Christopher BarrettChartered insurance broker and director of Luker Rowe Insurance Brokers, Peter Tilsed dives deep into the detail to clearly explain what the High Court judgement really means for business interruption insurance claims.
With the event and hospitality industry severely affected by the coronavirus outbreak over the past year, the question of whether insurance polices will pay for business losses has been regularly in the news. Because of the number of companies impacted in all forms of occupations the Financial Conduct Authority (FCA) took the very unusual, but sensible step of bringing test cases to court. The intention of this was to bring a quick conclusion and stop numerous individual court actions. In the events industry the action was joined by The Hiscox Action Group and The Night Time Industries Association. The High Court judgement was announced in September which was appealed by most parties and the case jumped to The Supreme Court which provided its judgement on 15 January 2021.
As an insurance broker I would wish for all my clients’ claims to be paid. Unfortunately, for the reasons shown below the majority of claims will still not be paid. After the court judgement the BBC and other media very quickly announced that most policyholders would now be paid. Unfortunately, this raised false hopes as these announcements were based upon the judges’ 15-minute summing up and not the detail in the 112-page judgement.
The good news is that more companies will be paid out because of the court case, and those that are being paid will be paid more because of this.
The Background
The FCA took to court 21 policy wordings from eight different insurers. As there are an estimated 700 different policy wordings, the policies selected were mainly those that the FCA thought most likely to pay. Most of the policies were specialist schemes policies and not the insurers’ standard wordings. The exception to this was for Hiscox and QBE where they were their widely used policy wordings. The Supreme Court decided that 14 of these policies must pay out, but only in certain circumstances. This generally was if the premises were ordered to close by the government. This will include pubs, hotels, nightclubs and non-essential shops. For many businesses, the government recommended that staff should work from home if possible but issued no instructions that they must close and these policies generally will not be paying claims. Hiscox Insurance, one of the main defendants in the case, considers that less than a third of their policies provide cover for businesses that were mandatorily closed and therefore may be covered.
What about other policies?
The court ruling only applies to the 21 policies taken to court. The FCA has instructed all insurers to review their policy wordings against the court ruling. The insurer is only likely to agree a valid claim if they have issued a policy with the cover highlighted below AND there was mandatory closure.
The Supreme Court ruled that mandatory closure would also apply if this was only partial, so a restaurant that was forced to close but could still continue with takeaways was entitled to claim for losses from the restaurant closure.
What is a Business Interruption Policy?
These policies were initially designed to cover loss of profits following a loss which had caused a buildings or contents claim. The main claims have historically been from fire, flood and storm damage and substantial claims have been paid under these headings.
Over the years the policies were extended and included extensions for many areas including denial of access due to a nearby fire which restricted access to the premises or an incident at the premises which may force closure such as a murder. The court case focussed on two of these extensions – ‘notifiable diseases’ and ‘denial of access’.
Notifiable Diseases – most policies provide cover for closure of the premises by specified diseases such as legionella, anthrax and others where the outbreak would be restricted to one or a small number of premises. Because Coronavirus was not known it was not included in the insured list. The FCA accepted these polices did not provide cover and these were not taken to court. However, some policies provide cover for “any notifiable disease” and these policies will generally be required to pay if there was mandatory closure.
Denial of Access – the cover which initially provided cover for denial due to a nearby fire or flooding was sometimes extended to include losses due to closure by a public authority. The Supreme Court generally held that this referred to where a specific premises was forced to close and did not apply to closure due to the pandemic. Most policies with this extension will therefore not provide cover.
The Good News
For the policyholders that do have cover, the amounts paid are likely to be substantially higher due to the court ruling. Insurers had argued that the case of Orient Express Hotel had set the precedent. This involved hurricane damage to a hotel in the Caribbean. The insurer paid for damage to the hotel but refused to pay for loss of profits because it claimed that the damage caused to the surrounding area by the hurricane meant that nobody would be visiting the area and therefore even if the hotel had not been damaged there would be no trade. The court upheld this view.
The Supreme Court over-ruled this and stated that if cover applied that other losses due to coronavirus could not be excluded. The insurer must use the pre-Covid income as a basis for calculating their future losses. Interestingly one of The Supreme Court judges was the judge who made the initial judgement!
Going Forward
The policies that will be paying out are generally because the insurers got their wording wrong rather than they intended to pay for pandemic losses. Correctly any ambiguity in a wording must go in favour of the insured. Insurer funds would probably not be sufficient to pay all insureds for a pandemic loss and similar to terrorism this form of cover would need government backing. Policies will therefore now exclude these losses. So all is clear going forward – until the next problem occurs!
This is a complicated topic which has been badly reported in the press. I have tried to keep the explanation as simple as possible and whilst this may not provide the answers you were hoping for, I hope it provides an overview which does provide answers to those unanswered questions.