Non-damage business interruption insurance: the UK response
Ince & Co, London
The manner in which insurance policies should respond to Covid-19 has given rise to a great deal of debate. In the United Kingdom, one of the most contentious areas of discussion has been in relation to the operation of non-damage business interruption (BI) policies and, in particular, those containing cover for loss following the imposition of government restrictions in response to a ‘notifiable disease’, or/and those covering the prevention of access to insured premises as a result of such restrictions.
In order to resolve a number of common coverage issues under these policies, the sector’s regulator, the Financial Conduct Authority (FCA) initiated declaratory judgement proceedings against eight leading insurers who were defendants in the action FCA v Arch & others. Two policy holder groups also intervened in the proceedings. The parties selected 21 sample policies which contained language typical of the non-damage BI covers at issue and asked the Divisional Court (the 'Court') to make a series of rulings on the proper operation of the relevant clauses in the context of a nationwide pandemic.
The Court handed down its judgement on 15 September 2020. In broad terms, its findings in relation to disease covers were seen as generally favourable to the insureds, while its findings in relation to prevention of access cover have been seen as more favourable to insurers.
Disease clauses typically provide cover in respect of BI losses following the authorities’ response to the outbreak of disease within specified area, for example within a radius of 25 miles of the insured premises. The Court held that this did not mean that cover would only respond to losses resulting from the authorities’ response to an outbreak of disease within the specified locale. Instead, the policy would respond to loss flowing from nationwide governmental restrictions made in response to a pandemic provided that there was an incidence of the disease within the specified area or radius.
In reaching this conclusion, the Court was influenced by the fact that cover was in respect of notifiable diseases which included highly infectious illnesses, such as SARS and plague. In the judges’ view, it must have been anticipated by the parties that diseases of this nature would occur nationally and trigger a nationwide response, not just simply a local response.
The Court found that the position was different, however, in relation to prevention of access polices. On their proper construction these covers only insure loss which arises from the prevention of access to premises following the imposition of local restrictions in response to an outbreak of disease within the specified area alone. This will mean that many such policies are unlikely to respond to claims for prevention of access following the imposition of nationwide restrictions. Insureds may, however, be entitled to cover in respect of the localised restrictions which are frequently now being imposed by UK authorities in preference to a further national lockdown.
Importantly, the Court found that access to premises was only ‘prevented’ when the business was directed by the authorities to close because it fell within a particular category such as restaurants. Access to businesses which were not within a class which was directed to close was not ‘prevented’ even if those businesses chose to shut in accordance with government advice, to protect staff or because they had no customers in light of the impact of governmental advice or regulations more generally.
The key issue of quantification of loss considered by the Court centred around the operation of the ‘trends clause’. Typically, these clauses require circumstances which would have affected the insured’s business had the covered event not occurred to be taken into account when assessing what the profitability of the business would have been had the covered event not occurred. Insurers argued that if the outbreak of disease was within a fixed radius of the insured premises it was a covered event. The only counterfactual argument was to assume that there were no restrictions affecting the insured’s premises, but that that the rest of the country was subject to lockdown and other restrictions as a result of the nationwide pandemic. In other words, the insured’s loss would be the profit it would have made as an unlocked down business in a locked-down country. Clearly, in the majority of cases, this would substantially reduce the insured’s recovery.
In the view of the Court, however, the actions and advice of the government in so far as they affect the insured premises and their vicinity are inseparable from the nationwide action and advice. Accordingly, the only way of establishing what the insured business would have achieved if the covered event had not occurred was to assume that there had been no Covid-19.
The FCA and each of the insurers have been given leave for a ‘leapfrog’ appeal straight to the Supreme Court. No date has been fixed for the appeals, but it is expected that they will take place as soon as practicable given the urgency of the matter.