Business Interruption Insurance Test Case Impact Of Covid 19

Business Interruption Insurance Test Case Impact Of Covid 19 Presented by: Charles Gordon, Independent Solicitor, Mediator And Arbitrator Background To Test Case 1. Case brought by UK's financial conduct authority 2. To resolve uncertainty in the interpretation of bi policies in the context of covid 19 pandemic 3. Used "financial markets test case scheme" 4. FCA represented policy holders 5. 8 insurer defendants agreed to participate 6. 21 sample policy wordings 7. 700 types of policy affected. 60 insurers. 370,000 policy holders 8. Claims of over £1.2 billion What Is BI Insurance? - Covers loss of profits and additional expenses - Arising from insured physical damage to property - Typically covers bi following fire, flood, storm, earthquake etc. - Many policies also extend cover to non-damage BI loss - Non-damage bi was the issue in this test case The Insurance Coverage - What is covered by non-damage BI insurance? - 3 common policy extensions are: 1. Denial or prevention of access to insured property following government or other authority action 2. A notifiable disease has occurred at or within a specified radius of the insured property 3. Hybrid wordings which are triggered by restrictions imposed on premises in relation to a notifiable disease How Are BI Losses Quantified? - The policy will specify the period over which BI losses can be claimed - The insured can claim for loss of profit and additional expenses caused by the insured event - Many policies also include a "trends" clause - This is to allow for business trends that would have impacted the business anyway, even if the facts which caused the insurance claim had not occurred Key Background Facts - The case focused on certain key events relating to the covid 19 pandemic in the UK during 2020 - 3 March. UK govt announces UK covid 19 action plan - 5 March. Covid 19 becomes a notifiable disease in England/Wales - 11 March. World health organization declares covid 19 to be a pandemic - 16 March. UK govt "directs" people to stay at home, stop non-essential conduct and travel, work from home where possible and avoid social venues Key Facts - 20 March. UK govt directs categories of business to close include pubs, restaurants, gyms etc. Given legal effect by regulations coming into force on 21 March - 23 March. UK govt announces lock-down involving closure of further businesses include all non-essential shops and restrictions on individual movement. Given legal effect by regulations coming into force on 26 March - Steps taken by UK govt didn't impact all p/h's equally - 16 March statements applied to all - 21 And 26 March regs imposed different requirements on different p/h's Arguments Of The Parties - Pandemics not compatible with BI cover • Insurers argued that bi policies not intended to cover pandemics. Policies designed to respond to local incidents and not consequences of a national event • FCA responded that insurers should have expressly excluded pandemics if they didn't want to cover them - Interpretation of key terms • FCA argued for a broad interpretation of policy terms to include cover for covid 19 losses • Insurers wanted key clauses to be interpreted as narrowly as possible Summary Of The Court Judgment - Most, but not all, of the sample disease and hybrid wordings were found to provide cover - Some of the prevention of access wordings also provide cover - Causation • Proximate cause of BI was composite peril of BI following occurrence of the notifiable disease • Individual outbreaks form indivisible parts of the pandemic Judgment - Prevention Of Access • 4 component parts to trigger cover 1. An incident which causes 2. A competent authority to 3. Take action 4. Which prevents access to the insured's business premises  Court interpreted incident narrowly to require a specific local incident and restrictions imposed in response to that local incident - The Action • Initial govt announcements were advisory only-not mandatory • Wordings which specify actions or orders which are "imposed" require steps with force of law - Prevention of Access • "Inability to use" premises meant what it said-hindrance or restriction of use not enough • "prevention" meant impossibility. Must be a closure of the business or at least a fundamental change in its use - - Disease Clauses • Cover triggered by national response to widespread disease outbreak • Cover not limited to outbreaks wholly within the defined area in the policy Trends Clauses • Insurers relied on orient hotels v Generali (2010) • They argued that many businesses would have suffered the same loss in any event because of the impact of the pandemic - Trends • Court decided not bound to follow orient express and it was wrongly decided! • The correct "counterfactual" was a world without the covid epidemic and not simply without the government action which triggered cover • In other words, an insured can claim for the loss of business resulting from the pandemic, starting from the date on which the policy was triggered for whatever period of cover the policy provides What Happens Now? - Court has made declarations to implement the judgment after hearing further submissions - All parties given permission to appeal - Appeals will "leapfrog" the court of appeal and go straight to the supreme court - Appeal will be heard on 19 November, lasting 4 days with judgment expected before year end - At some point each insurer will need to publish guidance for P/H'S as to how they will adjust individual claims - Possible legal actions against insurance brokers by disappointed p/h's - Possible arbitrations under policies that specify arbitration for dispute resolution - Possible mediation scheme Areas Of Uncertainty Following Judgment? - IF A P/H closed down before govt order and policy trigger, is that a "trend of the business" which could reduce claim? - Was court right to limit many policy triggers to actual law and regulation and not govt direction without legal force? - Impact on business which could continue some part of business. What is test? - Impact of local lockdowns? Was It Worth It!? - Judgment welcome news to many P/H'S - Disease and hybrid clauses do provide clear coverage - Prevention of access wordings may fall on either side of line-quite arbitrary - Inevitable further delay and uncertainty until supreme court judgment and possibly beyond - Clarity on how bi policies should be interpreted for the future