Update on Business Interruption Insurance

In this briefing note, William Sturge delves into Cover For Covid-Related Loses Under Business Interruption Insurances.

Financial Conduct Authority v Arch (2021, Supreme Court (“SC”))

Cover for business interruption (“BI”) insurance, or lost turnover, originated as an extension to property insurance.  The cover provides an indemnity for financial results that would have been achieved but for the damage. 

Modern policy wordings extend cover to certain circumstances where the business suffers loss unrelated to physical damage.  One example is cover for losses resulting from the occurrence of a notifiable disease such as COVID-19 within a specified radius of the business premises.  Another example is cover for loss resulting from intervention by a public authority, hindering access to the premises.

How are BI claims calculated? 

Usually, BI claims are calculated by taking an earlier period of trading for comparison purposes.  In most policies this is the calendar year preceding the operation of the insured peril.   This “standard turnover” is then compared with the actual turnover during the indemnity period, as reduced by operation of the insured peril (extra expense caused by the insured peril is also often covered in addition).  

While the basic comparison will enable a rough calculation of the lost revenue to be made, there may be specific reasons why a higher figure would have been expected in the indemnity period, for example, because the business was growing, or alternatively a lower figure was expected because a labour strike was scheduled.  The purpose of the “trends” clause in the policy wording is to provide for adjustments to reflect such circumstances.

Insurers have in the past relied on the trends clause to argue that the claim should be reduced because the trend in turnover would have been downward in any event due to the wider operation of the insured peril.  Thus, in Orient-Express Hotels v Generali (2010) a hotel in New Orleans was damaged by wind and water as a result of Hurricanes Katrina and Rita.  The surrounding area of New Orleans was also devastated by the two hurricanes and there was a mandatory evacuation of the city.  The insurers argued that the hotel could only recover for loss of turnover that it would not have suffered but for the damage to the hotel and could not recover loss of turnover arising from the wider devastation, which loss it would have suffered even if the insured peril had not operated directly on its own business.

Turning to the COVID-19 pandemic, in proceedings initiated under the Financial Markets Test Case Scheme, the Supreme Court has given guidance as to the operation of various BI policy wordings covering policyholders (for example shops and restaurants) against financial loss to their businesses arising out of the occurrence of a notifiable disease such as COVID-19 within a specified radius of their premises.

Here too, the insurers argued that they were not liable to indemnify for losses which would have arisen anyway, regardless of the operation of the insured peril on the business itself, by reason of the wider consequences of the COVID-19 pandemic, such as the Government’s closure of businesses generally and mandatory instruction to the public to stay at home.

In FCA v Arch the SC rejected this argument and decided that insurers must indemnify policyholders on the basis that the insurance protects against the wider consequences of the insured peril.  The court’s reasoning was as follows:

• Standard disease-based BI clauses provide cover for BI caused by any cases of illness resulting from a notifiable disease occurring within the radius specified.

• As to the causal link that must be shown between any such cases of the disease and the BI loss, the issue is whether what occurred, being an insured peril, was the “proximate”, or efficient, cause of the loss within the causal requirements specified in the policy.  

• In the present case, even if there would not have been sufficient numbers of occurrences of COVID-19 within the specified radius to cause the insured’s financial loss, all the cases of COVID-19 across the country were equal causes of the imposition of the national restrictions and indivisible in their effect via the measures taken by the government on any insured business. The clause does not cover interruption caused by cases of illness resulting from COVID-19 outside the radius.  However, unless expressly excluded, causation can be established when an insured peril, in combination with concurrent uninsured events, brings about a loss with a sufficient degree of inevitability to be regarded as the proximate cause of the loss.

• The commercial purpose of a trends clause is to arrive at the financial results that would have been achieved but for the insured peril and circumstances arising out of the same underlying, or originating, cause.  This means that only circumstances unrelated to the originating cause, being the pandemic, can be taken into account to cut down the amount of a claim. 

Thus, in the hotel case referred to above, the correct approach was that the BI claim was not confined to the operation of the insured peril on the insured business itself and extended to the reduced turnover attributable to the rest of the city being devastated by the same originating cause.  In the COVID-19 examples of shops and restaurants, the BI claim was not confined to the operation of the insured peril on the insured business but extended to the reduced turnover attributable to the wider government measures responding to the underlying originating cause of the insured peril, being the COVID-19 pandemic.

“Inability to use” clauses – The SC held that clauses providing cover for the inability to use business premises may include a policyholder’s inability to use either the whole or a discrete part of its premises, for either the whole or a discrete part of its business activities.

Impact

BI insurance should now provide greater cover. It is also worth policyholders checking the extent to which they have BI cover for financial loss unrelated to physical damage.

The SC’s identification of the COVID-19 pandemic as an originating cause for disease losses may be significant when issues of aggregation come to be considered in the context of reinsurance.

About the Author

The author of this article is William Sturge a Consultant Solicitor at Lovetts Solicitors. William is a leading lawyer in the insurance industry. He has advised on insurance and reinsurance claims on behalf of reinsurers, reinsureds and their insureds, both in the UK and worldwide. He has conducted insurance and reinsurance litigation and arbitration, acted in professional indemnity and financial lines business and in shipping and international trade disputes. William has also provided non-contentious insurance and reinsurance advice, usually with an international context.

For further information or advice please feel free to contact William by emailing [email protected] or calling 01483 457500.