Business Interruption cover in relation to Covid-19 – where are we now?
The Judgement on Friday the 5th of February, in the case brought by several publicans against FBD in relation to Business Interruption cover, was the first legal opinion in an Irish jurisdiction in relation to business interruption cover, as a result of COVID-19. This followed on, and was broadly in line with, the FCA Supreme Court test case in the UK published on the 15th of January. Both judgments have finally brought some clarity regarding the extent of cover, if any, offered by various insurers’ business interruption policies.
Business Interruption (BI) insurance, often referred to as consequential loss, provides cover for financial losses when a business is impeded by an unexpected event falling within the scope of cover under the given policy; for example damage to a business premises caused by fire, flood or storm. Standard BI cover only responds to losses caused by physical damage and, accordingly, would not cover Covid-19. Some companies, predominantly those in the hospitality sector, may have policies in place to protect against an outbreak of infectious diseases. This is by no means a standard clause but rather an extension to the standard BI cover to protect against closure (voluntary or by a local authority) due to a localised outbreak of a disease. In the vast majority of cases, this clause is limited to a maximum payment of €25,000 and may have other restrictions, such as a requirement for the outbreak causing the busines closure to have occurred “on the premises”, or for the infectious disease to be specially named within the policy wording.
COVID-19 has caused untold hardship to many businesses, especially those in the hospitality and entertainment sectors. Many small and medium-sized businesses, such as pubs and restaurants, saw their turnover decimated overnight, as the public was advised to stay at home and public health regulations were enacted. Businesses holding insurance policies containing business interruption clauses moved their focus to the policy wording in place. Disputes arose between policyholders and insurers as to whether, and in what circumstances, certain extensions to standard cover would cover Covid-19 related losses.
Whilst the UK FCA ruling and the FBD judgement and undoubtedly very welcome news for those businesses who can now succeed in their claims, unfortunately this is not a judgement which fundamentally alters the landscape for Business interruption amidst the Covid-19 landscape. In fact, what has been summarised in the respective judgements is broadly in line with what most industry experts had assumed would be the outcome. It is worth noting that FBD’s share price did not materially change in the aftermath of the judgement, akin to the insurers impacted by the UK FCA test case.
What is the FCA Test Case:
Many UK policyholders with business interruption coverage who had expected their losses arising out of the COVID-19 pandemic to be covered by insurers faced obstacles when asserting a claim. This ambiguity led the Financial Conduct Authority (the insurance regulator in that jurisdiction) to adopt the perspective of a typical policyholder and initiate a test case on 9th of June 2020 to determine issues of principle in relation to policy coverage under various specimen wordings underwritten by eight different insurers. It was agreed between the FCA and the insurers that the High Court in England would consider a representative sample of standard-form business interruption policies issued by the eight insurers. The court was asked to consider 21 “lead” policy wordings.
The court found for the FCA on the majority of the issues of interpretation. Although the judgment was welcome news for many policyholders, it did not conclude that insurers would be liable across all 21 representative wordings considered. It remains necessary for each policy to be reviewed carefully alongside the detailed judgment in order to determine liability.
Whilst not legally binding in Ireland, the case had the effect of setting precedent which was evident by the postponement of the delivery of the FBD judgment by Justice Denis Mc Donald pending the outcome of the FCA test case.
The positive findings for successful claims fell on the interpretation of 2 clauses in the respective policies, namely;
- The disease clauses, and
- the prevention of access and hybrid clauses.
For the sake of clarity, it is important to underline that these successful outcomes are only in relation to policies with these distinct policy extensions. There is no impact on the standard business interruption policy which, in reality, represents the vast majority of potential claims.
We are of the opinion that unfortunately the vast majority of business interruption policies will not respond to Covid-19 related losses. We appreciate this is disappointing for many businesses who were hopeful the FBD case would force insurers to a different outcome in relation to their own policy.
In reality, this view has not changed since the early stages of the pandemic. Fundamentally, these property policies were not designed to cover, nor do they generally respond to, non-damage disease or pandemic losses. Notwithstanding that, we believe that “drafting errors” within insurers wordings would leave them open to challenge and in several cases, this would result in successful claims. This is reflected in the content of the FBD judgement. It is also worth noting that other insurers have moved to pay claims, where they feel their policies will be interpreted in this way; most notably Axa, who confirmed in March that they would pay Business Interruption claims on one of their policy types, covering 4,000 customers. Other insurers have also responded by settling these types of claims however they are very much the minority of commercial cases.
FBD Judgement Implications:
The judgment in relation to the FBD case has brought some legal clarity in relation to extent of cover offered by FBD, and by default insurers who offer a similar policy wording. This case was brought by 4 publicans against FBD.
The FBD BI policies contained a clause confirming that pubs would be indemnified if they were closed by order of the government authority in relation to “outbreaks of contagious or infectious diseases on the premises or within 25 miles of same”. The publicans argued that the failure to cover their claims was a breach of contract and that ‘an insurable risk’ had occurred. FBD contested this and argued that its ‘outbreaks’ clause was not triggered in circumstances where the closures were as a result of a national disease outbreak.
The court found largely in the publicans’ favour and as a result, FBD are now required to pay these claims in respect of this policy type. It is speculated that FBD may have issued this particular policy wording to circa 1,100 publicans. It is worth noting however that not all FBD insured pubs will be successful in their claim with FBD. FBD have numerous policy wordings and not all public house customers are fortunate to be on the wording upon which the judgement was handed down.
LHK reviewed our clients’ BI policies in the immediate aftermath of the first lock down to assess the probability of success of any COVID-19-related business interruption claims. Whilst some insurers had held off progressing these cases, they are now moving to settle them, post the recent judgements. We are currently revisiting this review to see if there is an opportunity for any more successful outcomes.
We welcome the opportunity to discuss this further with any of our clients in relation to their specific business policy.