While many organisations are now getting back to business or adapting to their “new normal”, one important issue which has yet to be resolved is the impact of the COVID-19 pandemic upon commercial insurance policies. Many businesses with policies in place will rely upon these policies responding to a claim to remain in business when events outwith their control prohibit them from functioning. Here, we look at two common types of business insurance policy – Business Interruption Insurance (“BII”) and Event Cancellation Insurance (“ECI”) – and how both insurers and the FCA have reacted to these during the pandemic.
Business Interruption Insurance
The purpose of BII is to protect businesses against losses arising from events, outwith the control of the business, which interrupts the business’s ability to operate and generate income. Typically, such policies are aimed at protecting businesses from events such as fire or flood. However, it is crucial to note that the events which will trigger a policy response will always be dependent upon the specific wording of the BII policy itself. Any business considering making a claim should first consider the policy wording at the very outset.
It is common for BII policies to be focused upon there requiring to be an element of property damage. For instance, such wording may include that the policy will only respond to losses resulting as a consequence of damage to property used by the insured business. In such a policy, it could be argued that COVID-19 does cause damage to property as it is known to contaminate surfaces. However, it is not immediately apparent that such an argument would be successful – the traditional understanding of 'property damage' being actual and physical damage to a property, such as damage arising from fire or a natural disaster.
For such claims to be successful, there must be an interruption to the business as a direct result of the damage or disease. For instance, a business which has chosen to close as a precaution is unlikely to be successful in such a claim.
Some BII policies will also contain wording to the effect that the insured business is protected from their business being interrupted due to a “notifiable disease”. A notifiable disease is one which is recognised by law and, if a case of which is recorded by a medical professional, must be reported to government authorities. COVID-19 was declared a notifiable disease on 5 March 2020.
However, it remains unclear if the Government guidance and resulting COVID-19 legislation will be enough for BII policies to respond for businesses making claims that they suffered losses for requiring to close due to this. The argument from insurers is that for a policy to respond as a result of a notifiable disease, the disease itself must have been present at the business. Of course, there will be the practical difficulty of businesses proving this.
Event Cancellation Insurance
ECI is a type of insurance which protects businesses from losses arising from a specific event being cancelled due to circumstances outwith their control. Such an event could be a sporting event, a concert or a wedding. Normally, the wording of ECI policies is wider than that of BII policies and can relate to the event being cancelled for any legitimate reason over which the insured has no control. However, specific circumstances could be detailed within the policy, so it is important to check the wording. It is again important to note that, for such a policy to respond, the damage or disease complained of must be the direct cause of the cancellation. For instance, it would not be sufficient to make a claim based upon the decision to cancel an event because attendance would likely be lower as a result of COVID-19.
A well-publicised example of ECI during the pandemic is a policy which was taken out by the Wimbledon Championship, which specifically including indemnity for losses arising from cancellation due to a pandemic. Although paying a very high premium, Wimbledon reportedly received a payout in excess of £100m due to the cancellation of this year’s tournament as a result of COVID-19.
The FCA’s BII Test Case
The above types of insurance policy are likely to contain clauses detailing the circumstances under which a claim could be made. The type of clauses which are likely to be engaged fall into the scope of “public authority denial of access” clauses and “disease” clauses. The Financial Conduct Authority (“the FCA”) claims that since the commencement of the COVID-19 outbreak, UK insurers have generally issued blanket denials of claims under these clauses. According to the FCA, the insurers have adopted a common approach, broadly claiming that:
- the policy clauses do not cover pandemics, but only local events;
- any loss suffered by the policy holders was caused by matters other than the policy trigger (e.g. the existence of disease nationally, or country-wide action or behaviours in response to COVID19); and
- businesses are not, in the strictest sense, prevented from accessing or using the insured premises.
The FCA considers this generic approach in responding to policy claims to be unsound and potentially unfair to SMEs. As many SMEs are unlikely to have the resources to pursue a legal action under their policies, the FCA initiated legal proceedings under the Financial Markets Test Case Scheme to clarify the correct legal approach in interpreting the commonly encountered policy provisions (a sample of 19 BII policy wordings). The action proceeds on the basis of a high-level assumed factual matrix (mainly illustrative of SMEs) which could then be used in resolving more complex scenarios.
The action was raised in the High Court of England and Wales on 9 June 2020 and concluded an eight-day trial last week. According to the FCA’s estimates, the case’s outcome is likely to affect approximately 370,000 policyholders nationwide. We will report on the Court’s decision once it is published. The FCA and the involved insurers have agreed that an appeal of the decision could be pursued with the possibility of an expedited appeal to the Supreme Court. As usual, watch this space.
This article was co-written by Martin Kotsev.