of "Prevalence" is examined at paras. 536 to 578.  Some policies purported tio require proof of the occurrence or manifestation of COVID-19 within a specified geographical area which includes the insured premises. Issues therefore arose as to what cases of the virus there were in any given area at any given time. (The reader will see immediately that this is likely to be a very difficult matter to establish).

Various types of clause had been included in this form of insurance and the court examined specimen clauses.

The High Court's judgment concluded by the court asking the parties to make submissions as to the appropriate declarations to be made by the Court in the light of the judgment. These included applications for a "leapfrog" appeal to the Supreme Court.

Following the High Court judgment:

Herbert Smith Freehills issued a very useful update on 8 October 2020 setting out events in the litigation following the High Court's judgment. 

The court's final declarations are binding on the actual parties to the litigation but are persuasive only in relation to other insurers who may have included similar clauses in their policies.

The judgment does not determine how much is actually payable under individual policies. Hence, insured businesses may yet have some distance to go before any claims are finalised.

Supreme Court:

The appeal, before Lords Reed, Hodge, Briggs, Hamblen and Leggatt is being heard over 16 to 19 November 2020 - see Supreme Court website.

Financial Conduct Authority:

See the FCA's website for updates.

18 November 2020

UPDATE 15 January 2021

Supreme Court judgment [2021] UKSC 1 

The Guardian 15 January 2021 - Small businesses win Covid insurance payouts after UK supreme court victory

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