COVID-19 losses – will business interruption insurers be ordered to pay? (Part 1)

It was back in January this year that the Department of Health and Public Health England (PHE) first raised the risk level associated with COVID-19 from "very low" to "low". During the remainder of January and into February, the UK risk level continued to be increased, the World Health Organisation (WHO) declared COVID-19 to be a Public Health Emergency of National Concern, the UK confirmed its first cases and quarantine measures were introduced for those believed to be infected or who had arrived in the UK and had been in an affected area in the preceding 14 days [Fig. 1]. By early March 2020, the first COVID-19 death in the UK had been reported. On 3 March, the UK Government published its COVID-19 Action Plan and started to provide guidance to people and businesses on measures to be adopted to delay and limit the spread of COVID-19, including the now famous advice to wash hands whilst singing "Happy Birthday" twice. On 5 March, COVID-19 became a notifiable disease in England under the Health Protection (Notification) Regulations 2010. By 11 March, the WHO had declared COVID-19 to be a pandemic.

During the next two weeks, the UK Government produced further guidance and began introducing measures which ultimately resulted in the "lockdown" in England on 26 March 2020 (with similar measures being imposed in the devolved nations) [Fig. 2]. As part of the lead up to "lockdown", the Chancellor, Rishi Sunak, stated in Parliament on 17 March 2020 that the Economic Secretary to the Treasury had had extensive meetings with the insurance industry in relation to COVID-19. As a result of these meetings, the UK Government's position was that the insurance industry would honour claims under insurance contracts that would have been triggered if the guidance issued to date by the UK Government had been to ban certain activities rather than merely being advisory not to do them. Mr Sunak added "I thank the insurance industry for doing the right thing". This was reconfirmed the following day during a Treasury Committee Meeting. The UK Government's COVID-19 Fact Sheet published the same day (18 March) stated that the Government's medical advice as at 16 March was sufficient to enable policyholders of insurance covering both pandemics and government ordered closure to make claims under their policies provided other terms and conditions were met.

Not surprisingly, given the comments and apparent assurances being given by the UK Government, businesses affected by the COVID-19 emergency measures looked to make claims under their business interruption policies to help stem the flow of the significant financial losses they were beginning to incur. In its role as the insurance regulator, the FCA monitored how Insurers were responding to the situation. On 19 March 2020, it issued a statement setting out its expectation of Insurers, namely to be flexible in their treatment of policyholders given the current unprecedented circumstances. This statement was then followed on 15 April with a "Dear CEO" letter to Insurers which addressed specifically business interruption cover for small and mediums sized businesses (SMEs). The FCA acknowledged that basic business interruption cover linked to property damage would not respond to COVID-19 based claims. However, it considered that policies containing NDBI extensions may provide cover and Insurers should assess and pay such claims promptly to minimise the financial pressures on SMEs.

As significant numbers of policyholders, in particular SME policyholders, remained in dispute with their Insurers over their business interruption claims, the FCA decided it needed to step in and take action in the public interest to bring some clarity to the insurance market (for both policyholders and Insurers) on the coverage available under certain NDBI extensions (infectious/notifiable diseases, non-damage denial of access and public authority closures/restrictions) for COVID-19 related losses. On 1 May it announced that it intended to bring declaratory proceedings in the High Court using a representative sample of policy wordings. It made clear that its Court Action was not intended to cover all possible disputes that may currently exist between Insurers and policyholders but would instead seek to resolve some key contractual uncertainties on behalf of the market. It also made clear that the fact that it was bringing this Action did not prevent policyholders from seeking to resolve their own individual claims through the Courts or by referring them to the Financial Ombudsman. However, in bringing its Action, the FCA indicated that it was seeking to avoid multiplicity of litigation by policyholders with its associated costs and the administrative burden which it would place on the Court system as well as potentially inconsistent decisions being reached by Insurers and the Courts on materially similar issues.

Following its announcement, the FCA consulted with both Insurers and policyholders. It approached 56 insurers and asked them to provide information on the business interruption policy wordings which had been issued to more than 500 policyholders and how they intended to respond to COVID-19 related claims. Responses were received from 40 insurers by the FCA's deadline of 15 May. On that day, the FCA asked policyholders who were still in dispute with their Insurers to provide their policy wordings and details of their arguments and relevant facts. Over 1,200 policyholders and brokers responded.

On 1 June, the FCA issued an update on its consultation with the market and its proposed Court Action. Of the policies it had received from Insurers, it identified 17 policy wordings which it considered were representative of the key issues which it proposed to use as the basis for its test case. Of the 16 insurers who had provided these wordings, eight agreed to be Defendants to the FCA's declaratory action under the terms of a framework agreement entered into with the FCA on 31 May (Framework Agreement). Under the Framework Agreement (which indicated that the FCA intended to bring its claim under the Scheme), the Defendant Insurers are entitled to their own legal representation (although they were asked to co-operate to the extent possible to ensure expedition of the test case) and are entitled to appeal the resulting judgment (although any appeal is to be done on an expedited basis consistent with the FCA's intention that its Action should resolve matters expeditiously for affected policyholders). As intended by the Scheme, each party to the Action is to bear its own costs.

As part of the introduction of the Financial List into the Business and Property Courts in October 2015, the Courts began a pilot of the Scheme. The pilot was originally due to end in September 2017 but has subsequently been extended until 30 September 2020. The Scheme is intended to apply to claims in the Financial List which raise "issues of general importance in relation to which immediate relevant authoritative English law guidance is needed" (a qualifying claim) (Practice Direction (PD) 51M). Where a qualifying claim exists, a person who is or was actively in business in the relevant market may, by mutual agreement, issue proceedings against another party who is or was actively in business in the same market and who has opposing interests in how the issues before the Court are resolved. Commencing proceedings under the Scheme is not dependent on a cause of action currently existing between the parties to the claim.     

Before a qualifying claim can proceed under the Scheme, it needs to be accepted as a qualifying claim by the Judge presiding at the first case management conference (CMC) in the proceedings. Once accepted as a qualifying claim, PD51M indicates the parties should seek to agree facts and the general rule is that there should be no costs orders. PD51M also notes that in cases of particular importance or urgency, the trial may, at the Court's discretion, be heard by two judges from the Financial List or by a Financial List judge, together with a judge from the Court of Appeal.

Despite the availability of the Scheme for nearly five years, up to now, no use has been made of it. Whilst the Judges, in approving the extension of the Scheme for a further three years envisaged it coming into its own as a result of issues raised by Brexit (which it still may), it is in fact COVID-19 which has prompted it into action.

The FCA issued its Claim Form, together with Particulars of Claim on 9 June 2020. Its claim can be broken down into four elements: (i) General Points (ii) Notifiable Disease extension (iii) Government/public authority denial/prevention of access extension, and (iv) Causation.

(i) General Points

The FCA's overarching position is that subject to proof of loss and individual policy limits, all of the representative wordings (which are appended to the Particulars of Claim) respond to the events of COVID-19 and the UK Government/devolved governments' actions in the first half of 2020 responding to the disease, and that they do not contain any express or implied exclusions for pandemics. Further, the Court is not being asked to decide issues relating to the measure of indemnity or any other issues which are only of application to individual claims. It is also not asking the Court to make a decision by reference to assumed facts or sample factual scenarios. However, appended to the Particulars of Claim is a set of Assumed Fact Patterns which identify different categories of business by reference to the measures imposed (or not) upon them over time [Fig.3]. The FCA is seeking to use these fact patterns as a reference point as to how the sample wordings should be applied to the different business types in the circumstances of the COVID-19 emergency.

(ii) Notifiable Disease Extension

In general terms, a Notifiable Disease Extension provides cover in the event that there is an interruption to the Insured's business as a result of the occurrence of an infectious or notifiable disease either at the Insured's premises or within a certain radius e.g. 25 miles of the Insured's premises. On the basis that COVID-19 became a Notifiable Disease under the Health Protection (Notification) Regulations 2010 on 5 March 2020, such extensions potentially provide cover. However, the issue for Insureds has been the location requirement specified in these extensions and how the occurrence of COVID-19 within the required radius of the Insured's premises can be established for the purposes of cover. Whilst an Insured may be able to point to specific published hospital data indicating deaths or admissions related to COVID-19, the fact is that many of those who have been infected with COVID-19 have self-treated and recovered at home without ever having been tested for the disease or have been asymptomatic. Therefore, for some businesses there could have been an occurrence of COVID-19 within the required radius of the Insured's premises but for which the Insured will not be able to establish the necessary proof.

The position adopted by the FCA is that COVID-19 is a national emergency and that it can be assumed without Insureds having to establish specific occurrences of the disease that from March 2020, cases of COVID-19 occurred within a 25 mile radius (or other location requirement) of any business premises subject of a claim under a Notifiable Disease Extension. The FCA contends that this assumption can be made on the basis of the widespread prevalence of COVID-19 in the UK (per reported cases) and the even greater inferred prevalence (taking account of unreported cases), especially in urban areas, based on statistical evidence. Initially, the FCA sought to have the issue of the prevalence of COVID-19 in UK determined as an issue based on expert evidence at the trial in July. However, the Defendant Insurers successfully resisted this at the first case management conference (CMC) on 16 June on the grounds that suitable experts on this issue were not currently available, and in any event, there was insufficient time for expert evidence on this issue to be ready in time for a July trial date. The Court did, however, direct that the parties were not precluded from arguing at trial whether a type of proof could be sufficient to satisfy whatever onus of proof is on the Insured.

(iii) Government/Public Authority Denial/Prevention/Hindrance to Access Extension

The second type of NDBI extension which is the focus of the FCA's claim is cover where access to business premises is prevented or hindered as a result of action by a public authority (Public Authority Extension). This type of extension can take various forms as is reflected in the sample wordings which the FCA has put forward as a representative sample for its claim.

The position adopted by the FCA is that the UK Government constitutes a "public authority" for the purposes of the Public Authority Extension and that its actions in response to COVID-19, in its various forms over time from 16 March 2020 onwards, whether advice, guidance or mandatory instructions by way of statute, all constituted a single body of public authority intervention sufficient to trigger cover under Public Authority Extensions. The FCA further contends that for the cover to be triggered, it was not necessary for businesses to have to close completely as a result of the UK Government's measures; it is sufficient that businesses were not able to operate normally. This argument provides support for businesses such as retailers who have been able to operate their businesses on-line during the pandemic and cafes/restaurants who, in an effort to survive, have switched to takeaway sales.

(iv) Causation

The FCA's position on causation is that the nationwide presence of COVID-19 and the resulting restrictions on businesses and the population which the disease has caused constitute a single dominant and proximate cause of the financial losses suffered. The FCA further contends that if there is more than one concurrent cause of loss, in addition to the insured peril (i.e. COVID-19 as it applies), such concurrent cause is to be treated as uninsured and not excluded, meaning that the relevant NDBI extension will still respond to the loss. The FCA also argues that Insureds' losses should not be reduced on the basis that "but for" the occurrence of the relevant insured peril, all or the majority of the losses suffered would have been incurred in any event as a result of the broader COVID-19 measures such as social distancing. In the case of extensions requiring disease or action within a specified area, the FCA argues that the correct counterfactual is to assume that there is no disease or action within that area but that the disease or action continued outside it, with the result that cover remains for losses suffered had that area been disease or action free.

The Insurers who have agreed to be Defendants in the FCA’s Test Case are:

• Arch Insurance (UK) Limited (“Arch”)
• Argenta Syndicate Management Limited (“Argenta”)
• Ecclesiastical Insurance Office PLC (“Ecclesiastical”)
• Hiscox Insurance Company Limited (“Hiscox”)
• MS Amlin Underwriting Limited (“Amlin”)
• Royal & Sun Alliance Insurance Plc (“RSA”)
• QBE UK Limited ("QBE")
• Zurich Insurance PLC (“Zurich”).

Argenta and Amlin are the managing agents for policies issued by certain Lloyd’s syndicates. The sample wordings chosen by the FCA include wordings issued to particular types of policyholder, for example: Arch (retail, offices and surgeries), Argenta (guest houses, bed & breakfasts, holiday homes and self-catering accommodation), Ecclesiastical (religious buildings, residential care homes, nurseries, schools and colleges) and RSA (holiday cottages, pubs & restaurants). Certain policies issued by Arch and through Argenta only have a limit of £25,000 which indicates that even if the policyholders are successful in their claims, their insurance recoveries are unlikely to cover the full extent of the financial losses they have suffered as a result of COVID-19.  Insurers' Defences are based around the interpretation of the individual policy wordings. However, Insurers make the general point that contrary to the case put by the FCA, in the absence of express wording providing cover for pandemics (such as that which enabled the Lawn Tennis Association to recover for the cancellation of Wimbledon), there is no general presumption that NDBI policies provide cover for pandemics such as COVID-19; whether there is coverage in any individual case comes down to the facts of each individual claim as against the wording of the relevant individual policy to which Insurers say, commercial common sense should be applied even if that interpretation proves to be disadvantageous to policyholders.  As noted in a number of press reports, if these policies were intended to provide cover for pandemics, the premium for them would be significantly higher than that paid by policyholders. Insurers refer to the statement made by the European Insurance and Occupational Pensions Authority in the context of assessing and paying out on COVID-19 claims where, on a proper analysis, no cover exists:

Insurers also note that most of the policies were purchased through FCA authorised insurance intermediaries whose job it is to make sure that policyholders understand the scope of the insurance they are buying and that it provides the cover that they need. 

As the FCA has based its case around the interpretation of the Notifiable Disease and Public Authority Extensions contained in the sample wordings, Insurers have provided detailed responses on their own wordings to the FCA's arguments. However, there are general themes which come out of Insurers' Defences.

(i) Notifiable Disease Extension

As noted above, a Notifiable Disease Extension wording tends to have a location or occurrence within a certain radius of that location requirement. The position adopted by Insurers (in general terms) is that, as expressly stated by their policy wordings, the policyholder needs to establish that an incidence of the Notifiable Disease (in this case, COVID-19) occurred at or within the radius specified (as applicable); it is not enough that instances of COVID-19 were occurring generally throughout the country creating a nationwide threat, prompting UK Government action. Further, the policyholder needs to be able to demonstrate that the UK Government action was in response to the specific instance of COVID-19 within the policy's stated location requirement. Insurers say that policyholders will not be able to establish this as the measures taken by the UK Government were in response to the position in the country generally and not in response to specific instances of COVID-19. The position may be different in this regard for businesses in Leicester which were subject to specific lockdown restrictions more recently because of the prevalence of COVID-19 cases in that area.

(ii) Public Authority Extension

Two Insurers (Ecclesiastical and Zurich) rely on express exclusions in their Notifiable Disease Extension wordings (closure/restriction on use of premises due to order/advice of a competent local authority as a result of occurrence of infectious disease (Ecclesiastical) and exclusion for pandemic (Zurich)) to argue that there should be no cover for losses due to COVID-19 under their respective Public Authority Extensions. As Zurich puts it, the policyholder should not be able to recover through the back door of the Public Authority Extension if they are not able to recover through the front door of the Notifiable Disease Extension. More generally, in response to the FCA's case on the Public Authority Extension wordings, the Defences put forward by Insurers are:

• Access to insured premises is only prevented if there is total closure of the premises or it is physically impossible to access the premises (Ecclesiastical notes for example, that at no time has it ever been physically impossible to access churches); measures such as social distancing or working from home have not prevented access to business premises; further, if work could reasonably be done from home, there has been no interruption to the business;
  
  
• The UK Government's response to COVID-19 did not constitute a single body of public authority intervention; rather it was a number of separate individual actions with different aims and effects on different businesses and sectors of the economy;
  
  
• Contrary to the requirements of the policy wordings, there was no link between a specific localised incidence of COVID-19 in the vicinity of any particular premises; the measures were determined indiscriminately on a national basis.

A requirement for total closure would mean that any policyholder forced to adapt its means of trading, for example, a restaurant becoming a takeaway or a retail business taking orders on-line or over the telephone would not be covered.

(iii) Causation

Insurers' position is that even if a policyholder can show that the circumstances of COVID-19 constitute an insured peril under their particular policy wording, they will have to go on and prove that the insured peril is the actual and proximate cause of their loss and that "but for" that insured peril, they would not have suffered the losses they have incurred. In general terms, Insurers say that policyholders will not be able to show that their particular insured peril (for example, an incidence of COVID-19 within a 25 mile radius of their premises) is the proximate cause of their loss since the loss suffered would have been incurred irrespective of the local incidence of the disease as a result of the widespread occurrence of COVID-19, and the UK Government and public reaction to it.

In support of this argument, Insurers refer to the Scilly Isles as an example of a contractually defined area which had no confirmed cases of COVID-19 as of 30 April 2020, and yet was subject to the same restrictions as the rest of the UK; local businesses suffered similar financial hardship as a result to businesses elsewhere in the UK. Insurers also rely on what has happened in Sweden which has not been subject to similar lockdown measures as the UK but where businesses have still incurred losses on a scale comparable with the UK.

At the second CMC on 26 June, the Court permitted two action groups, the Hospitality Insurance Group Action (HIGA) (policyholders of Aviva Insurance Limited (whose wording is similar to one of the representative RSA wordings) and QBE, with businesses in the hospitality and retail sectors) and the Hiscox Action Group (formed of 369 Hiscox policyholders with a variety of businesses including restaurants, retail, estate agents, gyms, recruitment agencies and event companies) to intervene in the FCA's test case.  Both Action Groups served skeleton arguments setting out their positions on 10 July.

In addition to adopting the arguments of the FCA, the focus of the HIGA's case is the location/radius or "area" requirement of the Notifiable Disease and Public Authority Extensions in their policies. The HIGA argues that the area requirement is satisfied if there is an instance of COVID-19 in the relevant area even if it forms part of the wider COVID-19 picture which has actually prompted the government action. The HIGA goes on to argue that as the government action applies nationwide, it will necessarily apply within the relevant area, with the result that cover is triggered, the losses suffered having been proximately caused by the insured peril.

In its skeleton argument, the Hiscox Action Group notes that its members have combined losses of £47 million (applying policy limits) although their actual losses are much higher.  The Group is running a secondary case against Hiscox in relation to the Public Authority Extension in the Hiscox wordings in the event that the FCA does not succeed in its arguments. The Hiscox Action Group argues that under the relevant Hiscox Public Authority Extension wording, its members only have to prove that their losses are solely and directly a result of the interruption to their business. The Group is also making an additional claim for damages for Hiscox's failure to pay their claims within a reasonable time under section 13A of the Insurance Act 2015.     

In conjunction with bringing its test case, the FCA also published on 17 June, guidance for Insurers and insurance intermediaries dealing with non-damage COVID-19 related business interruption claims (https://www.fca.org.uk/publications/finalised-guidance/business-interruption-insurance-test-case). The guidance applies where claims remain outstanding or have been denied. Insurers were required, by 8 July 2020, to have undertaken a review of their non-damage BI wordings by reference to the sample wordings in the test case to determine if the outcome of the test case will or will not have an effect on claims generally made on those wordings, and to have reported the findings of their review to the FCA. The review applied to all relevant wordings even if only issued to a single policyholder. The guidance also requires insurers and intermediaries to keep all affected policyholders updated on an on-going basis about the FCA test case and the implications for their individual claims, both generally by providing information on their web sites, and by contacting affected policyholders individually, in the first instance, by 15 July 2020. The guidance explains that the FCA's test case and the policy review required by the guidance do not prevent insurers from continuing to assess and settle individual claims in the meantime. 

The COVID-19 emergency has created huge uncertainty and potential financial disaster for many businesses who have, not surprisingly, looked to their insurers to provide them with financial support. However, the fundamental questions facing these business Insureds is whether the circumstances of COVID-19 actually constitute an insured peril within the terms of the business interruption policies they have purchased and if they do, whether the financial losses they have suffered have been caused by that insured peril. It remains to be seen whether the first outing for the Financial Markets Test Case Scheme will serve its purpose and achieve the FCA's objective of resolving without delay these particular market issues of public importance to the satisfaction of all concerned so that businesses with valid claims can be paid promptly while they still have the financial strength to trade and Insurers do not find themselves making payments to insolvency professionals. Certainly, the Court is keenly aware of the importance of the test case to the industry and policyholders and has indicated that it will try to produce its judgment by the middle of September. However, that may still not be the end of the story if either side decides to appeal the judgment.    

A follow up to this article will be produced once the Court's judgment has been handed down. In the meantime, for further information or advice concerning the above, please contact a member of our Dispute Resolution team.

Fig 1: UK COVID-19 Timeline

Fig 2: UK Government Measures

Fig 3: Business Types