Good news for those with Business Interruption Insurance

Category: Dispute Resolution

If you have Business Interruption Insurance, you should already know about a recent High Court decision. We’d like to give you some more clarity around the decision itself.

Decision from the High Court

The High Court recently handed down a judgment that brought smiles to the faces of businesses. The Financial Conduct Authority (FCA) brought the case against various insurers. It was a test case concerning the wording of various Business Interruption Insurance (BII) policies. Essentially, the Court had to decide whether the defendant insurers were liable or not to pay out. The Covid-19 pandemic has wreaked havoc on businesses up and down the country. Businesses have incurred significant losses and until September, insurers had refused to pay out.

The Court found in favour of the FCA in the majority of instances. There are however, a few exceptions, and we’ve tried to explain these below.

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What the Court had to consider

Business Interruption Insurance policies are intended to cover the loss of profits and related expenses where ‘business interruption‘ is caused by an event identified in the policy wording. Typically, this would mean actual physical damage to a property (fire or flood being most common). There are however other, so-called “non-damage” policies which contemplate paying out for events other than physical damage. It is the wording of these non-damage policies which the Court considered in this case.

The Court looked at the wording in three different types of Business Interruption Insurance ‘non-damage’ policies:

  • “Disease” wording. These actually mention disease as part of the cover. This is for when business is interrupted because of, or following, or arising from, the occurrence of a notifiable disease, within a specified radius from their premises;
  • Prevention of access / public authority wording. These policies cover where Government or other Authority action has prevented or hindered access to business premises; and
  • “Hybrid” wording. This basically includes elements of both the above. Any restrictions imposed on the premises in relation to a notifiable disease are included.

Disease Policy Wording

Insurers had tried to argue that they should not have to pay their insureds under these types of policy. They claimed that Covid-19 was widespread and so not technically a local occurrence of a notifiable disease. The insurers argued that this was not the intention of the policies. The Court however, sided with the FCA and disagreed. They found that the actual cause of the business interruption was the notifiable disease, of which individual outbreaks formed indivisible parts. The Court said that the insurers’ arguments were “anomalous”. By their own logic, this would mean there is effectively no cover if a local occurrence was part of a wider outbreak. It would be too difficult or even impossible to show that the local occurrence made a difference to the response of the authorities or public.

Business losses caused by the Covid-19 pandemic are more than likely to have been covered by this wording.

Prevention of Access and Hybrid Wordings

The Court found that the ‘Prevention of Access‘ wording was to be interpreted more restrictively than the Disease wording. Whether or not the insurers were liable under these types of policy depends closely on the wording of the policy itself. Specific Government advice (and the regulations that were imposed on the insured’s business) is also taken into account.

The Court drew an example between two separate restaurants, one which only allowed eating in and one which allowed both eat-in and takeaway options. During lockdown, the former restaurant would have needed to close down completely to comply with the law and no access would have been allowed. This would lead to the policy wording being effective. Taking into account the second restaurant though, access was only partially restricted. Assuming each restaurant had the same policy wording, each one would find themselves in different positions regarding their cover. The interpretation is therefore stricter and each claim will depend on its own facts.

Where the policy is a ‘hybrid’, blending the wordings of both Disease and Prevention of Access, the Court followed its own findings for each type of wording. It agreed with the FCA when it came to the Disease wording. However it disagreed that it was only intended to apply to local outbreaks and that the ‘Prevention of Access‘ part was to be interpreted restrictively.

What next for policyholders

The judgment will of course be welcome news to many Business Interruption Insurance policyholders. In particular, those with Disease or Hybrid wording in their policy will be pleased by the Court’s wide interpretation. They should now consider (if they have not already done so) whether they have a claim under the policy for the losses incurred to their business by the Covid-19 pandemic.

Those with Prevention of Access wording have had some clarity given to their situation at least. However, they may still find themselves in much the same situation with their insurer as before the judgment was handed down.

Commercial Dispute Resolution

We can help you

If you’d like to chat to our Commercial Dispute Resolution team about this, or you have an issue that you need help with, please get in touch. We would be delighted to hear from you. You can call us on 01752 827014 or email [email protected]