The High Court’s recent judgment in a test case brought by the Financial Conduct Authority (“FCA”) in relation to certain non-damage business interruption (“BI”) insurance policies found that most (but not all) of the relevant policy wordings the court considered would cover losses related to the 2019 coronavirus pandemic (“COVID-19”), bringing some clarity as to when insurers will have to pay out for COVID-19 related business losses.
Many businesses have suffered significant losses as a result of COVID-19 resulting in a large number of claims under BI insurance policies. Most SME insurance policies only have basic cover for BI as a consequence of property damage, but some policies also provide cover for BI losses from other causes (including notifiable diseases and denial of access as a result of non-damage). While insurers have accepted liability under some of these ‘non-damage’ BI policies, there are a number of outstanding disputes and there remains a widespread concern about a lack of clarity as to coverage. The FCA brought the test case in the High Court in conjunction with eight insurers in respect of a representative sample of 21 BI provisions and put forward policyholders’ arguments with the aim of urgently clarifying key issues of uncertainty for as many policyholders and insurers as possible. The court was asked to rule on whether each of the relevant provisions would cover losses related to COVID-19. The provisions were grouped into the following categories:
- Disease Clauses – provisions covering business losses in relation to BI following the occurrence of a notifiable disease within a specified radius of the insured premises (the “Relevant Area”)
- Denial of Access Clauses – provisions covering losses in relation to an incident occurring that results in a denial or restriction of access to the insured premises
The court was also asked to consider causation issues including whether the required link between COVID-19 and the policyholder losses could be established taking into account “trends clauses”. “Trends clauses” allow insurers to adjust profit, turnover and revenue figures (for the purpose of calculating losses) to take account of trends in the relevant business or other circumstances that would have impacted the relevant business even in the absence of the relevant event.
The decision is also likely to be relevant for landlords and tenants in respect of claims under loss of rent insurance policies.
In a complex judgment, the court decision is broadly positive for policyholders. In general, the court favoured the FCA’s interpretation of the relevant policy wordings and held that most, but not all, of the Disease Clauses provide cover in respect of COVID-19 and that certain of the Denial of Access Clauses also provide cover (depending on the detailed wording of the clause and how the particular business was impacted by the Government response). There should now be some clarity as to when insurers have to pay out where similar policy wording has been used and in the light of the generic issues that have been determined. A number of the decisions have been appealed by the insurers on an expedited basis and the Supreme Court will hear the appeal commencing on 16 November 2020. Any decisions by the insurers in respect of relevant policies are likely to be put on hold pending the outcome of such appeal.
The court held that policyholders will generally be able to establish cover for COVID-19 BI losses in respect of Disease Clauses.
The insurers had argued that policy wordings required losses to be caused by the occurrence of a disease in the Relevant Area rather than the wider effects of COVID-19, but the court rejected this argument and held that in most cases causation is established where there is a national lockdown not just where BI occurred due to the effects of COVID-19 in the Relevant Area (although the policyholder would need to provide evidence of COVID-19 in the Relevant Area). Policyholders would not have to distinguish the effects of the nationwide COVID-19 from the local effects within the Relevant Area to establish that they had suffered a loss caused by COVID-19. However, in relation to Disease Clauses where the trigger for cover was the happening of a specified event (rather than just the occurrence of a disease), the court agreed with insurers that the cover was for specific and localised events, so policyholders could only recover where they could show that the disease in the Relevant Area had caused the BI losses.
Denial of Access Clauses
The court interpreted the Denial of Access Clauses less generously than the Disease Clauses. For clauses that provide cover for BI for “restrictions imposed” by a public authority on the premises, the court held that only those restrictions imposed by law would count and not guidance from government nor cases where employees or customers chose not to visit premises (but were entitled to do so).
The court also held that where policies cover BI where there is an “inability to use” premises, something more than hindrance was required. There is no cover just because the insured cannot use all of the premises or by reason of any and every departure from normal use. The court held that this wording is intended to provide narrow localised cover and that action taken in response to COVID-19 would not suffice.
Many of the relevant policies contained “trends clauses”. The case involved complex arguments as to the application of those clauses. The main argument of the insurers was that even if losses were triggered under the relevant policies, those losses have to be adjusted according to circumstances before and after the relevant outbreak, and therefore they should take into consideration the wider effects of COVID-19. As policyholders would in many cases have had no trade as a result of COVID-19 even if they had been open for business, they did not suffer an insured loss.
However, in summary, the court held that the effect of the “trends clauses” could not be that the losses would be limited by any part of the event that was being insured, including in this case the COVID-19 pandemic. Therefore, when calculating the relevant loss in respect of an insurance claim, the court held that it is necessary to strip out the effects of COVID-19, including as a result of the authorities’ and the public’s response, so that all the losses caused by COVID-19 would potentially be covered.
Landlords and Tenants
Many landlords and tenants are insured in respect of rent not paid/inability to pay under policies containing Disease Clauses or Denial of Access Clauses or similar provisions. Insurers receiving claims from landlords and tenants in respect of non-payment/inability to pay rent have often raised similar arguments to those raised by the insurers in the test case to justify the non-payment of claims. The court’s decision will assist some parties in being able to make successful loss of rent claims.
Landlords: While the test case may assists landlords who hold “loss of rent receivable” cover, there are additional issues that may impact such cover. Some landlords have granted rent concessions to tenants as part of COVID-19, and insurers may argue in such circumstances that the loss was created voluntarily. Landlords could argue conversely that the rent concessions were necessary to minimise losses. There will also be questions as to whether a loss of turnover rent as a result of COVID-19 would be covered by the relevant policies.
Tenants: The test case should be helpful for tenants with BI insurance who are facing increasing rent arrears.
Where tenants have no BI insurance and are required to continue paying rent, there does not seem to be much by way of contractual protection in leases that might help them. Most rent cesser provisions in leases will be linked to physical damage and it is unlikely that COVID-19 would constitute “damage” in these circumstances. Other than seeking a negotiated settlement with their landlords, there is little else that tenants can do.
Practical Implications: At the time when tenants most need help, the test case has been used as a reason by many insurers to delay their decisions on claims until the outcome has been settled, even though, in bringing the test case, the FCA was seeking clarity and to try to speed up the process. During this period where insurers have not paid out, even tenants that have the benefit of cover may suffer severe financial hardship which could lead to their insolvency ahead of receiving any insurance payout.
Tenants may in the future consider requesting more rent suspension arrangements in their leases to give them protection and we will likely see a debate as to the split of BI risk between the landlord and tenants.
Unless successfully appealed, the judgment is legally binding on the defendant insurers in respect of the policy wordings considered by the court. The judgment also provides guidance for the interpretation of similar policy wordings. While this is a positive development for policyholders, and insurers now have some direction for settling claims, each case will turn on the wording in the relevant policy as well as the position of the relevant insured party. Uncertainty also continues for policyholders while the appeal to the Supreme Court is being heard as pay outs under relevant policies are likely to be delayed pending the outcome of the appeal. We await the Supreme Court decision to provide final certainty on the position of BI insurance policies.
It should also be noted that none of the clauses were drafted specifically to cover pandemics but, on the basis of the test case, many clauses were nevertheless considered wide enough to allow COVID-19 to be covered. The insurance market may end up paying for claims it did not expect to meet and therefore there is likely to be a more considered approach to providing coverage for pandemics in future insurance policies.