Business Interruption insurance test case – where do we go from here?

by Charles Gordon

In a momentous court case affecting around 370,000 policyholders, 60 insurers and 200 different insurance policy wordings, last month the High Court handed down its highly-anticipated judgment in the Financial Conduct Authority’s COVID-19 Business Interruption Insurance test case. Here, we look at what the Court decided and what’s next for insurers and policyholders.

The BI insurance test case was brought by the FCA to resolve the lack of clarity around business interruption claims as a result of COVID-19 and was based on a representative sample of policy wordings issued by eight insurers. The High Court judgment, made on 15 September 2020, fell into two distinct parts: interpretation of the coverage under the many different policy wordings; and causation issues.

The question of coverage

In terms of coverage, the court considered 21 lead policies, which fell into three categories. I can’t in this short article do justice to the full court findings, however I summarise here the key overall findings and principles that emerged from the judgment.

• Disease wordings The court concluded that the proximate cause of the BI losses was the notifiable disease, COVID-19, of which individual outbreaks form indivisible parts.

• Prevention of access/public authority wordings This provides cover where there has been a prevention or hindrance of access to or the use of the premises as a consequence of government or other authority action or restrictions. The court construed the meaning of ‘Prevention of Access’ as not necessarily physical prevention but that there had to have been a closure of the premises for the purpose of carrying on the business. ‘Interruption’ didn’t require a complete cessation of business but was intended to include disruption and interference with the business.

• Hybrid wordings These are triggered by restrictions imposed on the premises in relation to a notifiable disease. The clauses are a blend of disease wordings and prevention of access/public authority wordings and similar conclusions were drawn by the court.

Whether cover is available to a specific insured business is going to depend, following the ruling, on the precise policy terms and the application of the government advice and regulations to the insured’s specific business. Was the business directly mandated to close  or was it affected by the more general ‘stay at home’ requirements and advice?

Cover, claims and mediation

It’s important to note that the detailed coverage questions depend on the specific wordings of the hundreds of policies in issue. Which side of the line a specific policy falls may actually be quite arbitrary, depending on the precise policy wording.

Given that many of the policies were written by insurance brokers we can expect satellite litigation against brokers, which will need to be resolved through mediation or otherwise. Such claims will depend on whether broader coverage would actually have been available to the insured business and whether the business would have been willing to pay the higher premium that such coverage would have cost.

We are still waiting to see the final declarations from the court after the judgment. All parties are very keen to see how the court actually phrases these declarations before deciding whether to pursue an appeal. At present all the parties have applied for and been given permission to appeal. The court has also certified that the case should go straight to the Supreme Court, bypassing the Court of Appeal. It is hoped that the Supreme Court will hear the case before the end of the year and give their judgment early in 2021.

It is clear from the discussion at the court hearings that have followed the judgment that the big issues on appeal will be, first, whether the court was right to draw a distinction between directions/advice from the Government as opposed to law/regulation (and thus to say that the policies were only triggered at the later date when specific laws and regulations came into force) and, second, whether policy holders can claim either for all losses flowing from the pandemic after the policies were triggered or only those losses that were directly caused by government action.

However, it appears that insurers and the FCA are still trying to agree on guidance as to how claims will be adjusted in light of the judgment. It is possible that a reasonably comprehensive agreement might mean that no appeal actually goes ahead. Where the fundamental policy wording issues have been resolved it will clear the way for the assessment of quantum – and, again, mediation can really play a part in resolving individual claims.

The causation issue

It really boiled down to this question: were the individual business losses caused by a narrowly defined insured peril or were they attributable to the overall effects of COVID-19 and a broad mix of the public reaction to the pandemic, government advice and direction, a general decline in economic activity, changes in business and personal behaviour etc?

On this, the court was clear. You can’t legitimately separate the immediate trigger for insurance cover – whether it be prevention of, or hindrance to, access to premises, disease in the vicinity of such premises, or government advice and direction – from the pandemic, which was the underlying cause of all these things.

In reaching its decision, the court considered an issue that has bedevilled BI insurance in recent years. What is the correct ‘counter-factual’ against which you consider the impact on an insured’s business? In Orient Hotels v Generali in 2010, another court had to consider an insurance claim by a New Orleans hotel that had been severely damaged by Hurricane Katrina and Hurricane Rita. The court reached the surprising conclusion that there was no BI insured loss. Even if the hotel hadn’t been damaged, the business would still have suffered the same financial loss because the whole of New Orleans was devastated.d

In the current case, the judges emphatically rejected the analogy to Orient Hotels and held that businesses who have coverage can claim for their losses caused by the pandemic without having to establish specific losses caused by the defined insured peril in their policy.

Arbitration and the case for mediation

Many BI policies have arbitration clauses and there are already arbitrations (both group and individual) underway. Given the groundwork already done through the FCA test case, such cases would be suitable for mediation, and insurers might well be minded to propose some sort of group mediation or mediation facility to drive early settlement of claims which don’t depend on the outcome of any appeal.

It may be that insurers will now, or after an appeal, issue guidance about how they propose to adjust individual claims. A fast-track mediation scheme with strict timetables, a panel of mediators, and agreed facts would have a good prospect of resolving large numbers of claims.

Working together to resolve insurance claims

Test cases are notorious for falling short of initial expectations and leaving many issues unanswered. In this instance, the Court has tried hard to produce a judgment that can be applied to the wide variety of policy wording and the circumstances of individual businesses. An appeal will inevitably prolong the uncertainty for business owners as to whether their insurance will respond. And new facts may emerge or circumstances change – for example, different considerations for a local as opposed to a national lockdown – that could undermine the clarity and certainty the test case was designed to achieve.

We know very well that litigation isn’t the way to achieve early finality. We now need to find a cost effective and speedy way to resolve individual claims to avoid more business insolvencies. Insurers, reinsurers, brokers and policyholders need to work together – perhaps alongside a mediator – to establish a process for achieving this.