FCA business interruption test case – COVID 19 cover
The insurance industry appears to be recognising the High Court’s judgment in the Financial Conduct Authority’s (FCA) business interruption test case as a win for policyholders (FCA v Arch Insurance (UK) Ltd and others [2020] EWHC 2448 (Comm)). As part of the proceedings the FCA sought clarification from the court in respect of the scope of cover provided by business interruption policies in the wake of the 2019 novel coronavirus disease (COVID-19).
The High Court has granted permission to appeal to the Supreme Court via the Leapfrog procedure. Certificates have been issued by the court in this regard and the Supreme Court is due to hear the appeal on 16 November 2020. Landlords and tenants alike will be interested in the final decision of the court due to the impact it could have directly on loss of rent insurance claims.
The issues
The FCA asked the court to determine whether losses relating to the COVID-19 outbreak were covered by insurance policies including “non-damage” extensions. Such policy extensions incorporating the following types of clause:
Disease clauses: which cover losses relating to the happening of a disease in a specific radial distance or vicinity of the insured premises;
Denial of clauses: covering losses relating to an occurrence that causes a denial of access to the insured premises.
The decision
Disease Clauses
The court held that in general, policies will respond to the risk and cover losses related to COVID-19. It held further that the scope of the disease clause was not limited to outbreaks solely located within a radius or vicinity of the insured premises. The court considered that this was the logical construction to adopt, given the way in which diseases grow and spread and also on the basis of the way in which national authorities respond to such outbreaks. Therefore, policyholders will not have to distinguish between local and national effects of COVID-19 to establish that they have suffered a loss covered by such insurance.
Denial of access clauses
The court construed this type of clause narrowly, in particular where there is reference to an emergency, incident, danger or disturbance having occurred. The court considered that reference to such events is intended to provide cover which is narrow and localised and that action taken in response to COVID-19 would not fall under such cover.
In addition to the above, insurers had argued that even if businesses had remained open, they would have had no trade and therefore they did not suffer an insured loss as a result of the events referred to in the disease or denial of access clause. The court disagreed with this argument. When assessing the counter factual matrix (i.e. with businesses staying open) to determine if loss would still have been incurred, the effect of the insured perils must be removed from the consideration. As the court had already determined the impact of the nationwide pandemic to be an insured peril, such assessment was to be performed as if COVID-19 had not existed. If the outbreak had not occurred, businesses generally would not have closed and there would have been no loss of trade. As such the losses were caused by an insured peril.
Should you have any questions in respect of the above or require more information about bankruptcy proceedings generally, then please contact James Thornton or Anna Barfield from our Litigation and Dispute Resolution Team.
James Thornton – Head of Litigation and Dispute Resolution
Email: jthornton@fionabruce.co.uk
Tel: 01925 217026
Anna Barfield – Trainee Solicitor
Email: abarfield@fionabruce.co.uk
Tel: 01925 263273
The contents of this article do not constitute legal advice and are provided for general information purposes only.