Following the nationally imposed lockdown in response to the Covid-19 pandemic, many businesses made claims on their insurance policies for business interruption and losses suffered as a result. Insurers responded by declining a large number of claims. In September 2020, the High Court gave its judgment on the correct interpretation of various business interruption policies. This was in response to a request for clarity brought by the Financial Conduct Authority (FCA) on behalf of Small and Medium Enterprise businesses (SMEs). We reported on the outcome of the judgment here.
Insurers were unhappy with the Court’s decision and the Court gave them permission to appeal to the Supreme Court. The decision was published on 15 January 2021.
The issues appealed included:
- The correct interpretation of disease clauses;
- The correct interpretation of so-called ‘hybrid’ and prevention of access clauses
- Whether the measures imposed by the government caused the financial losses suffered by businesses;
- The correct approach to take in relation to trends clauses.
The judgment leaves many business owners around the country able to claim on their business interruption policy. The director general of the Association of British Insurers said, “All valid claims will be settled as soon as possible and in many cases the process of settling claims has begun.”
Some business interruption policies include disease clauses. These provide specific cover for losses caused by the occurrence of a notifiable disease at, or within a specified distance, of the policyholder’s business premises. The specified distance is typically around 25 miles of the business address. Covid-19 was categorised as a notifiable disease in all parts of the United Kingdom by 6 March 2020.
The insurers’ appeal centred on how cover would be triggered. Would it only be where business interruption arose from an occurrence of Covid-19 within the relevant area of the insured’s premises? Or by business interruption arising from an occurrence of Covid-19 anywhere, providing there is at least one case within the relevant area of cover?
The Court decided that disease clauses cover only effects of cases of Covid-19 that occur at or within a specified radius of the insured premises. They do not cover effects of cases of Covid-19 that occur outside that geographical area. Let’s say your business is based in Leeds, and a Covid-19 outbreak in London affected it your business. Here, business interruption cover may not be triggered. However, if there was a Covid-19 case within the specified radius of your business premises, you may be entitled to claim.
‘Hybrid’ and prevention of access clauses
Prevention of access clauses cover losses resulting from public authority intervention preventing or hindering access to, or use of, the business premises. Hybrid clauses require more than one criteria to be satisfied before cover is triggered. They often combine elements of disease clauses and prevention of access clauses.
The High Court decided that ‘restrictions imposed by a public body’ required something that was mandatory and legally enforceable. It did not accept that government guidance was sufficient for business interruption cover to be triggered. This included the advice in the Prime Minister’s televised addresses on 16 March 2020 telling people to stay at home and 20 March telling bars, restaurants, gyms etc to close.
The FCA appealed this interpretation. They argued that ‘restrictions imposed’ can include mandatory instructions (including the Prime Minister’s messages on 16 and 20 March). They said that a reasonable person listening to those announcements would consider they had no choice but to close their business. The Supreme Court agreed.
The Supreme Court also clarified how to interpret ‘inability to use’ business premises. It decided that it means either an inability to use a discrete part of the business; or an inability to use the whole or part of the premises for the purpose of carrying on a discrete part of the business.
Consider a bookshop that sells books in-store and via telephone orders. The shop must close to walk-in customers, but can continue to accept telephone orders. It therefore has the inability to use the part of its business relating to walk-in customers. The shop may be able to make a successful business interruption claim as a result of the loss of footfall. However, a claim based on the reduction in telephone sales would likely fail. Similarly, a restaurant which also operates a takeaway service may be able to claim for losses associated with its inability to use the restaurant part of the business. However, a claim for any reduction in profits from its takeaway service would likely be unsuccessful.
Did the government measures cause the financial losses?
The insurers argued that no one occurrence of Covid-19 caused the losses suffered by the businesses seeking to claim. The Court decided that, in relation to disease clauses, it was sufficient for a policyholder to show that at the time a government measure was imposed there was at least one case of Covid-19 within the geographical area covered by the policy. Similarly, hybrid clauses may also cover where a combination of factors contributed to business interruption losses.
However, in some cases, cover may not be available. For example, consider a travel agency that had to close to walk-in customers and suffered losses as a result. Here, the ultimate cause of the losses may not actually have been the loss of walk-in customers; but, in fact, the various travel restrictions imposed by the UK and other countries.
Many business interruption policies calculate losses by looking at the trends of the insured business. They look at the turnover of a business at a similar period from previous years, allow some adjustment, and then calculate the losses associated by the interruption to the business.
The High Court decided that where a business had suffered losses as a result of the Covid-19 outbreak prior to the government restrictions, those losses should be taken into account as a general reflection on the performance of the business prior to the period of cover. The Supreme Court disagreed. They decided that when calculating the relevant losses, any losses arising from the effects of the Covid-19 pandemic should be disregarded.
The Supreme Court decision is a positive decision for business interruption policyholders. It provides a broad scope of scenarios in which business interruption cover will be provided.
Have you have made a claim under your business interruption insurance policy which your insurer declined? Our dispute resolution team can advise whether you may be able to challenge that declinature. We offer a free initial discussion. Call us on 0800 988 7756.