Business Interruption Insurance

COVID-19 continues to be a disruptive force across all sectors, with many companies unable to continue with business as usual.

When COVID-19 first impacted, companies turned to their business interruption insurance to claim back the money they had lost and they continue to do so. Companies were then faced with arguments from insurers refusing to provide cover.

Business interruption insurance – do insurers have to pay out for COVID-19-related losses?

To get clarity on whether insurers have to pay out to companies under business interruption policies for COVID-19-related losses, the Financial Conduct Authority (FCA) brought a test case.

The outcome of the FCA test case in the High Court provided a degree of clarity to both businesses and insurers, especially in terms of interpretation.  However, the arguments continued as both the FCA and six of the insurers had been allowed to appeal aspects of the original High Court judgment,  the decision on the appeal (which was heard by the Supreme Court)  was made on 15 January 2021 and has found in favour of policy holders. The decision to dismiss the insurers’ appeals was unanimous.

The decision is good news for policyholders. It is more likely now that insurers will be required to pay out on policies identical to and similar to those tested by the FCA’s case.

The art of interpretation

The aim of the original FCA High Court test case was to provide businesses and insurers with a degree of certainty on how the wording of policies should be interpreted. The Supreme Court’s decision provided more certainty. In some aspects, the Supreme Court went much further than the High Court which strengthens the argument for policyholders.

Potentially worth billions of pounds, the case involved the examination of 17 policy wordings from eight insurers to assess whether COVID-19 generates a pay-out. The Supreme Court’s decision had claims rejected to re-visit their policies and for others who did not claim at the time to have a look at their policies with a view to making a claim.  This decision will also have an impact beyond business interruption insurance and into other areas of insurance. This is because one element of the case was about causation; namely what was the cause of the business interruption?

Holiday lets

For many holiday homeowners, and for holiday-let businesses across the UK, 2020 was a very difficult year. A brief period of reprieve after the first national lockdown – when all hospitality businesses, including holiday lets were forced to close – has not made up for the inevitable losses in income suffered as a result of the first, second and now third lockdowns.

All business owners are now pinning their hopes on the holiday sector opening up again, waiting, with optimism, for the influx of summer bookings, however, how do you mitigate against the loss of income for such an unprecedented event as this global pandemic?

If you are running your holiday let as a business then insurance against fire, flooding and other insurable property damage will be something you will no doubt have.

You might also have some basic business interruption cover for any property damage i.e. to cover loss of earnings or profit in the event of a fire. However, whilst it will hopefully never be needed, knowing it is there can be a real business saver if the property is unable to be used. Some policies also provide cover for non-property damage (often as an extension to a property damage policy) and therefore have become very relevant because of the pandemic.

Why business interruption insurance is so important

Some policies cover business losses that relate to infectious or notifiable diseases, such as COVID-19. These policies may also provide cover for non-damage denial of access and for public authority mandated closures or restrictions.

If you had to close your holiday let business because of an outbreak of a disease at, or within the vicinity of, your holiday let, or due to the government’s mandatory requirements to close, then this is where this type of business interruption insurance may be of assistance.

If cover is provided it may lead to the insurer paying out for loss of profit or loss of earnings or any additional expenditure incurred, subject to the limitations in the policy.

Making a claim

During the first lockdown one of the biggest issues facing small businesses, including registered holiday lets, was that many insurance companies were dismissing claims that businesses and individuals were bringing under their business interruption insurance.

The Financial Conduct Authority (FCA) brought a test case on behalf of small businesses to seek clarity on various policy wordings in non-property damage business interruption policies. A number of insurers co-operated with the court case and had their policy wordings tested. In particular, the case looked at how to interpret disease clauses, mixed disease and denial of access clauses (hybrids), denial of access clauses and what triggered a pay-out under the policies.

In the Supreme Court (following an appeal from the High Court), it was decided that, in the main, the High Court’s decision in favour of the policyholders was right. The Supreme Court agreed with much of what the lower court had said and went further in some aspects.

As such, insurers will potentially now have to pay out billions of pounds to those businesses who rightly claimed on their business interruption insurance, (and for those yet to claim) providing a major financial lifeline in this challenging time.

Read more about the Supreme Court judgement.

Gaining clarity

As well as giving a lifeline to small businesses that they so desperately need, the Supreme Court’s decision provides some clarity. It will be much harder for the insurer to escape responsibility for those policy wordings identical to or very similar to the ones tested in the recent case. However, this remains very much a grey area. Whilst the decision provides business owners with the confidence they need to claim, you still have to look at each policy on a case by case basis. The court also did not say how much insurers should pay out, so there will be ongoing arguments about what sums are paid out and for what period.

It is still important to look at the specific wording in each policy. This analysis will work out whether you are eligible or not. Most insurers will have been in contact with policyholders affected by the Supreme Court’s decision (as the FCA encouraged them to be pro-active) but you should not wait. You should take a pro-active step yourself and get the policy reviewed.

Challenges to overcome

There are a number of issues that come into play regarding business interruption claims, including:

• The intended nature of business interruption policies – many business interruption insurance policies only have basic cover for business interruption resulting from property damage (so actual physical damage to the property). Other business interruption policies (often bought as an add on to a property damage policy) cover business interruption for other causes – for example relating to infectious or notifiable diseases or denial of access or where public authorities enforce closures or impose restrictions. This denial of access (and what caused it) often conflicts with the policyholder’s view, who may feel that they should receive a pay-out regardless of what triggered the business interruption.

• Geographical coverage – Some insurance policies include geographical coverage clauses, which cover businesses if there is a “notifiable disease” on the premises in the surrounding area. With COVID-19, it may be difficult to prove that it was present in a certain location (the outcome of the test case has helped here for certain policy wordings). Subject to the wording of the policy, the Supreme Court decision will now assist.

• Demonstrating a causal link – COVID-19 will have to be directly linked to the losses incurred for businesses to be covered. This could have been a challenge, as the losses may be due to the Government-mandated closures, rather than the virus itself but the Supreme Court’s decision has provided the clarity needed here too.

Making a claim on your business interruption insurance policy

The three national lockdowns imposed as a consequence of the COVID-19 pandemic inevitably mean businesses which cannot or could not operate (or whose operations are restricted) should consider whether their losses are recoverable under any business interruption insurance policy they hold. It is the case though that after the first national lockdown some insurers re-wrote their policies to tighten up on the extent of any indemnity cover and to put themselves in a stronger position to refuse cover when entering into new policies.

As a result of the Supreme Court decision, insurers with policy wording identical to or similar to those tested should now  settle all valid claims as soon as possible and it is understood that, in many cases, the process of settling claims has already begun.  However, regardless of the outcome, it is important to remember that claims will turn on their particular facts and, most importantly, the wording of the policy.

How we can help with our fixed fee support

It may be that you are thinking of making a claim under a business interruption insurance policy or that you have already made that claim and it has been rejected.

Making a successful claim

It’s vital that if you are thinking of making a claim to your insurer that you have an understanding of whether the policy wording will cover you and a plan to challenge any arguments that an insurer may advance to try to invalidate any claim.

If you do have grounds for a business interruption claim, you must gather the right supporting evidence, including collating original documents that show the lost revenues, as well as the forecasted revenues and any expenses incurred. Instead of treating this as a one-off process, you should keep an ongoing record of the relevant information, just in case you decide to make a claim at a later date.

How we can support you

We will carry out a review of your policy wording and provide you with an opinion on validity (whether we think the policy wording covers you or not). We will also identify potential obstacles to any successful claim resulting from our review of the policy wording. We shall do so applying the decision of the court (following the outcome of the Appeal).

Already made a claim and rejected?

A rejected claim doesn’t mean you have to give up. We will carry out a review of your policy wording, consider the reasoning from the insurer for the rejection of the claim and provide you with an opinion on validity. We will assess this against the findings in the Supreme Court decision, if relevant.

If we consider the insurer has got it wrong, we will summarise your options available, such as:

• Complaining directly to the insurer if you believe the wrong decision was made.
• Making a compensation claim against the insurance company for breach of contract.
• Making a complaint to the Financial Ombudsman Service to seek compensation.
• Assessing whether you are entitled to compensation from the broker if you believe the advice given wasn’t correct.

Costs