COVID-19 and Business Interruption Two Years On – Where are we Now?
It is now more than two years since the beginning of the COVID-19 pandemic and the introduction of national lockdowns, forcing thousands of businesses to close their doors across the country. This led to significant numbers of claims being made against business interruption policies, which many policyholders anticipated would provide them with cover and financial security in the event of this kind of closure. Unfortunately for the majority of policyholders, these claims were promptly declined by insurers, on the basis that such policies were not intended to cover such situations where a national closure was ordered.
Since then, several significant legal developments have taken place which have caused a notable shift in favour of policyholders. An initial High Court decision in 2020 and a subsequent Supreme Court appeal unlocked critical areas of cover for many business insurance policies, and this has been further expanded in subsequent case law and publications from the Financial Conduct Authority.
In light of the ongoing developments in this area, many policyholders may now be asking whether they are in fact covered for their losses after all. Whilst the answer will always depend on individual circumstances, the ongoing litigation and recent case law provides policyholders with more and more grounds for cover, meaning the ability to successfully claim is significantly improved.
With so much litigation ongoing, keeping track of the current position of the law is never straightforward. To try and demystify this, we have set out below a summary of what happened with regards to business interruption insurance, where we are now, and, critically, what policyholders can do to try and successfully claim against their policies.
Many businesses breathed a sigh of relief in January 2021 following the release of the Supreme Court’s decision in the much-publicised matter of The Financial Conduct Authority -v- Arch and others , otherwise known as the ‘FCA Test Case’.
This judgment was expected to help conclude one of the biggest legal debates arising from the COVID-19 pandemic – the question of the extent of cover provided by business interruption insurance policies.
With the introduction of the first national lockdown in March 2020, thousands of businesses across the country looked to their insurers for support from their business interruption policies to cover their lost income and revenue, to safeguard their businesses against an uncertain future. As the pandemic went on, these losses quickly ran into tens of thousands of pounds for businesses, and in many cases much more. Whilst the Government’s furlough scheme acted as a life-raft for many businesses, this was at heart a means to safeguard the wages of employees. What it did not do was recompense businesses for the money they would have otherwise expected to receive in normal trading circumstances. Prior to COVID-19, 2020 was expected to be a promising year for many industries, with events such as the planned celebrations for 75th anniversary of VE day and the Euros 2020 shaping up to be a particular boon for the hospitality industry.
In the early days of the pandemic however, many insurers were quick to inform their policyholders that they did not consider that their business interruption policies were intended to respond to national pandemics, or that the introduction of a national lockdown was enough to unlock any cover.
Many of the insurers’ decisions were based around technical and legal interpretations of insurance policies and terms within, such as whether a national pandemic constituted an ‘occurrence’ of a disease which affected a specific policyholder, as well as questions such as whether a positive case for COVID-19 had to be shown within a certain radius of the insured business. Whilst the need for a clear legal interpretation of policies was understandable, it was of little assistance to businesses looking to source as much financial support as possible and which, many argued, they were entitled to expect to receive. The overall result from the insurers’ decisions was that policyholders were left exposed financially, with little to no support provided from their insurers.
Unsurprisingly, numerous consumer action bodies were quickly created to take action and challenge the blanket declinatures being issued by insurers. This led in turn to the involvement of the Financial Conduct Authority (‘FCA’), who initially published statements setting out clear expectations for how they expected insurers to respond.
The FCA test case
Once it became clear that insurers’ positions were remaining largely unchanged, the FCA – with the agreement of insurers – began proceedings against eight named insurance companies so as to obtain “legal clarity” on the matter. The intention was to obtain a judgment which would serve to reach a legal determination on the application of different insurance clauses, to provide clarity for insurers and policyholders about the eligibility of various claims for cover.
The case involved the detailed analysis and scrutiny of a number of different insurance policies which had been underwritten by the insurers involved, with the aim of determining whether the insuring clauses contained in these policies would in principle respond in cases where a policyholder was required to close by way of Government order in light of a national pandemic.
Some of the clauses under review included “public authority” clauses which were common to many policies, and which formed the basis of many claims. Prior to the Test Case, the position of many insurers was that such clauses were not intended to provide cover in response to national lockdowns.
The case began in the High Court, with an eight-day trial taking place in August 2020. The High Court’s judgment was published on 15 September, with a decision which many agreed was favourable to policyholders. Some of the most significant findings of the High Court in relation to the above public authority clauses were that:
- The Covid-19 outbreak could qualify as an “occurrence” of a notifiable disease for the purposes of a business interruption policy;
- “Restrictions imposed” on a business, whilst needing to be mandatory (i.e. backed by/arising from a statutory instrument), do not need to have been directed specifically at the policyholder. A national lockdown and imposition of restrictions would therefore suffice for the purpose of satisfying this requirement.
- Whilst some policies specified that cover was only applicable to closures arising from diseases and restrictions occurring “in the vicinity” of the insured business, in cases where a specific measurement (for example, a five-mile radius) is not provided, then national Government actions would likely be accepted as being “in the vicinity” of the business. Therefore, it was not required for there to have been a clear, evidenced case of Covid in the vicinity of the insured business.
Whilst the outcome for policyholders was, overall, positive, the decision was not the complete victory that many had hoped for. The High Court did agree with insurers that certain clauses, such as a ‘non-damage denial of access’ (NDDA) clause would not ordinarily respond, and so claims relying on these clauses continued to be denied.
A more detailed breakdown of the High Court’s findings can be found in our article following the High Court judgment. Certain aspects of the decision were appealed and, in light of the significance and urgency of the matter, the appeal was escalated immediately to the Supreme Court in November, with the final decision published on 15 January 2021.
To the relief of policyholders, the Supreme Court largely dismissed the appeals raised by insurers and even went so far as to overrule prior case law (Orient-Express Hotels Ltd v Assicurazioni General Spa ) which had been relied on by insurers during the proceedings.
Once the decision was published, the attention of insurers turned to the subject of the claims themselves and beginning the process of adjustment and settlement.
Are insurers now paying business interruption claims?
Following the Supreme Court’s decision, insurers began to reassess prior claims and, in certain cases, began to process these and issue payments to policyholders who they considered were eligible for cover. The decision resulted in payments beginning to be made for a wide range of different businesses and industries, ranging from retail and hospitality, through to hairdressers and even the owners of holiday home cottages which could not be rented out during the national lockdowns.
Whilst some policyholders have finally had their claims settled and paid, many other policyholders have still faced claim declinatures from insurers. Often, this has been based on a determination that the policyholder’s business was not forced to close (often because it may have been possible for staff to work remotely), or where it was still considered that the insuring clauses were not triggered owing to specific requirements being in place within the insuring clauses which added an extra layer of evidence to be satisfied before cover was available.
In addition to this, during the course of 2020 many insurers began to introduce new clauses to policies come the point of renewal which amended the terms of cover, including specific exclusions and endorsements for ‘communicable diseases’, specifically intended to limit and restrict future cover for COVID-19. This has itself led to different policyholders across the same industry often receiving different outcomes in terms of their claims.
The owner of a hair salon whose insurance policy ran from August 2019 to August 2020 and then renewed, for example, may have had an exclusion for communicable diseases added come the point of renewal in August. This would mean that even if cover would likely be available for the initial lockdown period from March to July 2020, cover for the subsequent lockdowns in November 2020 and January 2021 would not be available, since each lockdown period is typically deemed a separate incident giving rise to a separate claim. By contrast, another salon’s policy which began in February 2020 and which would not have renewed until February 2021 would not have had the exclusion added before the renewal date, and so would potentially provide cover for all three lockdown periods since these all fell within the policy period when the exclusion was not present.
Since the Supreme Court’s decision, the reality for policyholders is that whilst some have been able to finally bring their claims to a resolution, there remain a significant number who are continuing to struggle and who are facing claim rejections or settlement proposals which are below what they were claiming for.
Ongoing litigation & court decisions
Given the above, it is perhaps unsurprising that litigation remains ongoing in this area and that courts are continuing to issue decisions which have expanded on, and in some cases even overturned, the decisions made by the High Court and Supreme Court in the FCA Test Case.
As we discussed in our last update in March 2022, the case of Corbin & King Ltd and Others v Axa Insurance UK PLC  further chipped away at some of the findings in the High Court decision which favoured insurers, such as their ability to refute cover under an NDDA clause. This particular aspect of the High Court’s original decision was not significantly challenged in the original appeal to the Supreme Court. This allowed the Court in Corbin to further analyse similar types of clauses, once such being:
“where access to your premises is restricted or hindered for more than [2 hours] arising directly from … the actions taken by the police or any other statutory body in response to a danger or disturbance at your premises or within a 1 mile radius of your premises”
In her judgment, Mrs Justice Cockerill determined that Covid-19 was in fact capable of being a danger within one mile of the premises in question, which caused the premises to be closed by a statutory body and suffer interruption. In this case, the national lockdown by the national government was deemed to satisfy the requirement for action by a statutory body. Therefore, the policy in this case did provide cover. This has further opened the door to policyholders with similar policy wordings, even where they may have thought the original decisions of the High Court and, latterly, the Supreme Court mean they do not have cover.
The significance of these various judgments and the substantial number of claims which are still being processed mean that litigation in this area will likely remain ongoing for several years to come. As with the Corbin decision, future judgments may continue to open the door for policyholders and present new grounds for claiming business interruption losses. However, whether all policyholders are aware of these claims is not clear.
For the insurance industry itself, COVID-19 proved to be an unprecedented challenge and many insurers have faced significant reputational damage as a result of coverage decisions made at the outset of the pandemic. The task for insurers now will be to work with policyholders to finalise all business interruption claims so far as possible, and allow for a period of reflection to determine what lessons can be learned from the pandemic and to develop strategies to respond to any similar crisis in the future.
For policyholders with outstanding claims, the focus now will be on trying to get these resolved as promptly as possible to conclude what has been over two years of uncertainty and doubt.
How do I know if I’m covered?
Cover for business interruption will vary from policy to policy. Some policyholders may have a specific, freestanding business interruption policy, whilst others may find business interruption cover is located within the terms of other policies, typically as an extension to property damage or buildings insurance.
If you think you may be entitled to claim for business interruption, you should contact your insurers in the first instance with the details of your policy and the losses that you are seeking to claim. Your insurers should promptly issue you with a claim reference and provide contact details along with details of what further information may be required, and then carry out a prompt review of your claim and inform you whether cover will be available. In some cases, insurers may also make an offer of interim payments whilst they carry out further reviews.
Overall, if you hold a policy containing business interruption cover and consider that your business was closed and/or significantly impeded as a result of the restrictions imposed in light of Covid-19, then there is a strong possibility that you may be eligible to claim. Even where a claim may previously have been denied, a further review may be worthwhile in light of the Corbin decision.
How much can be claimed for business interruption?
The sums which can be claimed for business interruption will depend on the terms of the specific policy. Particular attention will need to be given to the limit of indemnity specified in the policy, along with the details of any excesses (the contribution to be made by the policyholder) which may apply.
In terms of how losses themselves can be calculated, different policies will apply different measurement tools and/or provide cover for different types of losses. Some policies may provide cover solely for loss of gross profit, whilst others provide wider cover for the total lost revenue (usually calculated by way of comparison to the total business receipts collected over the prior year). Policies may also provide cover for increased costs of working caused as a direct result of Covid-19, such as the need to purchase additional equipment to maintain social distancing, along with additional cleaning costs.
Depending on the terms of your policy, the potential sums to be claimed for business interruption may be significant. Businesses who have outstanding claims or who have had claims declined may therefore wish to take a further look at what options are available.
What can policyholders do now?
As the recent Corbin decision shows, business interruption insurance remains an ongoing area of litigation, with more cover being made available as time passes. Many policyholders who had claims declined before may now want to conduct a further review of their policies taking account of their circumstances, as vital areas of cover may have since been unlocked and a claim may now be possible.
Freeths LLP’s Financial Services Regulation team are experts in this area and have successfully negotiated six-figure settlements for clients whose business interruption claims were initially refused by insurers. Our team is able to help with reviewing policies and providing prompt, helpful and straightforward advice about whether you may now be eligible to submit a successful claim. Our lawyers will be able to talk you through your options and guide you through the claim process from beginning to end. We will be able to liaise with your insurers directly on your behalf and assist with presenting the best possible claim.
Whilst we hope such action will not be needed, we will also be able to advise on the merits of litigation where this may prove necessary. We will be able to talk you through the costs and steps involved in commencing proceedings, and can assist you through the entire process to ensure you are fully supported and able to get the best outcome possible. We can also advise on alternative dispute resolution options such as mediation and arbitration, which can often bring about a successful outcome for all parties.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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