Covid-19 –Are your business interruption losses recoverable?

Most smaller businesses have insurance policies which focus on property damage. Whilst business interruption may have been included; it was as a consequence of property damage. Some policies covered business interruption for other causes such as notifiable or infectious diseases, no-damage denial of access or public authority closures. In many cases, the insurers took the view that these policies did not cover COVID-19 and refused cover.

Following a hearing in November 2020, the UK Supreme Court has now handed down the appeal judgement in the test case brought by the Financial Conduct Authority (FCA) on behalf of UK based small and medium enterprises (SMEs). This sought clarity on the coverage provided by certain extensions of cover for COVID-19 related business interruption losses.

The FCA proceedings were brought on behalf of policyholders under various insurance schemes, including many SMEs forced to close or partially close due to the pandemic who were particularly vulnerable to losses. The Supreme Court held that business interruption losses resulting from the Covid-19 pandemic might be recoverable under various insurance policies. There is potential for the decision to affect 100s of policies across 10s of different insurers.

Four types of clauses that were considered by the Supreme Court:

Disease clauses

This type of clause covers business interruption losses resulting from any occurrence of a notifiable disease within a specified geographical radius of the insured premises.

The key issue was whether business interruption losses resulting from health measures taken in response to Covid-19 fell within this clause. The Supreme Court concluded that all individual cases of Covid-19 which had occurred at the date of any measure by the UK government were equally effective “proximate” causes of those measures.

Prevention of access and hybrid clauses

These types of clauses cover loss resulting from government or local authority actions preventing access to the premises. Hybrid clauses combine certain elements of disease clauses and prevention of access clauses. The Supreme Court decided that it can be seen that each of these clauses contains a series of elements which must be satisfied to trigger the insurer’s obligation to indemnify the policyholder against loss. An instruction given by a public authority may amount to a restriction imposed if from the terms and content of the instruction, compliance with it is reasonably required. The Court agreed that inability rather than hindrance of use of the premises must be established, but found that this requirement may be satisfied where a policyholder cannot use the premises for a particular activity or is unable to use a discrete part of the premises.

Trends clauses

These clauses aim to arrive at the results that would have been achieved but for the insured peril and circumstances arising out of the same underlying or originating cause.

• The Supreme Court concluded that the trends clauses in issue should be construed so that the standard turnover or gross profit derived from previous trading is adjusted only to reflect circumstances which are unconnected with the insured peril.

What this decision means for businesses in Northern Ireland

• Business interruption losses resulting from the Covid-19 pandemic may recoverable through insurance.
• For disease clauses, to show that loss from interruption of a business was proximately caused by one or more occurrences resulting from Covid-19, it is sufficient for policyholders to show that, at the time of any Government measure, there was at least one case of Covid-19 within the relevant policy area.
• With access/hybrid clauses, the fact that business interruption losses are also caused by other (uninsured) effects of the Covid-19 pandemic may not exclude these losses from cover under these such clauses:
• With trends clauses, any factors or effects relating to or stemming from the COVID-19 pandemic should be disregarded when assessing trends or circumstances impacting a business for the purpose of calculating business losses to be indemnified by insurers.

What does this mean for businesses in Northern Ireland? Judgments of the Supreme Court are of course binding in Northern Ireland.  There may be cover for businesses who previously thought they were not covered by insurance. However, the decision should be taken with caution. Each case will need to be decided on the wording of a policy and specific facts.  In many incidences, it will be necessary to interrupt policy wording in conjunction with the exact factual circumstances causing loss as applied to a specific policyholder’s business during the lockdown. Proving causation of loss caused by COVID-19 and valuing that loss will also be tricky issues to navigate.

It has been estimated that some 370,000 policyholders could be affected by these issues. Times are hard for many businesses. It may be worth businesses reconsidering their insurance policies if they thought they were covered and/or refused cover. The business may need advice on its options and next steps.

This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact Michael King, Director at Cleaver Fulton Rankin for further advice or information.