A decision of the English High Court issued last week may have provided a glimmer of hope to businesses suffering from the COVID-19 fall out. Further details are set out below, but, in short, the High Court ruled on the interpretation of certain clauses in insurance policies after insurers previously rejected thousands of claims from small businesses on the basis that the coronavirus did not amount to business interruption. The decision can be seen as good news for policyholders, and bad news for insurance companies.
The judgement was given in a test case (the “FCA case”) brought by the Financial Conduct Authority (the “Authority”), the United Kingdom’s financial watchdog, against a number of insurance companies (the “Insurers”).
In our update in May, we discussed some of the options available to businesses seeking support and protection from the effects of the downturn in trading which, in many industries, has inevitably followed the lockdown and other measures taken to protect public health in light of the global COVID-19 pandemic.
One such option which may be available to businesses is to make a claim on their business interruption insurance (“BII”) policy (or the BII element of other policies). BII is a form of insurance which, as its name suggests, provides cover for losses incurred in situations where a business’ usual activities are interrupted, generally by circumstances beyond its control. Typically, a BII policy will cover losses resulting from damage to physical property so, for example, where business premises are destroyed by fire a BII policy may cover the income lost as a result of being unable to trade. Many BII policies also include provisions relating to losses arising from other types of business interruption which do not concern damage to physical property, such as outbreaks of disease, and it is these provisions which gave rise to the FCA case.
The Insurers had resisted paying out under a number of BII policies on the basis that the effects of the pandemic were not covered by BII, and the Authority sought clarification as to whether they were entitled to do so. Two ‘interveners’ in the form of action groups were also formed and represented in the FCA case to advocate for the rights of policy holders.
The Court considered in detail (the 162 page judgement is available online at judiciary.uk for those inclined to read it) several of the grounds upon which the Insurers contended they were able to resist the claims by their insured.
In summary, the Insurers claimed that the relevant provisions only covered the policyholders in relation to localised outbreaks of disease, as opposed to a nationwide lockdown. The basis of the Insurers argument was that the BII policies referred to outbreaks ‘within 1 mile of’ or ‘in the vicinity of’ the insured premises. The Court preferred argument, put forward by the Authority, that the policy terms covered both local and national outbreaks, as none of the policies before the Court stated that the outbreak must ‘only’ be in the local area. It was also an important consideration that the policies referred to notifiable diseases, which by their nature are likely to be highly contagious and so to have a national impact, so it would be inconsistent to cover an outbreak of a notifiable disease, but only if it was contained to a local area.
The Insurers also claimed that the definition of ‘insured peril’ in the policies (i.e. risk that the policy covers) should be construed narrowly as relating to a local occurrence but excluding other effects of the pandemic, such as the nationally enforced lockdown. Again, the Court was unconvinced, and rejected the argument which, if successful, would have resulted in a situation where the greater the gravity of the insured peril, the less the available cover. Clearly that was not a desirable position.
Whilst the outcome of the FCA case is undoubtedly positive for policyholders, it is likely that the issue of which BII policies will pay out will continue for some time before being resolved. Prior to the decision in the FCA case, the parties agreed that, due to its importance, it should be eligible for a fast tracked ‘leapfrog’ appeal, which means that the Insurers have the option to appeal the decision straight to the UK Supreme Court. Accordingly, it is likely that the points raised in the FCA case will be heard again and may be decided differently.
It should also be noted that the obligation of an insurer to pay out a claim under a policy will always depend upon the particular wording of that policy. Where the wording differs from that considered in the FCA case, the insurance company may interpret it differently.
In the Isle of Man, we should also note that the FCA case is a decision of the English Courts and as such is not binding on the Isle of Man Courts. It is likely though that the Isle of Man Courts would consider it to be highly persuasive. Policyholders would be wise to check the wording of their policies, particularly in relation to BII, and to check the governing law clause to see whether English or Isle of Man law is applicable.
The FCA case does though provide some clarity for businesses and suggests grounds for querying previously refused claims and, perhaps most importantly of all, demonstrates the willingness of the Courts to intervene in matters of national interest.