18 September 2020

COVID-19 & Business Interruption Cover: FCA High Court Test Case - Judgment

By Richard Graham
Executive Summary

As detailed in our recent briefing, the High Court judgment does not contain any sweeping statements in terms of policy cover.

The Court (as they will) have applied a purely objective interpretation of each of the included sample wordings to decide on whether a particular policy should or should not respond to Business Interruption losses as a result of COVID-19. Put another way, it all turns on what a reasonable, non-expert person would have understood the cover to have provided from the language used, therefore removing any subjective intent from insurers (i.e. what they had intended to cover if not supported by the black and white of the policy).

The judgment was surprisingly positive for some Clients but also surprisingly negative for others. As a summary and broadly speaking, Notifiable Disease extensions were the real winners, Non-Damage Denial of Access/Prevention of Access extensions were very much the losers.

The outcomes from the judgment are very much dependent upon the language and words used and therefore we are working through the ruling for each insurer to properly understand the implications. We also highlight that due to the likelihood of an appeal from one or more insurers, the judgment is not a final determination – this is far from over and we suspect that we will need to wait until conclusion of any appeal before any of this can be acted upon.

This latest briefing provides our summary of the most pertinent outcomes of the judgment and for the purpose of this update focuses on Hiscox.

We will be contacting affected Clients (that have already submitted a notification) shortly to discuss their particular policy and the implications.

Background

In our 23 March update to clients, we advised that the impact of COVID-19 was never intended (by insurers) to fall under an insurance policy. Despite this, we identified certain insurers and certain policy wordings that made this intention far from clear.

In the main, we identified two particular extensions / clauses within policy wordings that we believed could potentially allow a claim for Business Interruption losses caused by COVID-19:

  1. Non-Damage Denial of Access/Prevention of Access (not merely Denial of Access, which requires “damage” to have occurred)
  2. Infectious Disease

Due to the complexity of the situation, the FCA announced on 1st May that they would undertake legal action with a view to obtain clarity from the courts on a number of matters, but mainly focusing on the above two areas.

As part of this the FCA:

  1. identified 17 policy wordings that captured the majority of the disputed issues;
  2. asked eight insurers to participate in the High Court test case;
  3. provided a list of proposed questions that they wish to seek clarification on;
  4. provided a timeline, which aimed for the 8-day court hearing to take place in the second half of July.

The Test Case started on 20th July and concluded on 31st July.

Judgment – Main Outcomes

Non-Damage Denial of Access/Prevention of Access clauses

Generally, the judgment pretty much shut the door on these Non-Damage Denial of Access type clauses/extensions, highlighting that the language and words used very much requires a local “incident” to happen for policy cover to trigger.

In reaching this decision, the court pointed to the overall language of these NDDOA clauses, which in addition to requiring an “incident”, included other limiting language that, to them confirmed the purpose of these clauses was to cover local and specific incidents.

Infectious Disease clauses

It was already agreed ahead of the Test Case that Specified Disease clauses would not respond to COVID-19 (due to the absence of COVID-19 being included within the specific list of diseases), therefore the dispute surrounded ‘notifiable disease’ clauses.

Generally speaking, the court ruled that extensions providing cover for notifiable diseases apply, subject to the specific wording (which in some instances limit the cover to local ‘events’ or ‘incidents’).

Business Trends Clause / Orient Express Hotels Ltd v Generali

The Orient case and the ‘Business Trends Clause’ in general were highlighted as a potential hurdle from the very beginning, with insurers seemingly looking to apply both to any insured losses should a policy respond.

The basis for such a clause is to essentially adjust a client’s loss to reflect what the situation would have been (in terms of turnover and profit) had the insured peril not happened in the first place.

Insurers attempted to argue that the wide-scale impact of the national lockdown should be taken into consideration – i.e. the business would have suffered a significant impact to their turnover regardless of whether they had needed to close or not.

Pleasingly, the judgment makes it clear that insurers will not be able to rely on either (a) the Business Trends Clause nor (b) Orient, instead ruling that it would not be right for insurers to adjust the claim due to what is essentially, the insured peril (i.e. the national lockdown). It may be possible for insurers to take into consideration trends that occurred in the weeks immediately prior to compulsory closure/lockdown.

Hiscox

The court ruled that cover is not provided under the Non-Damage Denial of Access extension in respect to BI losses relating to the national lockdown. In any case, our main focus has always been on the Public Authorities extension. The court have agreed with this view, although the judgment provides a narrower scope of cover to what we had envisaged.

  1. Cover is only provided where a client was ordered to close as a result of COVID-19.
  2. This therefore only includes those businesses that were ordered to close as a result of Regulation 2 of the 21 March Regulations and Regulations 4 and 5 of the 26 March Regulations (which are detailed in the Appendix).
  3. Guidance, exhortation and advice from UK Gov does not constitute an order.
  4. The policy requires an “inability to use the premises” and whilst indicating that this refers to “complete inability”, the judgment has left the door open for Hiscox to consider losses from clients that had only partial use of the premises for the purposes of business. This will therefore depend on case-specific facts.
Next Steps

Very much a mixed bag and as mentioned previously, the judgment was surprisingly positive for some clients but also surprisingly negative for others. We are anticipating an appeal, which leaves the door open to a further hearing (most likely in the Supreme Court) in later 2020 or early 2021.

In the meantime, the FCA expects that:

  • All policyholders with potentially affected claims or potentially affected complaints will be updated following the judgment;
  • Any potentially affected claims and complaints which turn on questions that have now reached final resolution (i.e. will not be appealed) will be determined promptly; and
  • Potentially affected claims and complaints which have previously been rejected or reduced, but which involved questions that have now reached final resolution will be reassessed.
Aston Lark

Understanding the stress and challenge for our clients during this period, our aim has always been to keep you informed on key developments throughout and to support you each step of the way. Whether through direct contact or via LinkedIn, Twitter or our website, we will continue to do all we can to keep you up to date.

If you have any questions at all regarding the judgment, please do not hesitate to get in contact with either Richard Graham or Rob Hammond:

Richard Graham 
Head of Claims & Risk Management 
M: 07722 113211 
E: [email protected]                        

Rob Hammond
Associate Director – Technical Claims
M: 07957 490452
E: [email protected]

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