Lockton published some thoughts on the remaining BI claims cases that might provide a headache for insurers in 2022. Here’s an extract, you can get the full piece here by the way.
Despite the UK’s 2021 Supreme Court judgement in the FCA’s business interruption test case there remains a plethora of unresolved issues with very significant and high value claims now beginning to make their way to trial.
The Supreme Court judgement
On 15th January 2021 the Supreme Court’s judgment in The Financial Conduct Authority v Arch Insurance (UK) Ltd & others (the FCA test case) was released to the public. The largely pro-insured ruling has reportedly resulted in insurers paying (as of 13th January 2022) £967,987,042 in settlement of 42,842 claims; an average of £22,594 per policyholder.
Many of those who were successful were insured by way of a wide vicinity disease extension, often referring to coverage being afforded for the effects of disease within a 1 mile or 25 mile radius of insured premises, or a ‘hybrid’ extension requiring the presence of COVID-19 and resulting restrictions on their ability to trade.
However, that was far from the whole story. Those who successfully recovered from their insurers following the FCA test case were very much the minority. Many more policyholders, particularly those who had disease extensions that required the presence of COVID-19 ‘at premises’ or who had purchased Non-Damage Denial of Access (NDDOA) cover, were not so fortunate. At the time of writing many large claims for major corporates remain outstanding in the wider market, with insurers arguing over coverage or quantum issues that could cost millions.
Whilst the FCA is to be credited for successfully delivering one of the fastest Supreme Court decisions of all time, that efficiency required a streamlining of the issues under consideration. Accordingly the judgment, whilst bringing welcome and much needed clarity, left a very significant number of unanswered questions across a wide variety of legal issues. It was inevitable that further COVID-19 business interruption disputes would keep the courts busy for years to come.
Non-Damage Denial of Access Cover Re-examined
Extensions that afforded cover for a denial or prevention of access following a ‘danger or disturbance’, ‘emergency which could endanger life’ or similar, in the vicinity of insured premises, were ruled to provide only localised cover by the High Court in the FCA test case. This meant that such clauses may respond in the unusual circumstances of restrictions being imposed on the policyholder as a direct result of COVID-19 in the vicinity (and not beyond the vicinity) of insured premises. However, the clauses would not respond to losses resulting from restrictions imposed in the face of a national or regional picture of disease.
It is unclear why the FCA did not appeal the High Court’s ruling on NDDOA extensions to the Supreme Court, however what is certain is that this decision left many policyholders with little alternative but to accept, for the time being at least, that their policy would not meet any of their pandemic related business interruption losses.
At Premises Disease Cover
Extensions that require COVID-19 to be present at premises have seen a wide variety of insurer responses, with many taking the view that the cover afforded by such clauses is fundamentally different to disease extensions that cover instances of COVID-19 within a 1 mile or 25 mile radius of premises (i.e. those that were found to cover pandemic related losses by the Supreme Court).
Indeed the FCA themselves initially appeared to support arguments that the cover afforded by ‘at premises’ disease extensions was narrower, their test case pleadings arguing that: ‘the nature of the cover provided by these ‘at the premises’ clauses is different [to wide vicinity disease clauses] because the contemplated interruption (and authority action) caused by a disease occurring at the premises will be different to interruption (and authority action) caused by a disease occurring away from the premises. In the former case…the clause envisages measures directed specifically at the premises to stop that repetition or spread; measures that would not be taken on a national or wide area basis. The fortuity is therefore, as a matter of construction, contemplating and limited to the at-the premises aspect of any disease, not a wider outbreak.’
Whether or not insurers are able to consider payments made to policyholders under the furlough scheme has proven to be one of the most contentious battlegrounds in the area of COVID-19 business interruption claims. Whilst a number of insurers have confirmed that they would not seek to deduct government grants from business interruption claim settlements, no major insurer has yet confirmed they will take the same position regarding furlough. This has had the practical effect in some cases of vastly reducing policyholders’ claims, sometimes to nil.
On 25th September 2020, the Association of British Insurers (ABI) wrote to John Glen MP, the Economic Secretary to the Treasury, announcing that some insurers had agreed not to deduct Local Authority grants, Small Business grants and Leisure/Retail/Hospitality grants from claim settlements. However, the furlough scheme was notably absent from the ABI’s correspondence.
Replying to the ABI, Mr Glen wrote that ‘deductions are quite clearly not in line with the intention of the support schemes’. However again furlough, as the most significant of the various schemes implemented in the face of the pandemic, was absent from specific reference.
Ultimately government and the FCA appear to have not been willing to force insurers’ hands on the issue, preferring instead to provide general guidance that insurers should consider ‘the exact type and nature of the Government support, how the policyholder used this support and the type of policy and its precise terms’.