BUSINESS INTERRUPTON INSURANCE

TEST CASE TRIAL: Judgment to be released 15th September at 10.30 am.

With many businesses facing a cash crisis, many astute business owners who took out Business Insurance prior to Covid-19, to obtain cover for financial losses as a result of certain events, will be waiting on the outcome of the Business Interruption (BI) Insurance Test Case. 

If you do have such cover, make sure that you have notified your insurer in line with the policy, failing which any potential claim can be rejected.

Here, we provide a brief overview of the High Court Test Case which has been bought by the Financial Conduct Authority (FCA) to seek clarification on the wording used in a selection of BI insurance policies to ensure that all claims can be dealt with fairly.

Business Interruption insurance cover is usually purchased as an “add on” alongside property damage. Generally, coverage under the Business Interruption clause is tied to some type of property damage which is defined within the wording of the policy.

There will also be a “material damage proviso”, which means that an insurer will only accept a claim that flows directly from an incident of property damage. This means that there has to be some type of physical damage to business premises.

More bespoke policies, however, do cover losses where there has been no physical damage, for example infectious or notifiable diseases, non-damage denial of access and public authority closures or restrictions.

Covid-19 is a disease which has affected human life and behaviour BUT has not caused property damage.

Many Business Interruption Policies do however contain cover where there has been no damage to property under what is often called “non-damage extensions”. These policies are usually more expensive. As a policyholder, you still have to prove that a certain event or trigger has occurred, leading to loss under the non-damage extension. These extensions seem to fall into three categories: 

  • Denial/prevention of access (non-damage) to the insured’s premises.
  • Act of civil or statutory authority (e.g. action taken by government).
  • Notifiable disease.

Perhaps the most important here is action taken by the government and notifiable disease.

Action Taken by Government 

Under this coverage, the wording may require that the government has taken certain action in relation to an event (Covid-19), which has caused the interruption.

Notifiable Disease

Under this coverage, there is likely to be a specific list of diseases or the wording may refer to some type of infectious disease, which must be notified to the authorities.

The list of diseases will not include Covid-19 as this is a new disease, although it is unclear whether coverage might include the SARS. In relation to notifiable infectious disease, the issue here is Covid-19 became notifiable on 5 March 2020 in England & Wales and there is debate on what is an “occurrence” or “outbreak”.

Why the need for a test case?

With business interruption policies which do cover losses where there has been no physical damage, many insurers are disputing the validity of such claims on the basis of coverage and/or causation.

Many insurers are disputing the validity of such claims due to the interpretation of the wording.

The FCA stepped in to ask the High Court to resolve the uncertainty by issuing a Test Case which will cover 19 business interruption policies covering a wide range of policy wording in order that claims can be resolved as quickly as possible.

The FCA explains that as of June 2020 the policies listed cover approximately 370,000 policyholders.

The Court sat from Monday 20 July to Thursday 23 July and from Monday 27 July to Thursday 30 July, from 10.30 a.m. until 4.30 p.m. each day.  On the 11th September, the FCA announced that the Judgment would be handed down on Tuesday 15th September 2020, at 10.30 a.m.

What has the court been asked to consider?

There are two issues in dispute: 

The coverage issue – Do the non-damage clauses cover losses arising from the interruption with the business as a result of the Covid-19 Pandemic. 

The causation issue  If yes to the coverage issue, can the policyholder establish the necessary causal link to any loss suffered? 

In deciding these two issues a list of 21 potential questions have been prepared resulting from insurers’ reasons for denying claims.

What is the position of the FCA?

The FCA argues that the relevant Business Interruption policies do cover the events of COVID-19 and the government action responding to the pandemic in the first half of 2020.

What will be the effect of the test case?

The judgment in the Test Case will be legally binding upon the insurers that are party to the test case and will act as guidance for those insurers that are not.

We will provide an up-date following the release of the judgment on 15th September 2020. It is of course possible that either of the parties to the Test Case could appeal the decision, which will cause further delay.

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