Business Interruption Claims
STUART HENRY >
Consultant Chartered Legal ExecutiveTue 19 January 2021
Insurance law is rarely something that takes front and centre stage in the eye of the general public but following last Friday’s Supreme Court Judgment, it has become major news for many disappointed businesses in the wake of the COVID-19 Pandemic.
Stuart Henry, a Consultant and Chartered Legal Executive in Insurance Litigation at Taylor Rose TTKW takes a look at the key points to be aware of in the judgment.
The landmark case The Financial Conduct Authority v Arch Insurance (UK) Ltd and others  UKSC 1 looks set to bring a lifeline to many businesses across the UK who have suffered a drop in revenue as the government forced closures and business dried up.
For a full understanding of the intricacies involved, a long look at both the Supreme Court and High Court Judgments is necessary, however below is a summary of the key considerations to be aware of:
- Disease Clauses: Clauses that provide cover resulting from the occurrence of a ‘notifiable disease’ within a specified distance of the insured business premises.
Decision: In the RSA 3 Policy wording, which restricted cover to losses caused by and cases of illness resulting from COVID-19, within 25 miles of the business premises. No cover for losses caused by instances of COVID-19 outside of that area. (judgment paragraphs 74 and 95)
- Prevention of Access Clauses & Hybrid Clauses: Clauses that provide cover for losses resulting from public authority instruction or intervention which prevents of hinders access to the premises. Hybrid clauses combine this type of clause with the disease clause above.
Decision: The intervention does not need to have the force of law to take effect. So the government instructions to ‘stay at home’ would have an expectation of compliance and would trigger the clause before parliament made it law. The court also decided within these clauses the meaning of certain wordings:
Restriction Imposed: can be imposed on customers of the business, not just the insured business itself and its use of the premises.
Inability to use: Includes whole or partial use of the premises. It is not necessary for there to be a complete cessation of use.
Prevention of Access: Again, whole or partial prevention of access qualifies.
Interruption: was decided to mean, business interruption generally, which includes interference or disruption; not complete cessation of business.
- Causation (link between occurrences of a notifiable disease and the losses): This legally technical consideration is interesting. A claimant must usually show that the loss would not have arisen ‘but for’ the event. However few businesses suffered loss as a result of a single person catching COVID-19. It was more about the sequence of events, in that COVID-19 caused Government recommended or legally enforced closures, which had an impact on business.
Decision: The court recognised the traditional ‘but for’ test as inadequate for such a situation, and said that claims would not be prevented where an insured peril was combined with similar un-insured events brings about a loss with a ‘sufficient degree of inevitability’ to be regarded as a proximate cause, even if the insured event alone was not sufficient to bring about the loss by itself.
In a nutshell, if the knock on effects of the ‘disease’ are sufficiently closely linked as to be inevitable consequences, then it is unlikely the Business Interruption Losses will be considered too remote from the ‘disease’ to be disallowed.
- Trends Clauses: Quantifying the losses by comparison to what the business would have done had the insured peril not occurred. The starting point for many of these will be comparison to the previous year’s trading. Insurers were trying to adjust that calculation by separating insured events, for example saying that the drop in profit for cases of COVID-19 on the business premises was covered, but if that didn’t happen, you’d still be trading in a lockdown and so they’d only pay the money you would have made trading in a lockdown environment.
Decision: Trends clauses should be construed so that the gross profit derived from previous trading is adjusted only to reflect circumstances unconnected with the insured peril.
- Pre-trigger losses: Should the BI losses awarded be reduced to account for the downturn in business, which is due to COVID-19 but falls before the policy is ‘triggered’ by an insured peril?
Decision: No. When comparing the downturn in business, the assumption in the comparison scenario should be that there was no pandemic. When calculating sums due, assume any pre-trigger losses caused by the pandemic would not have continued during the operation of the insured peril.
- Review of the decision in Orient-Express Hotels Ltd v Assicurazioni Generali SpA (trading as Generali Global Risk)  EWHC 1186 (Comm)
This case decided that recoverable damage under BI insurance policy to a hotel as a result of a hurricane, did not extend to cover the loss the hotel would have suffered as a result of the wider damage to the city in the same hurricane.
The supreme court overruled that decision, holding it was wrongly decided.
Overall a resoundingly positive result for the many policyholders seeking support at a challenging time. Expect to see policy wordings change rapidly and new arguments to resist payments from some insurers.
As always, this article is for information purposes only and cannot be any substitute for seeking proper legal advice on your individual circumstances. Legal advice on each case will vary depending on it specific facts so we recommend you get advice on your individual circumstances.
If your business has been declined cover by your insurer, we can help. You’ll need to have a copy of your insurance policy, the letter or email from your insurer giving the reasons for their declinature and your business accounts for previous years.
Stuart Henry is a Chartered Legal Executive and Consultant with more than a decade’s experience in Commercial and Insurance Litigation. Stuart can be contacted on 01225 437028.
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