The judgment in the FCA test case concerning the operation of several non-damage business interruption insurance clauses has been handed down today. Groups representing policyholders are claiming victory, however, beyond the headlines is a complex and nuanced judgment. Nevertheless some broad themes can be discerned and insurers will want to consider these and re-assess their approach to all business interruption claims and not just those arising from COVID-19.
The FCA test case examined the operation of several non-damage business interruption insurance (BI) clauses in the context of the pandemic. While traditional BI policies only respond to claims arising out of physical loss or physical damage, non-damage based cover is provided by some policies such as by reason of a notifiable disease, prevention of access to premises or a hybrid of these two categories.
Disease cover is usually triggered where a business is interrupted as a result of an insured peril such as the outbreak of an infectious or notifiable disease within a certain radius of the business. In broad terms, the Court held in favour of the FCA and policyholders in relation to coverage on this point and held that the "the proximate cause of the business interruption is the notifiable disease of which the individual outbreaks form indivisible parts, in other words the disease in the UK is one indivisible cause". Alternatively, the Court held that each of the individual occurrences was a separate but effective cause of the national actions. It follows that disease cover will be triggered by the existence of the insured peril of COVID-19 and is not confined to the effects of only a local occurrence of the insured peril.
Prevention of access cover usually applies whereby an insured is prevented by the police or other statutory authority from gaining access to their premises. In general terms, the Court sided with the insurers on this point holding that, broadly, these policies respond to specific local events and required a total cessation of business albeit they provide cover for some insureds under some wordings.
The hybrid wordings are a blend of disease and prevention of access wordings and similarly the Court took a blended approach such that an outbreak of the disease does not have to be local for policy cover to be triggered but a relatively narrow interpretation of prevention of access applies such that each policy will need to be examined closely.
Even if the policy responds to the claim, there must be a causal link between the insured peril (eg prevention of access) and the loss claimed. Losses in BI policies are assessed on the basis of settlement formulas based on loss of profits/additional expenses which allow for the adjustment of losses for trends.
The Court considered the effects of "trends" and "adjustment" clauses in this context. It held that although trends clauses apply in non-damage BI extensions, one cannot apply the trends clause as a guide to the extent of cover.
Insurers relied on the case of Orient-Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm) to argue that if the cause of the loss is the wider pandemic rather than the insured peril such losses would not be covered. In that case, the Orient Express hotel in New Orleans was damaged by Hurricane Katrina and the court held that its losses should be assessed by reference to an undamaged hotel in a flooded city as opposed to its standard occupancy rates. The Court held that the issue of causation followed from the wordings before it and moreoever it was not bound by Orient Express and obiter that it had been wrongly decided. This aspect of the judgment will have implications for all BI claims and not just those arising from COVID-19.
What happens next?
It is widely expected that there will be a "leapfrog" appeal to the Supreme Court possibly early in 2021. Insurers are likely to receive many more business interruption claims (the FCA estimated the number of policyholders affected by the judgment at 370,000) which will have a significant impact on the market. In the meantime:
- Insurers must handle all potentially affected claims and complaints in line with the FCA's latest guidance.
- Insurers should re-assess the approach taken to all potentially affected BI claims and complaints (including those previously rejected) in light of the decision.
- If they haven't done so already insurers and intermediaries must revisit all of the wordings which the FCA said was affected by the proceedings.
- The existing approach to all BI claims must also be reassessed in light of the criticism of the Orient-Express decision.
- In the longer term, insurers, brokers and cover holders may want to review the design of policies and the way in which they are marketed and sold.