Many businesses had insurance cover designed to pay losses if they had to close down for a period, known as business interruption insurance. When the country went into lockdown last March they made claims on those policies but insurers declined the claims saying that, whatever the wording of those policies, insurers did not intend to pay for a pandemic.
This caused enormous upset last spring and the insurance regulator (the FCA) brought a test case for declarations of cover in June 2020. The judgment was delivered in September, broadly supporting the common-sense interpretation of the wordings that the FCA put forward. Insurers appealed, but the litigation is now ended with the final judgement delivered on 15th January 2021 by the Supreme Court.
The Supreme Court backed the FCA again and even improved policyholders’ position slightly where the FCA had also appealed a number of points.
This lawyer-fest has been an unedifying prospect from the side lines. The lawyers are congratulating themselves on having brought it to an end in only seven months, millions of pounds have been spent on teams of over 30 barristers and hundreds of solicitors, seven very senior judges have produced some enormously impressive judgments, but for the businesses left in peril and abandoned by their insurers, the situation remains very bitter.
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.
Planning for such eventualities included adding business interruption (BI) cover to already expensive business insurance, safe in the knowledge that if trade was disrupted through no fault of their own, the policy would pay out and cover the inevitable losses.
What are BI policies?
Standard business interruption covers a business for loss of income during periods when they cannot carry out business as usual due to physical damage: 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.
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 typical clauses that might cover Coronavirus losses.
Business Interruption (specific illnesses)
Most extensions cover specific diseases, listed in the cover. These are diseases that are well known and understood. Covid-19 was not named and these claims failed.
Some disease extensions are more generally worded to cover ‘infectious disease’ or ‘contagious disease’. In these cases, business interruption cover for Covid-19 is more likely to apply, particularly given the Supreme Court judgment.
Business Interruption (non-damage denial of access)
Another relevant extension is cover for losses as a result of people not being able to access the premises due to a specific circumstance such as the police cordoning off an area due to an event such as terrorism, a fire, or the risk of a collapsing building.
The clause might cover inability to trade due to a government restriction, which is what happened with schools, then bars/restaurants directed by the government to close prior to a full lockdown. These clauses might cover loss, again depending on the wording, although the court case has limited the types of clause that will respond.
The current situation
Any business that was affected by the lockdown and which has BI cover that includes a clause of the sort set out above needs to make a claim if it has not yet done so. Many could be forgiven for not making a claim when the insurance industry was so vocal about not paying claims, but now is the time to claim without delay. In many cases losses are now due to be paid.
Those who have already reported a claim need to contact their insurer to see what the insurer is now going to do to assess whether the loss falls within the clause.
There are many different types of clause with many different insurers. Not all insureds will have losses that fall within the applicable clause, but there is scope particularly for Royal Sun Alliance, Hiscox, Amlin and QBE policyholders to receive payouts (subject always to their specific circumstances and the precise clause they have).
The FCA test case did not deal with the detail of who should receive payment because each insured is in a different situation, but it gave clear guidance on what each policy clause means. This allows insurers to adjust claims without hiding behind spurious interpretations of the clauses. It does not mean that all policyholders in all circumstances will receive indemnity for loss, but it is a significant step forward.
The detailed loss adjustment process must now start without further delay and insureds need to collate detailed evidence of their losses for submission to insurers soonest.