The Covid-19 pandemic and resulting restrictions imposed by the Government are causing enormous losses to businesses all over the country. Many of those businesses hold Business Interruption (BI) insurance policies. The huge variation in terms and levels of cover of those policies means that it is far from certain whether any given policyholder can make a valid claim for losses caused by Covid-19. So far, the insurers have been less than enthusiastic about the prospects of paying out large sums of money and many claims made by policyholders have already been rejected.
The Financial Conduct Authority (FCA) recognises the importance of this issue. Following a period of consultation, on 9 June the FCA issued proceedings in the High Court against 8 insurers, who agreed to participate in the test case, namely Arch, Agrenta, Ecclesiastical, Hiscox, Amlin, QBE, RSA and Zurich.
In the proceedings, the FCA asked the Court to review the relevant clauses found within the BI policies administered by each of the participant insurers and to determine:
- whether the policy wording in question covers in principle the loss arising as a result of the interruption or interference with the insured’s business by the current Covid-19 pandemic; and
- where the coverage in principle is established, whether the insured can establish the causal link between the Covid-19 and sustained losses.
In relation to point 1, the Court will look at each individual policy and establish the meaning of words such as “outbreak”, “occurrence”, “incident”, “notifiable disease”, “vicinity”, “manifested”, “prevention of access”, or “hindrance in access” in the context of the policy.
The Court will also have to address the question of whether Covid-19 is an “organism” – a question that even scientists cannot provide a definitive answer to.
The answer to the question raised by point 2 might appear obvious – where the policy covers Covid-19 and the business suffered a loss as a result of the Covid-19 lockdown, the policyholder must be able to recover from the insurer.
However, as a matter of law, it is not so straightforward. The causal link is usually established by applying the “but for” test – but for the incident, would there be a loss to the business?
The 2010 case of Orient-Express Hotels v Generali concerned the damage caused by Hurricane Katrina and Hurricane Rita to a hotel in New Orleans. In this case it was held that the insured did not satisfy the “but for” test because even if the hotel had not been damaged by the hurricane, it would have suffered the loss of custom anyway due to widespread devastation in the area. The test case will decide whether this reasoning can be applied to the Covid-19 lockdown.
The 184-page particulars of claim document explaining the issues in detail, as well as the full list of policies and clauses to be considered by the Court is available for download from the FCA website following the link below.
The FCA applied for the test case to be heard as a matter of urgency, with the proposed timetable providing for a 5-10 day hearing in the second half of July. At the first Case Management Conference on 16 June, Mr Justice Butcher made an order for the case to be expedited in accordance with the proposed timetable, so the much-needed clarity to BI policyholders should be brought by early August at the latest.
We believe the circumstances of the current coronavirus emergency, and its effect on businesses holding BI policies means this uncertainty needs to be resolved as quickly as possible.