Many businesses have insurance cover designed to pay losses if they must close for a period. This is known as business interruption (BI) insurance.
When the Covid-19 pandemic and government-imposed lockdowns forced the unprecedented closure of so many organisations in 2020 and 2021, businesses began asking whether they were covered by their business interruption insurance. Insurers were not expecting to cover losses due to a pandemic; but following pressure from the industry regulator - the Financial Conduct Authority (FCA), and the courts, many pay outs are being made. The wording of each policy is key, but broad principles have become clearer, and specific issues continue to be clarified by court rulings. So, it is still worth investigating whether you have a claim against your business interruption insurance.
What is business interruption cover?
Standard business interruption insurance covers a business for loss of income during periods when it cannot carry out business as usual because of an unexpected event, typically damage to the premises caused by a storm, fire, or flooding. The insurance might compensate the business for any increased running costs and/or shortfall in profits for a set period and financial limit. It may be a standalone policy or included as an optional extra in, for example, a buildings and contents insurance policy.
Some policies have extensions that apply to loss as a result of contagious disease, for which additional premium will have been paid. There are two main such clauses which may cover losses from Covid-19:
Business interruption - specific illnesses
Most extensions cover specific diseases, listed in the cover. These are diseases that are well known and understood. Before March 2020, Covid-19 was not named and so, initially, insurers denied claims. Insureds felt aggrieved by that when they specifically bought cover for this type of circumstance - the clause was intended to cover disease closure and could not have named a disease that did not exist.
Some disease extensions are more generally worded to cover ‘infectious disease’ or ‘contagious disease’, except for any disease specifically excluded. Often the disease is required to have been present at the premises or within a short radius of the premises.
Business interruption - non-damage denial of access (NDDA)
Another relevant extension is cover for losses as a result of people not being able to access the business due to a specific circumstance such as the police cordoning off an area because of terrorism, fire, or the risk of a collapsing building. The clause might cover inability to trade due to a government restriction, which is what happened when many businesses were directed by the government to close.
Does business interruption insurance provide Covid cover?
Organisations of every size bore the brunt of the government-imposed lockdown, with many losing their entire business revenue overnight, particularly those in the hospitality and leisure sectors. Many businesses made claims under their Business interruption insurance, assuming that the Covid pandemic was exactly the type of situation for which they had taken out this cover. However, insurers did not immediately believe that they should pay out. Some issues surrounding these policies were complex, and there was potential for ongoing uncertainty for both policyholders and insurers.
What did the FCA do?
As the insurance regulator, in June 2020 the FCA brought a test case on behalf of policyholders for declarations of cover. The High Court delivered in its judgment in this case in September 2020, broadly supporting the interpretation of the wordings that the FCA put forward. Insurers appealed on many of these points, and the Supreme Court gave its judgment on 15th January 2021 in The Financial Conduct Authority v Arch Insurance (UK) Ltd and others. The Supreme Court backed the FCA again and even improved policyholders’ position slightly where the FCA had also appealed a number of points.
The Supreme Court judgment is legally binding on the insurers that were parties to the test case: Arch, Argenta, Ecclesiastical, MS Amlin Underwriting, Hiscox, QBE, Royal & Sun Alliance, and Zurich. It also provides authoritative guidance for the interpretation of similar policy wording of other insurers. It does not determine how much is payable but provides a basis for the assessment of covid-related business interruption claims.
What has happened since the Supreme Court case?
Not all issues relating to business interruption losses were dealt with by the Supreme Court. On 25 February 2022, the High Court handed down judgment in Corbin & King Ltd and others v Axa Insurance UK plc [2022] EWHC 409 (Comm) that focused on the non-damage denial of access (NDDA) clause in certain policies. It also ruled that in composite BI policies, the cover limit applied to each set of premises covered. The insurer in this case has said it will not appeal the judgment, so the court’s ruling can be used in similar policies.
The FCA has called on all insurers to take this, and any other new court judgments, into account when considering new and pending claims, and where appropriate to reopen both claims that have been settled and those that have been declined to review pay out in light of the judgment. Three more cases were heard by the High Court in July 2022, mainly do to with the amount of the business interruption that should be paid out. Other cases are scheduled to be heard in the coming months. The judgments in all of these matters will continue to inform how covid-related business interruption losses should be treated.
What should businesses do now?
If you purchased business interruption cover (BI) and your business was affected by lockdown, you might still have a claim for losses while you could not trade. You should investigate making a claim if you have not yet done so. If you have already reported a claim or had a claim settled or denied the changing legal landscape may alter how your insurer will treat this. You can ask for your claim to be reviewed if you still believe that you should be paid out. You may like an expert to assist you in making these assessments.
We keep up to date on all developments concerning business interruption insurance and covid claims, and we all happy to review your policy in light of these. We will give you up to date advice on whether you have a claim.