The judgment handed down last week in the recent test case brought by the Financial Conduct Authority (“FCA”) reached a number of different conclusions about different policy wordings.
Some of the wordings were in the favour of the insurers but in the main, the court decided that it agreed with the FCA on many of the issues raised in the case. This is potentially good news for policyholders with business interruption insurance claims (although at the time of writing it is unknown whether any of the insurers will seek an appeal of any aspect of the judgment).
The key findings from the judgment
1. For notifiable disease policy wordings, where the disease is arising within a certain radius or vicinity of the premises, the cause of business interruption is established (in the main - as there are some exceptions depending upon policy wording), where the outbreak in the relevant policy area is an indivisible part of the disease across the country. In other words, it is the notifiable disease itself being in existence that establishes cause - such that local outbreaks are indivisible from the existence of the disease itself. The court went further and suggested that each of the individual occurrences were separate but, in themselves, were causes of the national actions taken by Government.
2. Cover is not therefore now for the local occurrence of a notifiable disease or the effects on businesses of a local outbreak but applies where there is an outbreak of the disease which cannot be separated from the wider spread of COVID-19 across the country.
3. It means establishing cause is not limited to showing outbreaks within a particular policy area if the policy wording is in the form of the wordings tested in the FCA case. Where wording does not expressly say where the disease must only occur then cover is not limited to first establishing local outbreaks to determine cause. Therefore, business interruption must result from the outbreak itself but the person with the disease has to be within the radius or vicinity as defined in the policy.
4. The definition of vicinity should be carefully reviewed in policies as they could be widely interpreted such that any occurrence within England and Wales could be within the vicinity for the purposes of cover. Some of the policies in the test case had this wide definition of vicinity.
5. An insured party though will still need to prove that the disease occurred or manifested in a certain area (the prevalence test), at a certain location or at a certain time (the proximate test). Some policy wording may be very specific and the insured party may only succeed in a claim if the disease was in a particular area and that had then caused the interruption.
6. Denial of access clauses, for example those that require premises to shut down on public authority say so, that in turn prevent access to premises, are to be looked at more restrictively and so possibly it will be much harder for insured parties to establish.
7. The FCA test case enabled the court to look at various factors, including the nature of the advice and of orders given to shut down, and decided that the Government’s decision to lockdown was said to be advice rather than mandatory instructions.
8. Denial of access clauses will therefore have to be carefully considered to assess whether a business was directly mandated to close (cover more likely) or part of more general advice/guidance (cover less likely but not impossible depending upon wording). If the business could have kept open and diversified then it may struggle to support a denial of access for the purposes of a business interruption claim.
9. The court gave guidance on what the insured peril should be in respect of the various policy wordings being considered by it. For the notifiable disease wordings, it concluded that the insured peril is the interruption or interference after the occurrence of the disease including any response from the authorities. In the case of denial of access, the insured peril is the prevention or hindrance of access to or use of the premises by any authority action due to an emergency or incident that could endanger human life. These insured perils should then be “stripped out” when working out the level of indemnity to be provided.
It is important that polices with notifiable disease wordings and denial of access clauses identical or very similar to those assessed in the test case are reviewed, as those particularly are now more likely to be the subject of a successful claim (as the case decided most, but not all, provide cover). Indeed insurers, subject to any appeal, may take a pro-active step here in light of the judgment and pay out promptly on such cases when claims are made. The FCA guidance is encouraging insurers to take on board quickly the outcome of the test case in their dealing with the insured parties.
There is no doubt that the test case judgment is good news for policyholders but as is often the case, the devil is in the detail. Clearly the wording of a policy is key to being able to make a successful claim for business interruption and care should be take when purchasing a policy and further down the line if a claim is necessary.
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