What does the Supreme Court Ruling mean for Business Interruption Policyholders?
The Supreme Court ruling handed down 15th January 2021 on the FCA’s (Financial Conduct Authority) Business Interruption Test Case, has opened the door for what the FCA says will be claims from “thousands” of policyholders, due to “many of the roadblocks” having been removed by the court’s final judgement.2 So what is the reality for businesses who bought Business Interruption (BI) cover?
In the view of one of the insurers whose BI claims decisions were challenged by the FCA, fewer than one-third of its 34,000 policyholders will have policies that may respond.3 The devil will be in the detail and businesses which purchased only standard business interruption cover (which does not include any ‘non-damage’ cover extensions) will continue to find themselves unable to claim.
The test case only focused on specific non-damage extensions within business interruption policies and in three key areas – notifiable diseases, denial of access due to the actions of the government or local authorities and policies with various hybrid wordings capturing all non-damage extensions into a single hybrid cover. If a policy does not mention any of these areas, it is unlikely to offer any compensation to a policyholder.
Should a policy contain these non-damage extensions, it does not automatically mean that the policy will trigger. Certain policies have cover for ‘Notifiable disease on the premises’. This wording was not included in the test case as it was considered to be clear and unambiguous, effectively to cover the event, there needed to be a case of COVID-19 evidentially on the premises and the business interruption loss had to flow from that specific case. Whilst we understand that some policyholders have had claims for deep cleaning and a day or two of business interruption paid, in general losses do not result from a specific case on the premises but more correctly the necessary action taken by government to protect the public and the NHS.
Secondly, several policies which have notifiable disease cover are restricted to a specific listing of diseases, sometimes over 40 diseases may be mentioned. Unfortunately, COVID-19 would never be included as it is a new disease and not one which they could have quantified and modelled outcomes of.
The policies which have the possibility of triggering are those that extend to ‘any notifiable disease’ and give coverage for that disease within a defined vicinity of the insured premises (typically 25 miles). These types of wordings were looked upon favourably by the Supreme Court who interpreted these wordings as widely as they were able.
As mentioned above, some policies also include cover for denial or hindrance of access to the premises on the instructions of government or statutory body. Some policies can trigger in certain circumstances, though the majority of these clauses require there to be an incident / event within the neighbourhood, and again there is no cover for action at national level. The court did push the envelope on these clauses to try and exploit cover and has widened the denial of access to include ‘hindrance’ and also has included government advice as a possible trigger, but in reality, only a small number of policies will have direct cover for government action, without the need for a local event to have happened.
Whilst the non-damage extensions are almost always sub-limited, over and above this, it is necessary for a business to have the right level of business interruption loss of revenue, gross profit or in certain circumstances, increased cost of working cover, if it is to have a chance of a successful claim. If all these areas are ticked, it will still require an examination of the individual wording within the policy, and consideration of the specific circumstances of the loss as it relates to the policyholder before it can be determined whether a claim could be successful.
Whilst the FCA has now created a policy checker facility, to help smaller businesses determine whether their BI policy might pay out, even their guide comes with the caveat that everything depends on the individual policy wording. Previously, the FCA talked of there being 700 types of BI policy, provided by 60 different insurers. Its test case focused on just 21 policy wordings, the majority of which were of a type designed for SME policyholders.
Another issue is that, whilst the 112-page Supreme Court judgement creates the basis on which insurers should pay claims, if certain conditions are met, it does not and could not offer any advice on how much should be paid as this is specific to each client and their individual policy and circumstances, However as the Supreme Court officially overturned the case of ‘Orient Express Hotels -v- Generali which had previously restricted claims for ‘wide area damage’, the FCA believes “more policyholders will have valid claims and some pay-outs will be higher.” There will still be much ambiguity.
On the plus side for insured BI policyholders, the Supreme Court ruling has instructed insurers to widen their interpretations when paying claims, if any of the key areas highlighted above are included within the policy. For an applicable policy wording an insured policyholder now only must prove there was at least one case of COVID-19 within their policy’s specified radius e.g. 25 miles, to potentially satisfy a policy condition, as the Court believed localised cases had to be linked to the wider COVID-19 situation, when assessing impacts on businesses.5
Another good outcome for clients with qualifying policies is that any restrictions placed on a business, which prevented ‘access to the premises, do not have to have been legally enforced. The Prime Minister’s March 20 2020 instruction for many businesses to close was deemed a sufficient denial of access situation, but policyholders must study their policy’s own wording in relation to “actions” and “instructions” by those in authority and provide strong evidence of losses attributable to these. Definitions such as “inability to use” and “prevention of access” may need to be interpreted by a claims expert.
Insurers are also not now allowed to reduce a claim according to any loss of business that had already occurred before a denial of access-type “instruction” was issued by an authority. Businesses can also make a claim if just part of their operation was affected. For example, if they managed to keep one service operating, such as a takeaway, they can still potentially make a successful claim for lost revenue on eat-in dining, if other conditions are satisfied.
So, what is the current situation for business interruption policyholders? Summarising the case, the FCA’s legal firm, Herbert Smith Freehills LLP has stated that the ruling, “improves the position significantly beyond that which was already established by the High Court judgement.” It has added that the Supreme Court “gave broader interpretation to key coverage words in the prevention of access / hybrid wordings.” It is now for policyholders to assess whether their policies contain such wording and for insurers to review their policies and seek to follow the Supreme Court’s ruling, if policyholders satisfy its conditions.
The starting point should be to look for the key triggers on which the FCA focused within your policy – disease and denial of access in particular – and then contact your broker for guidance if you discover any wording relating to these. You can legally appoint an expert to fight your corner, if necessary. Despite the ruling, the debates that lie ahead are not likely to be easy ones and such representation may be required.
If you wish to discuss the vital and all-important wording that you believe you have found within your policy, we are here to try to make your case. Unfortunately, unless you have these extensions within your Business Interruption policy, there is nothing at all that your broker can do to champion a claim.
1 https://www.supremecourt.uk/cases/docs/uksc-2020-0177-judgment.pdf 2https://www.fca.org.uk/news/press-releases/supreme-court-judgment-business-interruption-insurance-test-case 3https://www.insurancebusinessmag.com/uk/news/breaking-news/insurance-industry-reacts-to-business-interruption-test-case-outcome-243793.aspx