Update on Business Interruption Claims: Light at the end of the Tunnel!

Covid 19 has brought many businesses to the brink of collapse and businesses naturally turned to their insurance companies seeking clarity on their cover for business interruption claims. As a result of the various interpretations placed on the business interruption clauses, many claims have been declined and clarity sought in litigation. Some policies are clear and cover is very clearly and often specifically not available for example in circumstances where the infection had to occur at the insureds place of business. For those whose cover was less clear ,businesses and brokers have been met with varying reasons for declining cover but in essence insurers have claimed that pandemics/epidemics aren’t covered; any cover is for localised outbreaks and in any event Covid 19 must be the sole cause of the loss (see the but for test - see my Article in the Irish Broker “Murder on the Orient Express”, July 2020) .   

The decision in The Financial Conduct Authority v Arch and Others (the UK Test Case) has now brought some clarity to this area. It has swept away the key arguments being relied upon by insurers. The legal submissions in this complex area ran to more than 11,000 pages so it certainly needed to be examined.  

By way of brief background, most policies contain extensions to the standard business interruption cover. Of the many extensions available the Disease Clauses, the Prevention of Access Clauses and the Hybrid Clauses potentially respond to Covid 19 related claims.   

In May 2020 The Financial Conduct Authority in the UK (FCA) brought a test case with the aim of speeding up the resolution of approximately 400,000 claims in the UK.The UK Test Case considered 21 lead sample wordings from eight insurers. The proceedings commenced on the 9 July 2020 and ran for 8 days. Two action groups, the Hiscox Action Group and the Hospitality Insurance Group Action participated in the hearing and judgment was handed down on the 15 September 2020.  

 The Court found in favour of the FCA on the majority of the issues, and in particular on the key issues of causation and the Trends Clause.  

The UK Test Case is a remarkably ambitious piece of litigation and the judgment is impressive in the manner in which it deals with multiple policy wordings. At the same time it is unavoidably complex. The Court emphasised that the central issue is the proper construction of the policies and once that is determined the other issues will naturally flow from it. One of the big takeaways from the judgment is that even minor differences in wording can be crucial when it comes to cover (see discussion below about OBE’s Disease Clause).  

In relation to the Disease clauses, the ones under consideration were written by RSA, Argenta, MS Amlin and QBE. It had been argued by the insurers that the clauses only covered localised outbreaks and did not cover epidemics or pandemics. According to their interpretation, any interruption to businesses was caused by the national outbreak and actions taken to combat it, such as closures or social distancing. Therefore there was no cover. The Court rejected this. It held that these types of clauses will cover Covid 19 and it was not correct to distinguish between national and local outbreaks or action. While it is necessary to prove a local occurrence of the disease to trigger the clause, this should not prove too problematic for an insured given the widespread nature of the disease. However in respect of two QBE policies these were found to only cover localised outbreaks as unlike the other clauses they were premised on the occurrence of events. The word events was held to imply a particular place and time.   

The Prevention of Access Clauses (which also covered Public Authority clauses) under consideration were written by Arch, Ecclesiastical, Hiscox, MS Amlin, RSA and Zurich. The Court interpreted these clauses more strictly than the Disease Clauses. The majority of the clauses considered were held not to cover Covid 19 related closures. They were found the case and again it depends on the precise wording of the clause. 

“It is important to note that the judgment had upsides for insurers also. Although the Court found that the majority of Disease Clauses would provide cover, most Prevention of Access Clauses will not. Whether there is cover in any particular case will depend on the precise wording of each clause.”

“The UK Test Case is a remarkably ambitious piece of litigation and the judgment is impressive in the manner in which it deals with multiple policy wordings. At the same time it is unavoidably complex. The Court emphasised that the central issue is the proper construction of the policies and once that is determined the other issues will naturally flow from it. One of the big takeaways from the judgment is that even minor differences in wording can be crucial when it comes to cover .”

Anne Marie James, Managing Partner, Kirwan McKeown James LLP Solicitors

Hybrid Clauses are those clauses where restrictions are imposed on premises on the occurrence of a notifiable disease. The ones under consideration were written by Hiscox and RSA It was held that these clauses were not limited to localised outbreaks but did require the restrictions to be of a mandatory nature and the inability to use the premises must have been more than an impairment of normal use. 

Another fundamental argument relied upon by the insurers was the Trends Clause.Most if not all policies will contain such a clause. It is normally found as part of the Basis of Settlement clauses and it is intended to exclude losses that the business would have incurred separately to the loss caused by the insured peril.The insurers again relied on the local versus national argument to claim that the insured peril was the local outbreak only.This meant that the impact of the national outbreak and actions taken to deal with it should be taken into account when assessing losses. With the result there was no loss as people would have stayed at home anyway. The Court rejected this argument on the basis that the local and national effect was all part of the insured peril. With the result that the Trends Clause still operates to discount losses that would otherwise occur but the effect of the outbreak either locally or nationally is ignored for this purpose.  

Conclusion

While the decision in the UK Test Case is likely to be appealed, it does bring some clarity and certainly given the fact that the judges who heard the case were renowned experts in insurance law, it is likely to bring clarity to the Test Cases here in the Republic of Ireland. The decision removes the major obstacles erected by insurers to accepting cover. The causation argument (namely that the disease had to be the sole cause of any loss) has been dismantled, as has the insurers’ interpretation of the Trends Clause. It is important to note that the judgment had upsides for insurers also. Although the Court found that the majority of Disease Clauses would provide cover, most Prevention of Access Clauses will not. Whether there is cover in any particular case will depend on the precise wording of each clause. Therefore there is still scope for disputes between insureds and insurers but the battle lines have narrowed considerably.