The scale of the claim rejections and the huge losses suffered by businesses from the start of lockdown at the end of March 2020, caused the regulator of the insurers, the Financial Conduct Authority, to bring a test case before the court to seek clarification on a number of points of principle arising from the wording of specimen policies which insurance companies had cited when rejecting claims [1].  Judgment in the case was handed down by the court on 15 September 2020 and it gave hope to businesses that they may have better prospects of challenging decisions of insurance companies to reject business interruption insurance claims.

The judgment of 580 paragraph will no doubt keep lawyers interested in the subject for some time to come, and it is almost inevitable that there will be technical points still to be analysed, such as the nature of the evidence that will be required to prove the existence of Covid infection impacting the particular business claiming under the terms of any policy, but for businesses there are two points of principle which should cause them to reconsider any claim rejection from and insurance company seek advice on the prospects of challenging the rejection.

What caused the business to close and suffer losses?

Based on the wording of the policy, insurance companies have been running two contradictory arguments as to why losses suffered by businesses were not covered by a particular policy:

1. the businesses premises were closed (and losses suffered) because of Government imposed restrictions – not the Covid pandemic; and
2. the businesses premises were closed (and losses suffered) because of the pandemic – not the Government imposed restrictions.

These arguments were essentially based on insurance companies taking a very narrow interpretation of the wording of the insurance policy and arguing that the closure of the business premises was caused by whichever of the two ‘events’ was not covered by the policy. 

The court, quite sensibly, has found that to be a far too simplistic approach.  The court has said that where the risk insured against was the prevention of access to business premises, that was something which involved three inter-connected elements:

1. prevention or hindrance of access to or use of the premises;
2. by any action of government;
3. due to an emergency which could endanger human life.

For a business to be able to claim under business interruption insurance policy, that composite risk must have caused the interruption or interference with the business.

The court has said that when interpreting the wording of the policy, the true nature of the insured risk must be identified and that in relation to claims relating to Government restrictions imposed to prevent the spread of Covid, that risk is a composite of three elements.  Insurance companies cannot reject claims by attributing losses to only one of the three elements and that one element does not fall within the insured risk.

Geographical proximity of the business premises to the ‘incident’

Many business interruption insurance policies provide cover for losses resulting from an incident which occurs within a specified distance of the business premises (say 10 miles).

Insurers rejected claims on a very narrow interpretation of the policy wording which enabled them to argue that they were only liable under the policy if the incident onlyoccurred within that specified distance from the business premises.  Put another way, if the incident occurred both inside and outside the specified distance, then the insurer could reject the claim.

The court rejected such a narrow interpretation and said that the incident need not be one which occurred only within the specified distance.  The fact that cases of Covid infection were being reported throughout the UK could not be used by insurers as a basis for rejecting claims.

However, the Court did say:

“…we consider that the correct construction of the cover provided by … is for the business interruption or interference caused by a notifiable disease, if that notifiable disease occurs within “the Vicinity”.  The occurrence of at least a case of the disease within the Vicinity is required for there to be cover, which is a restriction which means, on the interpretation of “Vicinity” now under consideration, that there is no cover for diseases which are only geographically remote”.

It is positive news for businesses who have had claims under business interruption policies rejected because Covid infections were not confined to a specified distance from the business premises, but it does not mean that an insurance claim must now be met by the insurer.  Factual issues will now undoubtedly arise in relation to whether any infection did in fact occur within the specified distance (and there will be issues in relation to how those facts are to be proven).

Conclusion

There is no doubt that many businesses have suffered losses due to the impact of Covid and the Government restrictions imposed to combat the spread of the disease, and no doubt that many businesses have been hit very hard by insurance companies rejecting claims made under business interruption insurance policies.

The test case decision will be welcomed by businesses as it establishes that, as a matter of principle, some of the grounds on which some insurance companies have relied to reject claims cannot be sustained. Claims will of course depend upon the precise wording of the relevant insurance policy and the particular facts, but the decision will at least give businesses confidence that there are grounds for challenging the basis upon which some insurance companies have rejected claims. 

The impact the decision will have on the insurance industry will be financially significant and, as such, it should not be assumed that this decision will not be challenged.  However, for any business engaged in a policy coverage dispute with its insurer, this decision is likely to strengthen the position of the business.

1 The Financial Conduct Authority -v- Arch Insurance (UK) Ltd and Ors [2020] EWHC (Comm)