A recent judgment by the UK High Court has clarified the position on business interruption insurance policies for many companies adversely affected by the Covid-19 pandemic. Lucy Trevelyan reports on the judgment, its implications and what happens next.

In-house lawyers whose companies suffered losses due to the Covid-19 pandemic should carefully review the wording of their business interruption (BI) insurance policies following a UK High Court ruling in mid-September.

In a test case brought by the UK’s financial regulator the Financial Conduct Authority (FCA), the Court ruled that most ‘disease’ clauses cover losses caused by a notifiable or infectious disease. However, it also found that some – but not all – denial of access policies (involving losses caused by government actions, advice or restrictions in response to a disease rather than losses caused by the disease itself) may also provide cover.

After examining a representative sample of policy wordings issued by eight insurers, the Court also clarified that the Covid-19 pandemic and the government and public response were a single cause of the covered loss – a key requirement for claims to be paid even if the policy provides cover. 

‘As a result of the judgment, it will be easier for “disease” policyholders to demonstrate that they should be covered for their losses,’ says Hannah Clipston, National Head of Commercial Litigation at Irwin Mitchell. ‘For example, they will not need to point to specific local outbreaks as the cause of their losses.’

‘“Denial of Access” policyholders may find it more difficult to establish cover, as they must show the governmental action or advice was in response to an outbreak of Covid-19 within a specified radius,’ explains Clipston.  

The recent High Court judgment affects hundreds of thousands of businesses which had BI insurance policies with wording of the type considered by the Court, says Jane Harte-Lovelace, a partner at Keystone Law.

‘For clients which have policies with business interruption cover including wording similar to those in the test case who have not yet given notice of claim under the policy, then this should be done as a matter of urgency,’ she says. 

Harte-Lovelace suggests that where notifications have been given but the claim denied, the particular wording should be carefully reviewed against those considered in the FCA judgment and the detailed findings in the judgment. ‘Insurers have a duty to reassess all potentially affected claims they rejected or where they made an adjustment or deduction for general causation,’ she says. ‘Any reviewed decision should itself be scrutinised carefully.’ 

Many policyholders whose claims have already been denied will have received a letter from their insurer reporting on how the judgment impacts them. Although the FCA is encouraging early payment and has written to each insurer’s CEO, some insurers may be reluctant to pay out until the appeal ruling emerges from the Supreme Court.

Even if coverage has been acknowledged, policyholders may face ongoing disputes about quantum, says Harte-Lovelace. ‘Policyholders need to ensure they comply strictly with any conditions about provision of information and maintain records of any further losses caused by the delay in payment of some or all of the claim.’

She adds that attention should be given to any attempt by insurers to rely on ‘trends clauses’ or other provisions to reduce the quantum of a claim.

The judgment doesn’t specify how much is payable under each individual policy and provides no basis on which insurers are making monetary decisions, explains Stephen Meade, who leads the commercial disputes team at Capital Law.‘Specific policy wording of each individual claim will need to be considered against the ruling to establish whether there is cover and how much should be paid – the real question is when and how much.’

The FCA has called for insurers to handle and assess BI insurance claims promptly and fairly when they have accepted liability. But when assessing the pay out, some insurers have been making deduction for types of government support received by policyholders during lockdown, he says.

‘This is no excuse. Holding off payment would not only be legally contestable, it would also be morally incorrect – as many businesses are struggling to survive as they face, once again … lockdown restrictions,’ says Meade.

Meade says policyholders must check their policy wording against the clauses that were considered in the case. ‘However, just because a policy wording is not identical to one of the clauses in the case does not mean it doesn’t provide cover. If a policyholder believes their policy should respond to their claim, but the insurer refuses, the options are either to refer the dispute to the Financial Ombudsman Service or bring a court claim.’

Policyholders should continue to gather evidence of the ongoing financial impact that their business is suffering as a result of the insured risks, mindful of their obligations to take all reasonable steps to mitigate their losses, says Peter Taylor, Managing LLP Partner at Paris Smith.

Taylor suggests maintaining pressure on insurers in accordance with the dispute resolution provisions of the relevant policy. ‘Some may include alternative dispute resolution or arbitration provisions, which should be explored,’ he says. Consideration should be given to using the UK’s Civil Procedure Rules to best effect, including the making of an offer of settlement under Part 36, believes Taylor.

‘Insurers are likely to continue to resist payment of the majority of claims pending the outcome of the ongoing applications and appeals, due to the significant financial implications of the judgment,’ he adds.

The FCA has urged insurers to communicate their intentions quickly to claimant businesses, with the regulator noting that the fate of thousands of companies and hundreds of thousands of jobs are likely to be relying on the outcome.

One issue which may arise in the future is whether insurers who do not pay out now, but subsequently lose their appeal in the Supreme Court, may be liable under section 13A of the Insurance Act 2015. By this section a term is implied into every contract of insurance that sums due in respect of the claim must be paid within a reasonable time.

‘Of particular relevance is s 13A(4) which provides that the insurer does not breach the term merely by failing to pay the claim while the dispute is continuing, but that the conduct of the insurer in handling the claim may be a relevant factor in deciding whether the term was breached,’ highlights David Walsh, a barrister at Essex Court Chambers.

‘Given the dire and urgent economic context in which the test case arises, and the FCA’s guidance to insurers to conclude their claims processes as swiftly as possible, we may see a number of late payment claims in the coming months and years,’ he adds.

Insurers can be expected to revisit decisions and resolve claims for policy holders following the outcome of an appeal to the Supreme Court, says Katie Chandler, a partner at Taylor Wessing. ‘However, to the extent any claims can be resolved without being impacted by any pending appeal, they should be and the FCA has urged insurers to do so. Many of the impacted small and medium-sized businesses will struggle to stay in business until the end of the year without, at least, an interim payment under their BI policies.’