Lockdown losses: can businesses claim from insurers?

Nicholas Brent, partner, head of real estate and Ben Lomer, senior associate, dispute resolution; Druces LLP.

Last week the High Court ruled in an important case[1] brought by the Financial Conduct Authority which potentially affects 370,000 businesses impacted by the COVID-19 pandemic.

These are all businesses which, as part of their regular insurance arrangements, had taken out insurance cover against the risk of interruption to trade. Chief among them were the risks of closure due to an outbreak of disease and restrictions of access to their premises.

Business interruption insurance, as it is known, is commonly designed to cover losses arising when there is physical damage, for example after a fire. However, it also usually extends beyond that to include other losses. For this reason, these policies are of keen interest to policy-holders whose businesses had suffered economic loss during the pandemic.

To the layman and woman, it seemed obvious that this insurance should provide cover: there had been both an outbreak of disease and restrictions in access during the lockdown. In March, COVID-19 had become a notifiable disease and a national lockdown ensued. Did it not follow that the insurers must pay out for the interruption to their business?

This was a test case brought because of the critical nature of the issues being determined (both to business policy holders and the insurers).  The court considered 21 sample policy wordings (from eight different insurance companies), closely examining them in three categories:

  • Disease: insurance cover in respect of an outbreak of a notifiable disease within a specified distance of the premises;
  • Access: cover in respect of a prevention or hindrance of access or use of the premises by government or other public authority; and,
  • Hybrid: cover in respect of restrictions on the premises as a result of a notifiable disease.

Importantly, the court also had to consider so called “trends clauses” which allow adjustments in the calculation of the insured loss in order to reflect what would have happened to the profits anyway had the damage (or other incident giving rise to the claim) not occurred.

The court’s decision

With regard to the Disease category, the insurers had sought to resist liability, arguing that the relevant policy wordings were designed to cover local outbreaks of disease. Where there was a wider outbreak, they said, their liability was only for the additional loss of a local outbreak over and above any wider impact.  The court rejected this approach and ruled that, legally, the cause of the business interruption was the notifiable disease, local outbreaks forming indivisible parts of the epidemic as a whole.

As to the Access category of policy wording, the Court’s approach was more favorable to the insurers, the outcomes very much turning on the specific wording of particular policies. By way of illustration, some of the Government’s actions as the pandemic took hold in March were mandatory and had the force of law; others were merely advisory. These in turn give rise to different outcomes under the insurance policies, depending on the particular wording in each case. Similarly, whereas some policies only covered losses where there had been a total prevention of access to the premises, in other cases, “hindrance” was enough. For example, a restaurant that had been reduced to take-away service only may have suffered a hindrance but not a complete denial of access.  The outcome for Access claims will be dependent on the particular wording of the policy in question and the impact on that business of the various Government edicts during the pandemic.

With regard to the Hybrid claims, the Court applied a blended approach: generally favourable to the policy holders in respect of the Disease element (as above) but, again, a narrower interpretation of the Access element.  As a result, these claims also require close examination of policy wording in individual cases.

The Court’s approach to the “trends clauses” was also crucial.  The insurers’ interpretation of these clauses would have had the effect of negating the losses, but the Court rejected that attempted approach.

What next?

This was a good decision for many of the businesses hoping to claim in respect of interruption of trade during the pandemic.  This is particularly true for those business with policies worded like the Disease and Hybrid examples considered by the Court; it may also be of assistance to those businesses relying on Access, depending upon the particular wording of the policy.

However, the insurers – now facing many claims to settle – are likely to appeal. In light of the importance of the case, this may involve a ‘leap-frog’ appeal straight to the Supreme Court. Just as the effects of the COVID-19 Pandemic are set to return this autumn, so it seems is this initial decision likely to return to a more senior court.

[1] The Financial Conduct Authority v Arch Insurance (UK) Limited and Others [2020] EWHC 2488 (Comm)