Small businesses have been thrown a lifeline as a result of the judgement on 15 September 2020 in the business interruption insurance test case, where the High Court ruled that some insureds will be covered for losses caused by the impacts of the Covid-19 pandemic.
In June 2020, the Financial Conduct Authority initiated a claim against eight defendant insurers, seeking to answer the question of whether business interruption losses caused by the Covid-19 pandemic are covered under certain insurance policies.
The regulator adopted an impressive and highly adversarial approach, fighting tooth and nail for the interests of affected policyholders, many of whom are small to medium sized enterprises.
Who will be impacted?
The test case considered 21 “lead policies” issued by the defendant insurers. However, any business owner with some form of BII policy will be interested in the outcome, as the lead policy wordings were only a representative sample of what was available in the market. The Court’s ruling recently will be of much wider application, as it delivered persuasive guidance for the interpretation of similar policy wordings.
In fact, it has been estimated that over 370,000 businesses could be impacted and the regulator has instructed insurers to apply the judgment in reassessing all outstanding or previously rejected claims.
The lead policies essentially fell into three categories:
- what the FCA termed “disease clauses”;
- what have been referred to as “hybrid clauses”; and
- clauses covering prevention or denial of access.
In broad terms, disease clauses provide coverage for business interruptions caused by the occurrence of a notifiable disease nearby to the insured business premises.
Although each disease clause considered by the Court was cast in slightly different terms, in all cases the trigger for cover was that Covid-19 must have occurred within a specific radius of the business premises (for example 25 miles).
The Court held that there will have been an occurrence of Covid-19 within any geographical area when at least one person infected with the virus was within its boundaries, triggering the relevant disease clause from that point in time.
The upshot is that most insureds with disease clause cover will be entitled to receive payment, assuming they can prove that Covid-19 occurred within the geographical area specified under their policy.
What losses will be recoverable?
The insurers sought to argue that the presence of Covid-19 was not itself the only (or even the predominant) cause of the losses that many businesses have suffered since the lockdown began in March 2020.
Losses arising from a general reduction in consumer demand and the government’s various lockdown measures were said to be distinguishable and therefore not covered. However, the Court disagreed, ruling that all those consequences resulted from the same composite cause: namely, the occurrence of Covid-19.
With very limited exceptions, most insureds will therefore be able to claim up to the allowable monetary limited under their policy for any business interruption which the insured can show resulted from Covid-19, including by reason of the actions, measures and advice of the government, and the reaction of the public in response to the disease, from the date when the disease occurred in their relevant geographical area.