Business Interruption Insurance - an overview and FCA guidance

The widespread disruption and closure of businesses caused by the Covid-19 pandemic and the subsequent national and local lockdowns since March 2020 has brought into sharp focus the question of available insurance cover for losses under business interruption (‘BI’) insurance policies and the extent of that cover.

The FCA brought a test case in summer 2020, in the public interest, which asked the High Court to consider a sample of BI policy wordings and whether policyholders that were previously denied cover under their BI policies could make claims for their losses arising from Covid-19 related disruption and closure.

The High Court subsequently found in favour of policyholders on the majority of the issues in September 2020 but also granted the parties permission to appeal aspects of the complex and lengthy judgment, with the appeal being “leapfrogged” to the Supreme Court. The Supreme Court handed down judgment on 15 January 2021. It substantially allowed the FCA’s appeal and dismissed those of the insurers.

Shortly after the judgment, the FCA announced that “many thousands of policyholders will now have their claims for coronavirus-related business interruption losses paid”.  This is the news that businesses impacted by Covid-19 wanted to hear. However while the Supreme Court judgment goes some way to provide clarity, there is a still room for argument. Craig Thompson and Julien Luke from our Commercial Dispute Resolution team consider these potential stumbling blocks in this article and provide some practical guidance to businesses in assessing whether they have a potential claim or not.

Which policies are covered?

The FCA test case did not deal with all BI policies. Most policies (for the SME market) are focused on property damage and only have basic cover for BI as a consequence of property damage.   However, some policies also cover BI from other causes, in particular infectious or notifiable diseases ('disease clauses') and prevention of access and public authority closures or restrictions ('prevention of access clauses').  It was these ‘non damage’ BI policies that the FCA sought clarity on, in view of complaints that insurers were taking a narrow view of whether policy wordings would provide cover in response to Covid-19.

On appeal, the Supreme Court agreed with the FCA’s argument that disease clauses did provide cover for the effects of cases of Covid-19 occurring within the specified radius of the insured premises (but not cases in the wider area). In relation to prevention of access clauses, the Supreme Court ruled that cover may be available for partial closure of premises (as well as full closure) and for mandatory closure orders that were not legally binding.  It also concluded that if claims are valid, they should not be reduced because the loss would have resulted from the pandemic in any event.

FCA guidance

The FCA has created a policy checker to assist small businesses in assessing whether the wording in their policy is the same as, or very similar to, the sample policy wording considered by the Supreme Court.  However, it is not able to determine whether a claim is valid or the amount due and businesses should seek advice.

The FCA has also recently produced:

• A list of policies  assessed by insurers as, in principle, capable of responding to Covid-19 as a result of the test case.While it is obviously helpful if a policy is included in this list, the outcome of a particular claim will still need to be considered on a case by case basis.Also, there may be different reasons that an insurer has omitted a policy from this list, for example, if it includes wording not considered by the test case.
• General FAQs for policyholders with business interruption insurance : this includes a link to final guidance regarding proving the presence of Covid-19 in order to be able to make a claim.If a business is not able to establish a case within any relevant radius specified in the policy, then they may not have a valid claim.In order to establish whether a case of coronavirus was present so that you can claim under your policy, you should review our guidance. If you cannot establish a case within the relevant radius specified in the policy, then you may not have a valid claim. The FCA has published final guidance regarding proving the presence of coronavirus
• Claims data gathered from all affected insurers to show the progress of their non-damage BI claims.

The FCA has asked insurers to communicate directly with policyholders who have made claims/complaints that are potentially affected by the Supreme Court judgment. If businesses are unhappy with their insurer’s response, they should seek advice on next steps.

Our Commercial Dispute Resolution team are currently busy advising clients in a number of different sectors impacted by business interruption and on a number of issues arising out of the test case. The team can help a business to consider their BI policy, assess when an insurance pay-out is triggered and ensure that any such pay-out adequately compensates that business.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.