Insurance: courts grapple with business interruption cases in wake of Covid-19 lockdowns
Many UK policyholders whose businesses suffered losses during the Covid-19 pandemic have received a welcome boost from the country’s High Court. In mid-September the Court ruled that most ‘disease’ clauses in business’ insurance policies cover losses caused by a notifiable or infectious disease, in a test case brought by regulator the Financial Conduct Authority (FCA).
However, the Court found that only some ‘denial of access’ policies – which involve losses caused by government actions, advice or restrictions in response to a disease rather than losses caused by the disease itself – provide cover.
‘As a result of the judgment, it will be easier for “disease” policyholders to demonstrate that they should be covered for their losses,’ explains Hannah Clipston, National Head of Commercial Litigation at Irwin Mitchell. ‘For example, they will not need to point to specific local outbreaks as the cause of their losses.’
The UK judgment is likely to be highly persuasive in other jurisdictions, particularly common law jurisdictions such as Hong Kong and Australia
Partner, Taylor Wessing
She notes however that ‘denial of access’ policyholders may find it more difficult to establish cover, as they must show the governmental action or advice was in response to a Covid-19 outbreak within a specified radius.
After examining a representative sample of policy wordings issued by eight insurers, the Court also clarified that the Covid-19 pandemic and the government and public response were a single cause of the covered loss – a key requirement for claims to be paid even if the policy provides cover.
‘This is great news for policyholders, but not a blanket success, as the Court did not find in favour of policyholders across all policy wordings – and the findings only touched upon a small number of available policy wordings,’ says Stephen Meade, who leads the commercial disputes team at Capital Law.
The judgment, says Jane Harte-Lovelace, a partner at Keystone Law, is a stark reminder of the vital importance of policy wordings. ‘Policyholders should ensure that their brokers are aware of their needs and expectations for coverage in all their policies and assess policies on the basis of breadth of coverage, not just price.’
For example, she says, the inclusion of the phrase ‘in consequence of’ an ‘event’ led the Court to decide that insurers were entitled to deny coverage unless the policyholder could prove the loss was caused by a local outbreak rather than the general lockdown. Slightly different policy wordings, meanwhile, were held to be sufficient to engage coverage without needing to establish a local outbreak.
There are potentially wider implications for insurers and policyholders, too. ‘The Court indicated that an important English case on causation – Orient Express Hotels Ltd v Assicurazioni – which insurers rely on frequently to reduce the quantum of coverage in property damage business interruption claims, was wrongly decided,’ adds Harte-Lovelace.
While the judgment does provide some clarity, says Peter Taylor, Managing LLP Partner at Paris Smith, there remain issues to be resolved.
‘Importantly, the Court invited the parties to agree a form of wording for declarations to be made appropriate to the judicial decisions,’ he explains. ‘This has proved a stumbling block and the Court may have to become involved in that process if differences of interpretation of the judgment cannot be resolved directly between the parties.’
The judgment, says Meade, doesn’t specify how much is payable under each individual policy and provides no basis on which insurers are making monetary decisions. ‘Specific policy wording of each individual claim will need to be considered against the ruling to establish whether there is cover and how much should be paid – the real question is when and how much,’ he says.
The FCA has called for insurers to handle and assess business interruption (BI) insurance claims promptly and fairly when they have accepted liability. But Meade says that when assessing the payout, some insurers have been making deduction for types of government support received by policyholders during lockdown.
‘Holding off payment would not only be legally contestable, it would also be morally incorrect – as many businesses are struggling to survive as they face, once again, local lockdown restrictions,’ says Meade.
For policies where the Court determined that cover was available, insurers should process valid insurance claims within a reasonable time, says Andrew Northage, a partner at Walker Morris.
‘Failure to provide the designated cover would result in the ability to bring a claim against the insurer, including the ability to claim for damages incurred as a consequence of the insurer’s delay,’ he adds. ‘Some small businesses and small charities could choose to complain to the Financial Ombudsman Service rather than bring a legal claim.’
The High Court has allowed an appeal of the test case to ‘leapfrog’ to the Supreme Court, although insurers Ecclesiastical and Zurich have opted not to appeal.
This means that the test case judgment will not be the final word, says Mubarak Waseem, a barrister at Essex Court Chambers.
‘In the meantime, however, the FCA has encouraged insurers to conclude their claims processes as swiftly as possible in light of the first instance judgment, but in any event to be as clear as possible to policyholders,’ he explains. ‘The FCA has also encouraged insurers to consider any claims handling steps that can be taken now, irrespective of any appeals.’
Various approaches to business interruption are being taken in other jurisdictions.
In Germany, a scheme has been developed under which industry associations and insurers will pay ten to 15 per cent of a policyholder’s losses in the event of business closure due to Covid-19. ‘Whilst the scheme is not legally binding on insurers, many insurers throughout Germany have announced they will take part,’ says Clipston.
In Australia, the New South Wales Court of Appeal has heard a BI insurance test case. Judgment is still awaited, but, says Clipston, since the case will only consider the application of certain exclusion clauses, Australian policyholders may seek to bring a second, broader, test case to establish a binding precedent of wider application.
In the United States, many policyholders have initiated individual and class action lawsuits seeking to recover losses caused by the Covid-19 pandemic and the resulting governmental restrictions. So far, the US courts have largely favoured insurers.
‘The UK judgment is likely to be highly persuasive in other jurisdictions, particularly common law jurisdictions such as Hong Kong and Australia,’ believes Katie Chandler, a partner at Taylor Wessing. ‘I think Australia, in particular, is waiting to see how matters unfold in the UK.’