UK: Coronavirus and Business Interruption (BI) Insurance: do you have coverage?

However, it is currently unclear whether BI policies will provide coverage and, if so, what losses will be payable by insurers.  Since the start of the Coronavirus outbreak, a number of policyholder claims have been reported in response to initial rejections by insurers.  As a result, the Financial Conduct Authority ("FCA") has decided to commence a 'test case' in the English Court, in an effort to provide certainty to the market.

BI insurance

In broad terms, there are three key types of BI cover:

1. Physical damage to the insured's property that occurs by reason of a specific event (e.g. a fire or flood), which causes interruption or interference to the insured's business.
2. Physical damage to a third party's property that occurs by reason of a specific event, which causes interruption to the insured's business.  This is often known as Contingent BI insurance.  It is typically taken out where an insured's business is reliant on a supply chain (e.g. an important supplier to an insured's business is affected by a fire or flood).
3. The interruption to an insured's business as a result of a specific event – for example, where restrictions imposed by government or public authorities prevent an insured from accessing its business locations.  This type of coverage – which is not dependent on any physical damage to property – can be included in a standalone policy or under a policy extension (usually at an additional premium).

All of these types of cover may potentially be engaged in connection with COVID-19, although most businesses' focus will be on number 3 (non-physical damage BI cover).

Usually, the main loss protected under BI policies is the insured's lost income or reduction in turnover.  In other words, the amount by which the insured's turnover during the crisis falls short of its standard turnover, less any costs – which would normally be payable from the turnover – that have ceased or reduced during the crisis.  

Other types of loss that may also be recoverable include increased costs of working (e.g. a business having to operate from alternative premises), penalty sums that a business may be forced to incur under its contracts, and public relations/crisis management costs.

The FCA test case

On 1 May 2020, the FCA announced its intention to start a test case in order to obtain Court declarations regarding: (i) the interpretation of a select group of BI insurance policies; and (ii) the validity of certain policyholders' COVID-19 coverage claims under those policies.  Although the FCA's focus is on the position of Small and Medium Enterprises (or SMEs), the case is likely to effect the position of all businesses across a large number of sectors which hold BI policies and are impacted by the pandemic.

As part of its selection of the policy wordings, the FCA consulted with over 1,200 policyholders and brokers.  17 specific policies have been selected in the hope that they will be "representative of all the most frequently used policy wordings that are giving rise to uncertainty"[1] . The list of the policy wordings being considered can be found here[2].

On 9 June 2020, the FCA started its expedited claim against 8 insurer defendants in the English Commercial Court under the Financial Markets Test Case Scheme[3]. The parties' statements of case were served between 10 June and 3 July 2020.  An 8-day Court hearing is scheduled to take place on 20 to 23 and 27 to 30 July 2020, with a Court judgment expected to be handed down shortly thereafter in August/September 2020.

The result will be binding on the defendant insurers in the case, and will provide guidance for the interpretation of similar policy wordings.  Specifically, the action will provide certainty for policyholders at a lower cost than would be the case if policyholders took their own legal action.

The key issues to be determined

The central issues being considered are as follows:

• Broadly speaking, the policies under the test case contain two types of clauses which are potentially engaged: (i) cover for BI caused by infections and contagious diseases – often termed as 'notifiable diseases'; and (ii) cover for BI caused by the prevention of access to an insured's business locations due to interventions or restrictions imposed by government/public authorities (i.e. enforced closure). 

• Some insurers have declined claims on the ground that cover is not triggered unless the relevant business has been ordered to close completely (for example, where a restaurant business is still able to provide takeaway or drive-thru services).  In that context, one important question is to what extent a business is required to be "interrupted" or "interfered with" to trigger an indemnity.  There are a number of potential key 'trigger' dates:

• 31 January 2020, when the UK confirmed its first COVID-19 cases.
• 3 March 2020, when the UK Government published a COVID-19 action plan and guidance in relation to certain businesses.
• 5 March 2020, when COVID-19 became a notifiable disease in England by being added to the list of notifiable diseases under the Health Protection (Notification) Regulations 2010.
• 16 March 2020, when Boris Johnson (the UK Prime Minister) gave a public statement announcing that: (i) those with symptoms should stay home for 14 days; (ii) everyone (regardless of symptoms) should stop non-essential contact with others and stop all unnecessary travel; (ii) people should work from home where they could; and (iii) people should avoid confined spaces such as pubs, restaurants, clubs, theatres and other such social venues.
• 20 March 2020, when Mr Johnson announced that cafes, pubs, bars, restaurants and other leisure venues (including nightclubs, theatres and gyms) would have to close that night, and confirmed that the public should stay at home.  Following that announcement, on 21 March 2020, the Health Protection (Coronavirus, Business Closure) (England) Regulations 2020 came into force, ordering the closure of certain businesses.

• For policies that include cover for a 'notifiable disease', the relevant clauses refer to the disease having to be present at the insured's business location or within a certain radius (e.g. 10 miles) or vicinity of those premises.  Some policies include a list of specified diseases that are covered, although given its recent emergence COVID-19 is unlikely to be identified.  The Court will be asked to consider: (i) whether COVID-19 amounts to a covered disease; (ii) what COVID-19 related events would be expected to have an impact on an insured's business; and (ii) what evidence policyholders would need to provide as proof of the existence of COVID-19 at their insured locations or within the relevant 'vicinity'.  
• For policies that require evidence that access to, or use of, an insured's business premises was restricted by government intervention, the case will establish what policyholders will be required to prove that respect – including whether closure of the whole (or part) of the premises is required.  
• In relation to the issues of causation and BI loss, the Court will consider the effect of 'trends' clauses contained in many of the relevant policies.  These clauses require adjustments to be made to reflect overarching trends in an insured's standard turnover, so that the level of any indemnity payable under the policy reflects the profits that would have been achieved regardless of the COVID-19 pandemic.
• In addition, for those BI policies which are dependent on physical damage to an insured's property (or a third party's property), can incidences of COVID-19 amount to a 'contamination' of the relevant property?

What are the key practical steps for businesses to take?

We consider that businesses who have BI policies in place should take the following important steps:

1. Check the terms of your BI policy to determine whether you may have cover in principle and, if so, whether there are any requirements or conditions to be satisfied. The precise wording of your policy will be critical.  Specifically:

• Is there a notification requirement?  

It is often an express condition that an insured needs to notify the insurer about the relevant insured event and/or loss within a strict time limit.  The policy may also specify certain formalities to be followed when giving notice.  Many policies permit notice to given by an insured through its insurance broker, if applicable.

• Are there any relevant exclusions that may relate to COVID-19 or diseases/pandemics more generally?

After the outbreak of SARs in 2002, many policies now expressly exclude loss arising from contagious or infectious diseases.

• Are there applicable limits on the indemnity?  

The policy may have: (i) a maximum indemnity time period during which loss will be recoverable; and (ii) financial caps regarding the maximum sum that can be paid out.  Moreover, many policies expressly set out the basis by which any loss of income, loss of profit or increased costs of working should be calculated.

• Do you need to obtain the insurer's consent before you incur certain costs to deal with the pandemic?

2. Check whether your BI policy is included within the selected policies under the FCA test case.  If so, the arguments presented in the FCA test will be particularly relevant to your position.

3. Keep, maintain and update documentary evidence of the losses that you are suffering or incurring.  This may include: (i) up-to-date financial records and accounts (including for turnover and profit); (ii) records of employee absence and reduced staff costs; (iii) invoices for additional expenditure that you have incurred; and (iv) written records of business decisions that you have taken in response to the pandemic.

4. If you have coverage in principle, consider setting out your claim in writing to your insurer.  Although insurers will be closely monitoring the progress of the FCA test case, that case does not prevent policyholders from advancing or settling their own claims against insurers.

5. If it is unclear whether your policy covers BI as a result of COVID-19 when you would have expected that it should have done, investigate the circumstances in which the relevant policy was placed – especially where the insurance was placed by a broker or other intermediary.  One avenue to explore is whether your broker placed your insurance policy properly in accordance with your instructions.

6. Check whether your policy is due to be renewed in the short term.  Insurers may seek to amend future policy renewals by excluding or limiting cover for contagious or infected diseases.

For further related disputes content please visit Disputes+, Bird & Bird’s dispute resolution knowledge portal.

[1]  https://www.fca.org.uk/news/statements/insuring-smes-business-interruption 

[2] Business Interruption Insurance Test Case, Representative Sample of Policy Wordings, 9 June 2020 - https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-tracked-representative-sample-of-policy-wordings.pdf 

[3] This is a scheme for financial claims that raise issues of general importance that require immediate Court guidance.