COVID 19 tests business interruption insurance

As the COVID-19 outbreak initially swept across the globe, disrupting commercial operations and markets on an unprecedented scale, our clients raised many queries regarding the mechanisms available to minimise the risk of contractual breach and substantial financial loss to a business.

Forced closures resulting from COVID-19 government mandated lockdowns have ultimately resulted in heavy losses for some businesses. This is likely to continue in the short term at least and there is ongoing concern about the significant financial impact that COVID-19 is continuing to have on economies across the globe. While many businesses have successfully applied some of these mechanisms outlined in our insight and invoked force majeure clauses in their commercial contracts to avoid liability where the delay or failure to perform is due to the COVID-19 pandemic, some parties have been unable to rely on these contractual protections. As a result, many Irish businesses have been looking to their insurance policies to cover the financial losses incurred due to the disruption.

Business interruption insurance is intended to cover the loss of income that a business suffers after a disaster. The income loss covered may be due to disaster-related closing of the business facility or due to the rebuilding process after a disaster; the cover is designed to put a business in the same financial position it would have been in if the interruption event had not occurred. Whether or not such a policy extends to a virus and in particular the interruption related to the outbreak of COVID-19 very much depends on the policy terms. In short, if a business has a policy which includes a business interruption component then it may be entitled to pursue a claim for any losses being suffered, including loss of revenue or additional expenses such as loss of rent or increased cost of working.

The Irish Times estimated that approximately 75,000 businesses in Ireland have an insurance policy that includes some form of business interruption cover. The key question, however, for all policyholders is whether their claim will be accepted by insurers or not. Insurers have sought to rely on policy wording to support their position that no valid claim arises.

In this context, policyholders may welcome the recent decision of the English High Court in the business interruption insurance test case (The Financial Conduct Authority (FCA) v. Arch Insurance (UK) Ltd et al.). While the insurers have been given leave to appeal the judgment directly to the English Supreme Court, the English High Court held that the particular businesses involved which were forced to close as a result of COVID-19 restrictions are entitled to recover losses incurred during that period from their insurers, subject to the limitations of their particular policy.

English High Court Test Case

In its capacity as conduct regulatory of UK based insurers, the UK Financial Conduct Authority (the “FCA”) asked the High Court to make a ruling on whether a representative sample of business interruption insurance policies should cover COVID-19 related losses, in order to assist policyholders and insurers to resolve disputes regarding the validity and interpretation of such policies. The FCA argued on behalf of insured businesses (mostly small to medium sized) which had purchased policies from eight insurers that the policies in question should cover COVID-19 losses. The Court considered a sample of standard form business interruption policies issued by the insurers.

The insurers (who had agreed to participate in the case) argued that the “insured peril” covered by the business interruption policies should be narrowly defined as the COVID-19 pandemic itself, meaning the consequential Government restrictions and public response should be taken into account when calculating the sums to be paid out. Sums to be paid out under such policies would therefore be reduced by the loss caused by the Government restrictions and public response. These policies included (i) “disease clause” provisions; (ii) clauses covering denial of access; and (iii) “hybrid clause” provisions (being those which focus on loss caused by denial of access to the business’ premises due to the occurrence of a disease).

The Court provided guidance on how certain types of clauses be applied in practice:

1. Disease Policies: the occurrence of the disease locally should be regarded as part of, rather than separate to, its occurrence elsewhere in the country and the insurers therefore insured the effects of COVID-19 both within the radius specified in the policy and outside it. Therefore, when looking at the position that the policyholder would have been in but for the “insured peril”, insurers should discount the COVID-19 pandemic, the Government restrictions and the public response both inside and outside the relevant radius.
2. Denial of Access Policies: the insurer insures the prevention of access to premises by the action of an authority due to an emergency or incident. Therefore, when looking at the position that the policyholder would have been in but for the “insured peril”, insurers must discount these events. Businesses with Denial of Access Policies will have a harder time establishing cover, but the judgment does give much-needed clarity to such businesses as to what they will need to demonstrate in order to recover their losses, and the limitations on the losses which will be recoverable.
3. Hybrid Policies: the insurer insures the inability to use the premises by restrictions posed by an authority due to an infectious or contagious disease. Therefore, when looking at the position that the policyholder would have been in but for the “insured peril”, insurers must discount these events.

In its ruling the Court held that businesses who hold business interruption insurance policies and were forced to close due to the COVID-19 restrictions are entitled to be compensated by their insurers and that, subject to the limits of their policies, this compensation should return policyholders to the position that they would have been in had the interruption event (i.e. the pandemic) not happened. In particular, it was held that “non-damage” clauses covering disease and denial of access to business premises triggered pay outs. The Court was however careful to emphasise that each policy must be construed in its own right and in full and whether coverage is available will depend on the specific wording of the policy and the relevant facts in each case.

While the Court did not find in favour of all of the arguments advanced by the FCA, the decision has been widely considered as a “win” for policyholders and the judgment provides much needed clarity on the selected policy wordings. It also sets out how issues such as causation and trend clauses (those which operate to adjust the amount paid out under policies in light of what would have been achieved if the insured peril had not occurred) should be approached.

Implications for Irish Businesses

The English High Court decision has already sent shockwaves through the insurance industry, and may lead to significant payments being made by insurers to affected businesses in that jurisdiction. That compensation will help to remedy damage suffered by businesses in some of the hardest-hit industries such as retail and hospitality.

While the judgment is not binding in Ireland, the decision is likely to be of persuasive authority before the Irish courts. It is expected that the Commercial Court will consider the decision in the test cases due to be heard in October which have taken by publicans against FBD Insurance over its treatment of business interruption insurance claims insofar as issues raised in the UK fall for consideration here. These cases, which have been brought by Dublin bars Aberken, trading as Sinnotts Bar; Hyper Trust Ltd, trading as The Leopardstown Inn; Inn on Hibernian Way Ltd trading as Lemon & Duke, and Leinster Overview Concepts Ltd, which trades as Sean's Bar, in Athlone, Co Westmeath, are expected to address a number of issues which include questions on causation and the application of principles of quantum in cases of this nature. The court is also expected to consider the proper interpretation of the "trends clauses" which typically allow insurers to reduce the amounts payable under the policy where other wider factors have affected its ability to trade.

Irish insurers can now also expect the Central Bank of Ireland (the “CBI”) to closely scrutinise their decisions not to pay out on business interruption insurance claims made as a result of the COVID-19 crisis. We expect that the CBI will consider the English High Court decision as part of its ongoing Business Interruption Insurance Supervisory Framework, it seems the CBI intends to exercise the full extent of this supervisory function. The framework is designed to:

• identify and monitor insurers’ approaches and treatment of these types of policies in the Irish market;
• to set out CBI’s expectations in relation to same; and
• to indicate that matters will be escalated where those expectations are not met.

At the heart of the CBI framework is the need for insurers to put customers first and treat them fairly. As such, insurers will continue to be cautious when considering the terms of their policies as well as their overall communications with the policyholder when determining the extent of cover, adopting a consistent approach for customers with similar policy terms so as to ensure that customers with similar issues are treated in the same manner.

Conclusion

Business interruption policies sold in the Irish market have been subject to much scrutiny since the Government imposed COVID-19 lockdown measures in March 2020. Businesses and insurers alike have been reviewing the terms of their insurance policies to determine whether in their view the policy terms provide cover for business interruption resulting from the current pandemic and it is expected that there will be a high volume of business interruption insurance disputes in the near future.

Although an appeal of the English Court’s decision is forthcoming given the significant and wide reaching implications of the judgment, for now the recent decision of the English High Court provides persuasive authority to the Irish courts on the extent to which insurers are required to pay out under a range of business interruption policies. While policyholders will still have to individually persuade their insurers that their business interruption cover entitled them to make a claim for damages arising from the impact of the COVID-19 pandemic, both the English High Court judgment and the CBI’s Business Interruption Insurance Supervisory Framework is something insurers will consider when evaluating their approach to the determination of business interruption claims.

We will provide further updates on this insight following the Commercial Court cases in October 2020.