Business Interruption cover in the time of Covid-19
Much has been made, in recent weeks, of the Supreme Court’s decision in The Financial Conduct Authority v Arch Insurance (UK) Ltd & Others, more generally known as “the FCA case.” The potential impact of the case is enormous. Unfortunately, the importance of the case is matched only by its complexity; with nine represented parties and a judgment that rivals many novels for length, it can be difficult to cut through to the important points.
As this was a test case, not every wording under every available business interruption cover was considered here. Broadly, the different types of cover can be broken down into three categories:
- Notifiable Disease, where cover activates in the event of the business being interrupted by an occurrence of a disease which is notifiable to the proper authorities within a defined radius of the business premises;
- Loss of Access, where cover activates upon an action taken by an appropriate authority which prevents access to the business; and
- Hybrid clauses which, as the name suggests, incorporate aspects of the previous two.
The most notable omission here is “specified disease” clauses. These differ slightly from Notifiable Disease clauses in that the cover is predicated on an outbreak of a disease which is on a list specified in the policy wording. This means that the scope of the cover does not change after the policy is issued, unlike with Notifiable Disease cover, where a disease may become notifiable during the lifetime of the policy. These were likely excluded from the case as there is no real ambiguity about their operation – if COVID-19 wasn’t on the list of diseases, the cover did not operate. However, if a business interruption policy contains one of the three types of wording above, then it may be that the cover was operational when the business was forced to close.
Within the three categories, the court considered a number of detailed arguments about points of interpretation. Regarding certain Notifiable Disease clauses, the court held that so long as there was a single occurrence of COVID-19 within the policy radius, that would trigger cover in the event of a lockdown, irrespective of the fact that the lockdown may have been predominantly caused by cases occurring elsewhere. Crucially, regarding many Loss of Access clauses it was held that cover was activated by the Prime Minister’s instruction to the general public to remain at home – even though the closures did not become legally enforceable until some days later. The clauses did, however, only activate where there was a total inability to use, or loss of access – a mere hindrance was not enough. In certain cases it was held that cover could apply to parts of businesses – so a business which could partially trade online could claim for the interruption to its foot trade while still operating online. It is important to reiterate here that not all of the court’s conclusions are applicable to any given insurance policy – even those falling within the three broad categories above may be subject to particular nuances which mean that some, or all, of the court’s interpretations do not apply.
The court also considered the case of Orient-Express Hotels Ltd, in which the High Court (on appeal from a tribunal panel) had held that a policyholder could not recover under a business interruption policy for losses due to damage to the hotel, where the loss would have been suffered anyway due to widespread devastation in the area (the hotel in question being located in New Orleans immediately following Hurricane Katrina). The Supreme Court held that this case had been decided incorrectly, which may be relevant in the present circumstances where a business is forced to close due to widespread infections, not simply in the immediate area.
This is only a small picture of the major issues which were raised by the case, but hopefully it gives some perspective. In light of the decision, IPs should be considering whether any companies to which they are appointed had a business interruption insurance policy and whether it might respond to any of the recent lockdowns.
BBM Solicitors specialise in advising IPs in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (firstname.lastname@example.org). This briefing note is current as at 29 January 2021 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).