Over the summer the FCA brought a landmark test case in the High Court in relation to the operation of insurance policies providing cover for lost revenue flowing from interruption to trading (business interruption). This quickly became a crucial issue when large swathes of the economy were closed down in response to the pandemic.

The FCA reviewed thousands of policies to determine the areas of uncertainty and key questions for the court. Eight insurers agreed to be defendants in the test case and 21 sample policy wordings were considered. The FCA reported that around 370,000 policyholders could be potentially affected by the test case.

The clauses fell into three main categories:

• Disease wordings – these clauses provide cover for loss caused by any notifiable/human infections disease within a specified radius of the insured location.
• Prevention of access/Public Authority wordings – these clauses provide cover for loss caused by an inability to use the premises due to restrictions imposed by a public authority.
• Hybrid wordings – loss caused by a lack of access due to restrictions by a public authority due to a notifiable disease.

We've been closely involved in the process, reviewing hundreds of business interruption policies and claims in our role as adviser to UK Hospitality, as well as acting for other policyholders in separate litigation across a range of sectors. The High Court’s decision was published yesterday and brings welcome clarity to those policyholders seeking to recover significant business interruption losses suffered as a result of the pandemic and the government’s response to it.

The court emphasised the overriding importance of the precise wording of each policy, particularly the definition of the insured peril. Consequently different decisions have been reached by the court in respect of each sample policy wording. We do not propose to cover the decisions on each sample policy here. That said, we expect a large number of policyholders will benefit from the court’s findings as to the correct approach to the interpretation of these polices which favoured the FCA on most of the key issues.

Not all policies, however, will provide sufficient cover and it will be necessary for policyholders to carry out a detailed analysis of the court’s reasoning as applied to each specific policy wording. For example, it appears that not all disease cover sample wordings will provide cover (particularly those with a smaller relevant policy area which contemplate specific localised events) and the court took a more conservative approach to the interpretation of prevention of access cover (see below). Furthermore, the judgment is of no assistance to policyholders whose policy terms were not expansive enough to cover COVID-19 as a potential trigger event.

The court found that COVID-19 and the government’s response to it was a single (if composite) peril. It follows that the correct "counterfactual" when the court is trying to work out what revenue has been lost by reason of the insured peril is a world without COVID-19 (as that is part of the peril).

The insurers had argued that they only had to compensate policyholders for the effect of the lockdown (not COVID as such) so when calculating what revenues businesses would have made in 2020 they could assume business would have been depressed by the other effects of COVID on customers and the economy. This argument has been effectively rejected so policyholders can claim (subject to the policy limits and any pre-pandemic downturn) all the revenue they would have expected to make in a normal summer.

The court adopted a broad approach to disease cover. An outbreak is an "occurrence" where there is a diagnosable case (not necessarily diagnosed ) in the relevant policy area. Provided there is an outbreak of COVID within the relevant policy area the insured will not need to prove a specific local instances of the disease.

The court also interpreted "vicinity" widely as meaning nationwide to include outbreaks in England and Wales. In essence, provided the insured can establish prevalence of COVID-19 within the 25 mile radius (based on empirical evidence and statistical data), the insurers should cover losses caused by COVID-19 and the Government’s response to it. This is hugely helpful to policyholders as it means there is no need to prove that any localised cases of COVID-19 were causative of the loss.

Further, cover will not necessarily be limited to outbreaks within the geographical radius under the policy because the wordings do not expressly state that the disease should only occur within it.

The court adopted a more restrictive approach to denial/prevention of access and actions/closure by government or local authority clauses. As such, these clauses will need to be carefully considered against the findings by the court specific to each sample policy wording.

• The court found that certain wordings ("danger", "disturbance", "emergency", "incident") were intended to respond to specific and localised events which took place at a particular time in a particular place. This means that cover will only apply to actions taken by the authority specifically in response to a localised occurrence of COVID-19, not to a nationwide lockdown. This could have particular relevance to businesses affected by so-called "local lockdowns".
• The court held that mere advice does not prevent access only mandatory public health regulations has that effect.
• Prevention of access need not be absolute but a business would not necessarily be "interrupted" if it could carry on in substantial part (such as continuing to offer an existing take-away service when in restaurant dining was prohibited).

The court was asked to consider legal causation arguments in business interruption claims. These arguments became less crucial to this application once the court took a broad view of the nature of the insured peril but are arguably of wider application.

Business interruption claims are unusual because they try to put the policy holder in the position it would have been in had the business not been closed down. This necessarily involves the court trying to assess what the businesses’ lost period of trading would have been but for the problem which caused the interruption. Would the business have done better or worse than last year and what factors should be taken into consideration?

The High Court considered a number of the authorities in this area including the well-known first instance decision in Orient Express Hotels. The FCA argued that there should be no adjustment to losses claimed as a result of any downward trend because the correct analysis of the insured peril (disease/prevention of access/government action) as that event also caused the other factors which might have reduced the businesses’ revenue.

The correct "counterfactual", the FCA argued was therefore the revenue that would have been earned in 2020 without any COVID-19 at all. The High Court agreed with the FCA and rejected the insurers narrow approach to the extent of the insured perils effectively stripping out COVID and its effects from the "counterfactual".

For example, under disease cover, the court held that the insured peril should be construed as the interruption to the business following the occurrence of the disease which includes the Government’s response and it was incorrect to assess coverage on the basis of losses which would have been suffered in any event as a result of other factors relating to the pandemic including social fear, lockdowns and social distancing etc.

The court, while expressing a view that the case was wrongly decided in any event, also distinguished Orient Express Hotels on the basis that the types of insured perils being considered in the test case were not the same as those considered in connection with Hurricane Katrina.

The decision is now legally binding on the eight insurer defendants as applied to the 21 lead sample wordings, pending any appeal. It will also be persuasive for those policies with similar wording which did not form part of the test case and are impacted on the key issues determined. There is a hearing in October to consider any applications for permission to appeal by the insurers which seem likely as well as a leapfrog to the Supreme Court given the significance of the test case on the insurance market. The court will also consider the specific declarations it should make on each policy wording tested.

The court had ordered insurers to contact all policyholders whose claims are impacted by the decision within seven days. We would expect policyholders to move quickly in seeking interim payments or final settlements based on the High Court’s findings. It remains to be seen how insurers will respond and in light of any applications to appeal or whether they will continue to delay pay outs. The FCA has of course urged insurers to act on the judicial guidance irrespective of any appeals and progress these claims accordingly.

How can we help?

• We can analyse the terms of the policyholder's BI policy against the detailed reasoning in the judgment to determine whether the policyholder's losses are covered.
• If the losses are covered, we can assist the policyholder with determining the amount of the losses suffered and with gathering evidence to support and prove a valid claim for those losses.
• We can liaise with loss-adjusters to manage the loss-adjusting process.
• We can also assist with putting the policyholder in the best position to seek an interim payment over losses suffered or an early settlement of the claim.

Please contact Julian Randall, Katie Chandler or Ed Spencer for further information.