The High Court in England and Wales has today handed down its judgment in the Financial Conduct Authority’s (FCA) business interruption insurance test case The Financial Conduct Authority v Arch & Ors. The FCA has won what is being described as a ‘significant victory’ on behalf of holders of business interruption insurance

The 160 page judgment found here, will bring welcome news to what the FCA estimates is as many as 370,000 business owners who are seeking pay-outs under their policies following the coronavirus pandemic.

Following expedited proceedings, the judgment brings highly anticipated guidance on the proper operation of cover under certain non-damage business interruption insurance extensions.

Not only will this judgment have implications for businesses in Northern Ireland, the eyes of the insurance sector and businesses throughout the Republic of Ireland will be firmly fixed on the potential repercussions of this decision as outlined in our previous commentary.

In the Republic of Ireland, a number of test cases have been taken by publicans against FBD Insurance and are due to be heard in the Irish Commercial Court in October 2020. Whilst this judgment will not be a ‘binding precedent’ in the Republic of Ireland, it is certainly shall be of interest and possible help to the High Court in Dublin

The Judgment

A total of 21 lead policies were considered and relevant provisions in the policies broadly fell into three categories:

• Disease wordings: provisions which provide cover for business interruption in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises.
• Prevention of access / public authority wordings: provisions which provide cover where there has been a prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restrictions.
• Hybrid wordings: provisions which are engaged by restrictions imposed on the premises in relation to a notifiable disease.

Given the sheer volume of policy wordings considered over the eight-day hearing, the Judgment is extremely detailed and businesses should examine and take advice upon the particular policy wording relevant to them.

The implications of the judgment

A key point of note from the judgment, and a lifeline to some business owners is that the Court provided clarification on the need for the policyholder to prove that an outbreak occurred within the relevant area within their policy. Something which insurers repeatedly sought to argue.

Clarification was also given on the requirement for individuals to be ‘diagnosed’ with Covid-19 and symptomatic within the relevant policy area, for cover to be granted.

Much of the case centred around what constitutes ‘interruption’ with some insurers taking the extreme position that it meant a physical obstruction or impossibility or alternatively, a complete cessation of the business. The Court largely held that “interruption” did not require a complete cessation of the business, but was intended to mean “business interruption” generally, including disruption and interference with the business.

Huw Evans, director general of the Association of British Insurers, said:

“Insurers have supported this fast-track court process led by the FCA to help bring clarity for customers and we welcome the speed with which the court has delivered a ruling.

“The judgment divides evenly between insurers and policyholders on the main issues. The national lockdown was an unprecedented situation that posed understandable questions of interpretation for some business insurance contracts.

“Insurers always regret any contract dispute with their customers and will continue to reflect on feedback from recent events.”

Coronavirus has caused and is continuing to cause substantial loss and distress to businesses and many are under immense financial pressure to stay afloat. This judgment is being viewed as a lifeline by many business owners, particularly those with wordings similar to those considered in the test case.

Importantly, the Court did not find that the 8 defendant insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the Court.

Instead what the Court did was provide guidance as to how business interruption insurance wordings should operate in the context of the Covid-19 pandemic which has brought such a devastating effect on businesses in the UK and Ireland.

Next Steps

At Lacey Solicitors, we are assessing this judgment in detail and are working closely with insurers, brokers and their policyholders both in Northern Ireland and the Republic of Ireland to determine whether the facts of their individual circumstances satisfy the requirements of the policy wordings in establishing cover.

Business interruption claims will remain complex to assess and quantify and whilst this case is of immense benefit, it is not a silver bullet. The test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers. The judgment does not determine how much is payable under individual policies but will provide much of the basis for doing so.

Clearly time will be needed to fully digest the judgment both by insurers and their policyholders.

The next steps for business owners will be to;

• Speak to their insurers or legal representatives and allow them to read the judgment in line with their policy to see how the principles laid down by the court applied to their particular policy wording, either directly, or indirectly.
• Consider what additional issues will be needed to establish and prove a valid claim bearing in mind that the judgment considered 21 lead sample wordings from eight insurers and reached different conclusions for each.

The FCA and insurers are considering the judgment and what it might mean in respect of any appeal. Any applications to appeal will be heard at a consequentials hearing before the High Court. The FCA is seeking to have a consequentials hearing as early as possible.

The FCA and insurers have agreed that they will seek to have any appeal heard on an expedited basis, given the importance of the matter for so many policyholders. It is widely anticipated that any appealing party will issue a ‘leapfrog’ appeal directly to the Supreme Court, Court to expedite the final decision on this crucial case.

Business Interruption underwriters working from the discomfort of their homes have been pouring over their previous craftmanship more than most in the industry in recent weeks. Not without good reason. The stakes are high. The future of their business may well come down to some perceived uncertainty in the small print. If ever the idiom the devil is in the details were true it’s now.

Court Scrutiny

The British Financial Conduct Authority (FCA) is to seek clarity from the courts about whether the wording of some Business Interruption insurance policies in the UK should provide cover as a result of the Covid19 pandemic. The regulator said it would select test cases with business interruption policies containing the most frequently used policy wordings that have caused uncertainty for firms trying to claim. In doing so, the Authority says it still believes that most claimants on business interruption policies do not have the right coverage to warrant a pay out.

It is reported that the matter will be before the courts as early as July.

The Hiscox Action Group

One under scrutiny is a Hiscox policy with a Business Interruption clause. In the UK a group of Hiscox policyholders, made up of publicans and restauranteurs has rallied and met with the FCA last week, prior to the announcement to refer policy wording to the courts. Hiscox, one of the Lloyds of London members that services the Irish market, has told customers that its policies do not include diseases linked to pandemics such as coronavirus “due to the difficulty of insurers being able to quantify the potential risk”.

Concessions in Ireland

Retail and Vintners groups in Ireland are at the centre of the current uncertainty. The Government in response to the growing Covid19 crisis asked all Public Houses to close on the 15th March. On the 27th of March the government ordered the closure of public houses. Certain insurers initially indicated that valid claims from closures after 27th March would be met.

After lobbying from Industry Groups Minister Donohoe is reported as having extracted two concessions from insurers.

The first is that the insurers accept that the request from the government to shut down pubs was in fact a direction that the pubs were not free to ignore. As such valid claims from the initial shut down on the 15th March should be met.

The second point is that where there is doubt in the wording of a policy, this doubt should be exercised against the insurer. This is merely an iteration of the contra proferentem rule which would apply in any event and ultimately adds nothing to the debate other than an agreement on what is the stated law. Insurers have been steadfast in making it clear that these ‘concessions’ do not mean that they will now be covering any insured who would not otherwise have been covered.

Battle lines have been drawn between Industry Groups and certain Insurers where there are perceived uncertainties in policy wording. Hiscox Policyholders in Ireland will be eyeing the UK court action, as will many other Irish policyholders of GB Insurers with English Law jurisdiction clauses.

Principles of Construction

Irish Insurers and their policyholders will be looking to the UK action with more than a little interest. The Supreme Court in Ireland has confirmed in Analog Devices v Zurich Insurance and others and Emo Oil v Sun Alliance and London Insurance Company, that the principles of construction as set out by Lord Hoffmann in the UK case of ICS v West Bromwich Building Society should be applied to the interpretation of insurance contracts. Hoffman LJ set out the principle in five paragraphs that would guide the court in reaching an interpretation where the policy was clear and unambiguous. What if there was no such clarity?

In his Supreme Court judgement in Analog Devices Geoghan J thought it worth quoting a passage from the standard work Ivamy General Principles of Insurance Law 6th ed.

“Since exceptions are inserted in the policy mainly for the purpose of exempting the insurers from liability for a loss which, but for the exception, would be covered by the policy, they are construed against the insurers with the utmost strictness. It is the duty of the insurers to except their liability in clear and unambiguous terms.”

Contra Proferentem and Common Sense

Where exceptions to liability are not clear and unambiguous the contra proferentem rule shall apply. That would be a disaster for those insurers who would seek to persuade the court that the Industry could not possibly have insured against this once in a century global event. They would do well to refer to the Lord Diplock’s dicta in Anntaios Compania Naviera S.A. v. Salen Rederierna A.V. and quoted by Hoffman LJ in his guiding principle.

“If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense’.”

The devil is in the details.

As a result of the global spread of Covid-19 and with the number of confirmed infections rising globally, businesses are looking to their insurance policies and the terms therein to establish whether or not they have any business interruption coverage to help them through these difficult times.

Business interruption policies are policies of indemnity, the purpose of which is to put the business in the position they would have been had there been no interruption subject, of course, to limits and terms and conditions of the policy.

Lacey Solicitors has seen an increase in instructions relating to the terms of these business interruption policies where it transpires that, more often than not, business disruption typically is included within the policy.

The query therefore arises, can a business utilise the business interruption cover in their policy of insurance to claim back their losses arising from the spread of Covid-19?

To answer this one must carefully review a business’s policy of insurance, but a history lesson is also helpful to understand the wording of these policies.

The 2003 Severe Acute Respiratory Syndrome (SARS) Outbreak was one of the largest losses to the insurance industry ever recorded.

By way of comparison, SARS was also a Coronavirus and also began at a Chinese wet market.

Covid-19 however has dwarfed the death and infection rate of SARS with current figures at the time of writing as;

349,090 infections and 15,296 deaths globally over the past 4 months to date.

SARS however had 8098 infections and 774 deaths over a 20-month period.

Insurers paid millions in business interruption losses as a result of the SARS outbreak and given those losses, insurers quickly amended insurance policies to list the diseases for which the Insurer is in fact providing cover.

This would cover losses as a result of interruption of the business carried on at the premises as a result of illness sustained by any person resulting from an outbreak of disease which the local authority has stipulated will be notified to them and any the insurers added themselves, but would allow insurers to refuse to deal with claims beyond the scope of that list.

In these instances, such lists are often entitled ‘Notifiable Diseases’ but our experience is that this is not always the case.

On the issue of these lists Axa Insurance DAC for example said in a statement earlier this month:

“In general, when our Business Interruption policies provide an extension in cover for infectious diseases, they list the diseases by name. Only for those diseases will they compensate for financial losses resulting from premises having to close….Our wordings don’t refer to a general class of notifiable diseases, but they name each disease individually.”

In the Republic of Ireland, on 20th February 2020, Minister for Health, Simon Harris TD signed the ‘Infectious Diseases (Amendment) Regulations 2020’ to include Covid-19 on the existing list of notifiable diseases.

Sometime later on 5th March 2020 Covid-19 was classed by the UK Government as a “notifiable disease.”

The dates are important so as to accurately measure the extent of the losses sustained. These dates are in effect the ‘trigger dates’ as to when cover begins after outbreak.

The Hong Kong Courts following the SARS outbreak considered these issues in New World Harbourview Hotel Co. Ltd v ACE Insurance & Ors [2012] HKEC 264. The case confirmed that insurance cover is not (usually) retrospective and that loss will only arise as a consequence of the insured peril that triggers the policy. In that case, losses that occurred before the date the SARS virus was added to the 1st schedule of the Quarantine and Prevention of Disease Ordinance (similar to our list of Notifiable diseases) were not covered by the Insured’s policy.

Although this is, in some respects, good news, it does not automatically mean that businesses will be able to claim under their business interruption insurance.

The Association of British Insurers says most business insurance policies are still “unlikely” to cover losses.

AXA Insurance DAC stated:

“When Covid-19 was added to the list of notifiable diseases in England, it did not change policy coverage.”

The Insurance Industry will argue that insurance is effective, available and affordable to the public and business community at large only if Insurers are able to accurately assess their liability and price risks in a way that allows for insurance to remain viable for all.

How then could an insurer price in a disease that did not exist at the time they incepted the policy? They will likely collectively ‘dig their heels in the sand’ that if it wasn’t on the list at policy inception, it is not covered.

One would have thought therefore that the vast majority of business interruption policies would provide for a list of the diseases for which the Insurer is in fact providing cover.

Our experience now however is that this is not always the case.

Indeed, some policies specifically confirm an indemnity as a result of a business being affected by an outbreak of a contagious or infectious disease. We have read with interest one such policy which gives no breakdown or definition of a contagious or infectious disease and no restrictions on that cover.

The Insurer of that policy is seeking to argue that it provides business interruption for normally expected interruptions that might impact a business in its day to day operations.

Some insurers during this crisis are allowing business owners to ‘cancel’ free of charge their contract of insurance where the business has closed as a result of the current crisis and business owners are (understandably) struggling to pay premiums where a business is currently closed. An insurer may even go so far as to offer a refund of any outstanding premiums for the duration of the crises. To that, we say that a business owner should be mindful of this, where a cancellation and/or refund may be construed as acceptance of the position of the insurance company.

The Insurance industry shall wish to maintain the argument that global and widespread issues such as Covid-19 are too large for the insurance industry to bear and would, if they did have such a liability, involve insurance premiums to a business at unaffordable levels.

Over the past 100 years or so Insurers have learned to know to exclude eventualities such as Nuclear War, Civil Unrest, Radioactivity, and importantly, a long list of diseases etc. The more prudent insurer, following the SARS outbreak took appropriate steps to amend their policies to reflect the possibility of a second outbreak.

We would argue therefore that an insurer who neglects to sufficiently define the extent of their coverage in the policy wording or sufficiently restrict or exclude liability in this eventuality does so at their peril.

Lacey Solicitors has solicitors qualified in NI and ROI that are dedicated to complex Business Interruption claims. In addition to this, all our solicitors are experienced in the technically demanding task of policy interpretation. The expert handling of Business Interruption claims is part of our core offering to Insurers, Policyholders and private clients.

In the first instance, we are ready to respond to prospective claimants by reviewing the extent of policy cover provided by the actual policy. Thereafter we can discuss our prospective involvement on your behalf and show you where there may be cover that might respond to your loss.