Did the insurers take the umbrella away when the storm arrived?

In March 2020 when the Prime Minister announced that certain businesses had to close, those with ‘business interruption’ cover, reached for their insurance policy to read the small print in anticipation that they could make a claim for losses as a result of the forced closure.

Business insurance ‘denied access’ cover

In many cases, where the business property was fundamental to the business’s ability to trade, particularly in the hospitality and retail sectors where the fairly standard ‘all in one’ package of Business Insurance may have included specific cover for losses due to being ‘denied access to the premises’.

Typically this insurance was intended to be an extension to the basic business policy to cover the losses that would have arisen in the case of, for example, a fire on the premises preventing trading or in the case of disease clauses, where a specific outbreak on the premises required closure to facilitate a clean-up or investigation.

The COVID situation was never anticipated by the insurers or the insured, so whether a claim was likely to be successful would turn on the precise wording of the policy.

The terms of the cover for ‘business interruption through denied access to the premises’ were therefore, not entirely clear and many insurers rejected the potential claims, leaving policy holders in a state of purgatory, thinking they had a claim based on the common sense reading of the policy, but frustrated by the insurers’ reliance on the precise wording.

covid storm business

The Financial Conduct Authority Steps up

The insurance industry is regulated by the Financial Conduct Authority (FCA), whose primary role is to protect consumers. The FCA, to its credit, quickly recognised the impasse between insurers and their policy holders and launched an emergency application to obtain a court ruling to provide guidance to both parties.

The FCA did this by selecting a representative sample of 21 types of policy issued by eight insurers. The FCA’s role was to put forward policyholders’ arguments to their best advantage in the public interest. 370,000 policyholders were identified as holding 700 types of policies issued by 60 insurers that may be affected by the outcome of the test case.

The Court responds

Over an unusually short timetable for exchanges of evidence and obtaining of directions on the conduct of the case, which the timetable also included an appeal against the first Court decision, the Supreme court handed down its final judgment on 15th January 2021

Some testing issues

Broadly, the Court found in favour of policy holders, but each sample wording had to be considered in detail and the Court had to consider some less than obvious questions including:

At what time would the policy kick in and the claim period start? When did the COVID pandemic start? To answer this point arguments took place over the legal status of the Prime Ministers statement(s) towards the end of March 2020. Were businesses legally required to close, or was it a form of ‘guidance’ without statutory authority – the law catching up with circumstances sometime later, as various statutes passed through parliament?

Most potentially valid policies required evidence of a ‘contagious’ disease, if not on the premises, then within a specified radius of the business premises – how was that to be established at a time when there was little COVID testing being carried out?

What about businesses that were ‘partially closed’? For example, a restaurant that closed its doors to customers, but was able to offer a takeaway service. Was access to the premises being denied, or was it just a change to the business model?

The various hearings took place ‘virtually’ over several days and with numerous QCs (highly paid barristers and leading experts in their field) involved, acting for the both the FCA and the insurers, the costs of the proceedings would have run into several £millions, but with potentially £billions at stake, each party was not going to scrimp on the legal fees.

business closing covid

Success for the insured

The final outcome of the legal process has provided some clarity in a lot of cases and mostly in favour of the insured. Whilst it is still necessary to consider each policy wording, broadly the court ruled:

  • It was found that the Prime Minister’s statements did have the effect of commencing a claim period, if the business had to close.
  • In the absence of an actual Covid case, statistical evidence of its presence could be used to establish the presence of the disease in the required locality.
  • Partially closed businesses could claim for losses in respect of the closed element.

Calculating claims

The second part of the equation was if cover was provided, how were claims to be calculated?

Most policies refer to claims being calculated based on loss of income or loss of gross profit.

One of the big areas of dispute was how were government grants and staff furlough payments to be treated when calculating losses?

The insurers argued that the government declaration that these receipts from government were legally required to be treated as ‘income’ for tax purposes and therefore, should be applied in the calculations to reduce the loss of income and gross profit suffered by the business through closure.

The FCA argued that the required tax treatment of the receipts was not the same as defining this income as ‘business’ income for the purposes of calculating a ‘loss of income’ for an insurance claim. A side argument would be that the amounts paid out by the government should not be subsidising the claims against the insurers under the policy cover they were providing!

In a further win for the insured, guidance is being published on this point and it seems that when calculating the loss, the government grants and furlough receipts are not to be included as income to reduce the loss during the closed period.

Progress but still a way to go

Some of the further points in dispute, particularly around calculating the claim, have yet to be clarified over a year later, but some insurers are starting to make interim or final payments to their insured.

The FCA have published data that as at Mid May 2021 the insurers have so far paid out £701,374,158, but the situation is still a long way from being concluded.

AUTHOR: Carl Faulds (Managing Director)