Covid-19 Business Interruption Update – FCA challenges Orient Express v Generali
The FCA and insurers have now filed their skeleton arguments in the COVID-19 business interruption Test Case, drawing the battle lines and setting out in full the arguments in support of their pleaded cases.
Of particular interest, and with potentially significant wider implications, are the sections on causation, including the application of trends clauses. The general thrust of the FCA’s case on causation is that:
- for disease clauses, the presence of COVID-19 in each locality is an integral part of one single broad and/or indivisible cause, being the COVID-19 pandemic; and
- for public authority/prevention of access clauses, the various ingredients of the clause and the government’s actions in response to the pandemic amount to a single indivisible cause of loss, and the insurers' "salami slicing” of the insuring clause is legally flawed.
Most notably the FCA submits that, not only is Hamblen J’s decision in Orient Express Hotels Ltd v Assicurazioni Generali Sp.A [1] to be distinguished on the facts, but that it was wrongly decided , ‘falls to be revisited’, and is ‘open to correction.’
Recap
Our commentary on the contentious Orient Express case can be found here, but in summary, the case concerned a claim brought by a hotel in New Orleans following Hurricane Katrina, which had damaged the insured property and devastated the city as a whole. The policyholder claimed for its business interruption losses caused by the damage, but the court found that the application of the trends clause prevented recovery of the losses due to the application of the ‘but for’ test of causation. ‘But for’ the damage to the insured property, the policyholder would still have suffered the same losses because of the damage to the wider area, meaning that there would have been no tourists able to stay in the hotel even if it had been undamaged.
Insurers’ reliance on the case
In relation to COVID-19 business interruption claims, insurers have cited the Orient Express case in support of their arguments that, even if coverage is triggered under Infectious Disease, Public Authority or Prevention of Access clauses, the application of trends clauses in the relevant policies means that adjustments must be made for the wider effects of the pandemic and/or other government actions such as social distancing and the general lockdown. The net result, insurers say, is that policyholders would have suffered the same losses regardless of whether the insured peril can be demonstrated to have been triggered.
The FCA’s case
The FCA attacks Orient Express from a number of angles. First, it notes that this was a first instance decision that was itself an appeal from an arbitration award, and as such was limited in scope to considering whether the arbitral tribunal had made an error of law. The court acknowledged that further arguments could have been made as to the disapplication of the ‘but for’ test in the interests of fairness, and indeed such arguments were raised by the policyholder in the case. But as the arguments had not been raised in the underlying arbitral proceedings, the court was unable to consider them. The court in Orient Express also granted permission to appeal, but the appeal was regrettably never heard as the case was settled.
Secondly the FCA points out, as many policyholders have done repeatedly to insurers, that the decision in Orient Express related to a dispute under a damage-linked BI cover, and that insurers had in fact paid out the available sublimits under the Denial of Access and Loss of Attraction covers in that case. The fact that they had was germane to the decision of the court, since the judge remarked:
“if Generali asserts that the loss has not been caused by the Damage to the Hotel because it would in any event have resulted from the damage to the vicinity or its consequences, it has to accept the causal effect of that damage for the POA or LOA, as indeed it has done. It cannot have it both ways. The ‘but for’ test does not therefore have the consequence that there is no cause and no recoverable loss, but rather a different (albeit, on the facts, more limited) recoverable loss.”
In the present case, insurers are indeed seeking to ‘have it both ways’, since they deny that coverage extends either under the main damage-linked insuring clause or the wider area non-damage extensions.
Thirdly, the FCA argues that the court in Orient Express applied the ‘but for’ test in a fundamentally incorrect way by treating the damage to the property and the underlying cause as distinct competing causes even though the property damage could not have occurred without the hurricane.
Finally, the FCA submits that the court failed to properly apply the superior court decision in The Silver Cloud [2], a case considering claims brought in relation to business interruption losses arising from the 9/11 attacks, in which the Court of Appeal found that the two causes of loss (terrorism and government warnings) were inextricably linked and so could be treated as a single cause. The case has obvious relevance to the present circumstances.
What are the possible outcomes?
Broadly speaking there are three different landings the court may reach on this issue (although inevitably the court may find some more nuanced combination or alternative):
- The Court rules in the FCA’s favour – Orient Express was wrongly decided, and the ‘but for’ test should consider a counterfactual in which the broader underlying cause of loss is removed. This outcome is very unlikely at first instance: although not technically bound by the High Court decision in Orient Express, the decision will be viewed as highly persuasive authority, and the court in this case is unlikely to depart from it, since this would result in two conflicting lower court decisions. It is possible however that the court may simply find that it is bound by the Court of Appeal’s decision in The Silver Cloud rather than the lower court decision in Orient Express. Any such decision would almost certainly be appealed by insurers.
- The Court rules in insurers’ favour – the application of Orient Express means no (or limited) recovery even if coverage is triggered. In this case it is quite possible, that the court may in its judgment indicate that whilst it finds itself bound to follow Orient Express, it disagrees with the decision in whole or in part. Either way, by arguing that Orient Express ‘falls to be reconsidered’, the FCA must presumably be contemplating appealing on this issue to seek the overturning of the decision by the higher courts. As the Framework Agreement expressly contemplates a leapfrog appeal, it is therefore possible that this issue could fall for determination by the Supreme Court in the near future.
- Alternatively, the Court may take the somewhat easier path of distinguishing Orient Express on the basis that it only applies to property damage losses, which has also been argued by the FCA. This would leave the legal principle intact, but would narrow the scope of its application so that it does not act to limit claims brought under non-damage BI extensions, which is surely right, since these extensions are themselves effectively intended to respond to ‘wide area’ perils. Such a ruling would still have significant implications for insurers and may well still be appealed.
It is clear that the FCA’s Test Case has far-reaching implications beyond the scope of COVID-19 business interruption coverage for which it has been brought, and whilst these issues will be fiercely contested by insurers, the end result will hopefully be a greater degree of judicial clarity and certainty, which in the long term can only be in the best interests of both policyholders and insurers.
[1] Orient Express Hotels Ltd v Assicurazioni Generali Sp.A [2010] EWHC 1186 (Comm), [2010] Lloyd’s Rep IR 531
[2] IFP&C Insurance Ltd (Publ) v Silversea Cruises Ltd, the Silver Cloud [2004] EWCA Civ 76, [2004] Lloyd’s Rep 696 CA
COVID-19 Business Interruption Update: FCA Test Case First Hearing and Guidance for Insurers
First Hearing – Case Management Conference (CMC)
On 16 June the first hearing (Case Management Conference) of the FCA Test Case took place remotely at the Commercial Court. At the hearing, the court granted an order that the case will be expedited in accordance with the proposed timetable (i.e. with a final hearing from 20 July to 30 July) and that the Financial Markets Test Case Scheme will apply. The court confirmed that the case will be heard by a 2-judge panel consisting of Mr Justice Butcher and Lord Justice Flaux.
There was some early disagreement between the FCA and Insurers as to the scope of the declarations sought from the court by the FCA, in particular whether the court should make any ruling as to the actual prevalence of COVID-19 in the UK during the relevant period, and the extent to which any such finding would depend on fact and/or expert evidence. These matters will be considered further at the second CMC on 26 June.
The insurers’ Defences are due to be filed on 23 June and at that stage we will see the full extent and basis on which the insurers will resist the declarations sought by the FCA.
The second CMC will be live-streamed on 26 June via https://fl-2020-000018.sparq.me.uk/
Guidance to Insurers
The FCA’s guidance for insurers and intermediaries has now been finalised and came into effect on 17 June. It is equally useful for policyholders seeking to understand the process and how their claim may be affected. Important points to note include the following.
Summary of Test Case
In summary, the core questions that the test case seeks to resolve are:
i. issues of coverage in relation to ‘disease’ and ‘denial of access’ clauses (including any relevant exclusions); and
ii. causation (including any relevant ‘trends clause’ or equivalent wording).
The test case is not seeking to resolve, in particular:
- coverage issues relating to clauses that have an exhaustive list of diseases which does not include Covid-19
- coverage issues relating to clauses which require the disease to be present on the insured premises
- issues concerning misselling of policies
- other issues flowing from the determination of the questions in the test case such as aggregation, additional causation issues specific to loss of rent and similar claims under a property owner’s policy, and the specific quantum of any particular claims
Policy Review
Insurers are required to examine each of their relevant policy wordings to determine whether the outcome of claims under the policy will be affected by the resolution of the Test Case.
Insurers are to notify the results of their review to the FCA by 8 July. The FCA then intends to publish a comprehensive list of insurers and policy wordings that will be affected by the outcome of the Test Case.
Claims Review
The guidance also sets out quite detailed requirements for communicating with policyholders during the Test Case.
In particular, by 15 July 2020 insurers should individually notify policyholders whose claims or complaints for business interruption losses related to the coronavirus pandemic under relevant non-damage business interruption policies are outstanding or have already been declined (or had an adjustment or deduction for general causation) of:
- whether their claim or complaint is a potentially affected claim or a potentially affected complaint and the implications of that (including the FCA’s expectations of the insurer in respect of such claims or complaints under this guidance), or
- the reasons why their claim or complaint is not a potentially affected claim or potentially affected complaint, and the implications of that.
Insurers are required to continue to communicate with policyholders as and when any developments occur in the case that may affect the outcome of their claim.
Any policyholder whose claim has been declined or remains outstanding should therefore follow up with their insurer or broker if they have received no communication by 15 July at the latest.
Clock Stopped on Time Limits
Time limits for making claims or taking any other step under policies, or for making complaints to the FOS are suspended from 17 June until final resolution of the Test Case.
Whilst most claims should already have been notified before 17 June, this means that any other time limits expressed in the policy, for example in relation to proving calculations of loss, or taking action against the insurer will not apply while the test case is ongoing. That does not stop policyholders from taking such steps or pursuing their claims.
Settlement
The guidance expressly recognises that claims may be settled between insurers and policyholders while the test case is ongoing. However, when making any offer to settle, insurers should inform the policyholder about the test case and its implications. In particular, they should tell the policyholder whether the final resolution of the test case may affect the insurer’s decision about their claim, and the implications of accepting or rejecting an offer made on a full and final settlement basis.
Reassessment of Claims following Final Resolution
Upon final resolution of the Test Case, insurers should reassess all potentially affected claims, apply the judgment, and promptly inform the policyholder of the outcome of the reassessment.
The Good, the Bad & the Ugly: 100 cases every policyholder needs to know. #9 (The Good). UK Acorn Finance Ltd v Markel (UK) Ltd
Welcome to the latest in the series of blogs from Fenchurch Law: 100 Cases Every Policyholder Needs to Know. An opinionated and practical guide to the most important insurance decisions relating to the London / English insurance markets, all looked at from a pro-policyholder perspective.
Some cases are correctly decided and positive for policyholders. We celebrate those cases as The Good.
Some cases are, in our view, bad for policyholders, wrongly decided, and in need of being overturned. We highlight those decisions as The Bad.
Other cases are bad for policyholders but seem (even to our policyholder-tinted eyes) to be correctly decided. Those cases can trip up even the most honest policyholder with the most genuine claim. We put the hazard lights on those cases as The Ugly.
At Fenchurch Law we love the insurance market. But we love policyholders just a little bit more.
#9 (The Good)
The next case selected for consideration from our collection of 100 Cases Every Policyholder Needs to Know is UK Acorn Finance v Markel.
Issues
This case considered the scope of contractual discretion exercised by an insurer under an Unintentional Non-Disclosure clause and whether that discretion had been exercised in a fair and arbitrary way when considering whether a misrepresentation made by the insured was fraudulent or intended to deceive.
Background
UK Acorn Finance Ltd (“UKAF”) was a bridging finance lender who had obtained judgments in default in excess of £13m following allegedly negligent overvaluations on a number of agricultural properties. The Judgments were obtained against Westoe 19 (formerly named Colin Lilley Surveying Ltd (“CLS”)) who had entered into liquidation.
UKAF issued a claim against Markel pursuant to s.1 and s.4 of the Third Parties (Rights Against Insurers) Act 1930 for indemnity under a professional indemnity insurance policy issued by Markel in favour of CLS.
Markel sought to avoid the policy on the basis of alleged misrepresentations and non-disclosures made by CLS prior to renewal regarding the work it had done with sub-prime lenders. Before the Court, a lot of emphasis was placed upon whether or not the question raised by the Markel prior to renewal regarding work done with sub-prime lenders was understood by the insured and what was actually meant by “sub-prime lenders”. The term was not defined in the policy or within the renewal documentation. It was apparent that a lot of correspondence had been passed between Markel, CLS’s broker and CLS on this issue but ultimately, CLS confirmed it did not do work with sub-prime lenders.
Insurance dispute
The policy contained an Unintentional Non-Disclosure Clause (“UND clause”) which stated:
“In the event of non-disclosure or misrepresentation of information to Us,
We will waive Our rights to avoid this Insuring Clause provided that
(i) You are able to establish to Our satisfaction that such non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive…”
Relying on the UND clause, Markel alleged that misrepresentations made by CLS regarding its work with “sub-prime” lenders were fraudulent and/or intended to deceive and consequently, avoided the policy and declined the claim.
The Court’s decision
Whilst there were a number of issues for the Court to determine in relation to whether the alleged misrepresentations were warranties, inducement and waiver, the crux of the Court’s decision was whether, in light of the UND clause, Markel was entitled to avoid.
The Claimants argued that it was for the Court to decide, as a matter of fact, whether the representations relied upon by Markel were free from any fraudulent conduct or intent to deceive, i.e. by the Court stepping into the shoes of the decision-maker. Markel disagreed and argued that the Court’s role should be limited to determining whether Markel’s decision to avoid the policy was one that was open to a reasonable decision-maker to make on a Wednesbury unreasonableness basis.
Construction of the UND clause was considered in light of numerous authorities and in particular, the Supreme Court judgment of Braganza v BP Shipping Limited [2015] UKSC 17. The nature of the UND clause is one by which “one party to the contract is given the power to exercise a discretion, or to form an opinion as to relevant facts” – as per Lady Hale in Braganza.
Following Braganza, where such a term is present in a contract permitting one party to exercise a discretion, there is an implied term that the relevant party “will not exercise its discretion in an arbitrary, capricious or irrational manner” (Mid Essex Hospital Services NHS Trust v Compass Group UK [2013] EWCA Civ 200.
When seeking to imply a Braganza implied term to give effect to the UND clause, the Court identified the need for consideration of the principles applicable to implied terms, as set out in Marks and Spencer Plc v BNP Paribas securities [2015] UKSC 72. Those principles are, namely:
i. Terms are to be implied only if to do so is necessary to give the contract business efficacy or if it was so obvious that it goes without saying;
ii. The term is a fair one or one that the court considers the parties would have agreed had it been suggested to them; and
iii. No term may be implied if it would be inconsistent with an express term.
Based upon the wording of the UND clause, in particular that the insured is to demonstrate to the satisfaction of the insurer that the misrepresentation was innocent and free from any fraudulent conduct or intent to deceive, the Judge concluded that it was wrong, as a matter of principle, to conclude that the Court could substitute itself for the contractually agreed decision-maker, as observed by Lady Hale in Braganza.
On the basis that Markel had a power to exercise a discretion or form an opinion as to relevant facts (i.e. whether the misrepresentations were innocent or fraudulent), the Judge considered it was necessary to imply a Braganza term in order to eliminate the possibility of the defendant making decisions in an “arbitrary, capricious or irrational manner”. The Judge considered that such an implied term was necessary to give the UND clause business efficacy and because the necessity for implication of such a term is so obvious that it goes without saying. The implied term did not contradict the agreement of the parties; on the contrary, it was giving effect to that which both are treated as having intended. As such, the test in Marks and Spencer Plc v BNP Paribas was satisfied.
Having determined the construction of the contract and the need for a term to be implied in accordance with Braganza, the Judge concluded the real issues which arose were three in number:
i. Did Markel, via its loss adjuster (who conducted the claims investigation):
a) fail to take into account any facts and matters that he ought to have taken into account; or
b) take into account any facts and matters that he ought not to have taken into account;
ii. would the decision have been the same even if any such errors had not occurred; and
iii. was the decision one that no reasonable decision-maker could have arrived at on the material that ought properly to have been considered.
When considering these issues in accordance with the principles identified in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223, the Judge noted that it was necessary to bear in mind the often quoted direction in Re H (Minors) (Sexual Abuse: Standard of Proof) that “the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probabilities”. Applying that notion to the wording of the UND clause, it required the decision-maker at Markel to bear in mind that it is inherently more probable that a misrepresentation had been made innocently or negligently, rather than dishonestly, based on an analysis of all the evidence. The more serious the allegation against the insured, the stronger the evidence of such dishonesty or fraud is required.
Whilst the Judge expressed that it would be a mistake to expect an insurance company in the position of the Defendant to adopt the same microscopic investigation as a Court, having considered all of the evidence, he concluded that Markel failed to approach the dishonesty issue with an open mind or bearing in mind that it was more likely that a misrepresentation has been made innocently or negligently rather than dishonestly. The Judge felt that too much weight was given to certain evidence, leading Markel to the conclusion that the misrepresentation was dishonest, resulting in the decision-maker failing to properly take into account other relevant evidence which should have been taken into account.
Ultimately, the decision was not one that Markel could safely arrive at if in reaching that decision, it had taken account of factors which ought not to have been considered or failed to take account of factors that ought to have been considered.
Implications for the policyholder
This decision illustrates the approach taken by the Courts when applying the principles in Braganza where one party to a contract has a discretionary power to make a decision as to a matter of fact, in particular in relation to Unintentional Non-Disclosure clauses. Insurers will need to be mindful of the need to act in a manner which is not arbitrary, capricious or irrational and should take extra care to ensure that sufficient evidence is obtained to support a conclusion where the allegations made are severe. The decision is a useful tool for policyholders who have made innocent misrepresentations to insurers prior to inception and renewal but also serves as a reminder that in circumstances where questions asked by an insurer are unclear or ambiguous, the insured and its broker should make effort to ensure they fully understand the questions being asked to avoid any later disputes.
COVID-19 Business Interruption Update: Further details of FCA Test Case
The FCA has now published details of its proposed test case in which it seeks to determine a number of coverage issues common to a majority of declined COVID-19 business interruption claims.
Insurers/Policy Wordings
Following consideration of over 1200 submissions to its preliminary policyholder consultation process, 17 Policy wordings have been selected as a representative sample covering the broadest spread of common issues.
At present the FCA has indicated that 16 insurers have issued policy wordings within the list identified, eight of whom have been invited to participate in the proceedings:
• Arch Insurance (UK) Limited
• Argenta Syndicate Management Limited
• Ecclesiastical Insurance Office plc
• Hiscox Insurance Company Limited
• MS Amlin Underwriting Limited
• QBE UK Ltd
• Royal & Sun Alliance Insurance plc
• Zurich Insurance plc
It is anticipated however that other insurers who have issued policy wordings materially identical will also be affected by the court’s finding, and the FCA intends to issue a comprehensive list of affected insurers in July.
Issues
As anticipated, the focus of the proceedings is on the coverage provided by ‘non-damage’ extensions to business interruption policies, including Non-Damage Denial of Access, Infectious Disease, and Public Authority clauses.
The key issues that have been determined to be common to a majority of disputed COVID-19 BI claims include the following:
• What is meant by ‘interruption or interference’ and is closure required in whole or in part?
• Does “notifiable disease” or “human infectious or human contagious disease” include COVID-19?
• If the disease is required to be in the “vicinity of the insured premises” what does this mean?
• If the policy requires that the disease must exist within a geographical limit of the premises (e.g. 25 miles) what is required by way of proof?
• What is the meaning of an “occurrence” of notifiable disease or an “outbreak” of notifiable disease?
• What does a policyholder have to prove to show prevention or hindrance in access or use of premises?
• What is meant by “actions”, “advice”, “restrictions” imposed by government or other authority?
• What is meant by an “emergency likely to endanger life” (or similar)
• What is meant by “public authority” or “competent local authority”?
• What are the relevant causal links that must be established depending on the words used in the policy?
• Is there more than one potentially operative cause of loss, and if so what is the effect on recovery?
• What effect do any trends clauses have on the application of causation arguments?
• Do micro-organism, pollution or contamination exclusions act to exclude the losses?
Timeframe and Procedure
The FCA intends to file its claim on 9 June 2020, with Defences to be filed by 23 June 2020, and a final hearing is anticipated to be scheduled in the second half of July. In a Framework Agreement executed between the FCA and the participating insurers, it is expressly recognised that the FCA or any Insurer may appeal the decision of the court in relation to any particular issue, but the parties agree to explore the possibility of an expedited leapfrog appeal to the Supreme Court if necessary.
Further Documents
Alongside its announcement, the FCA has published:
• A proposed representative sample of 17 policy wordings;
• A preliminary list of affected insurers;
• Proposed Assumed Facts against which the determination will be made;
• Proposed Questions for Determination by the court arising from insurers’ reason fo declining claims; and
• Proposed Issues Matrix, showing which questions for determination by the court are engaged by each policy in the sample.
• The Framework Agreement agreed by the FCA and Insurers
All documents can be accessed at the FCA website https://www.fca.org.uk/firms/business-interruption-insurance
Consultation
Policyholders, insurance intermediaries, insurers and other stakeholders are invited to provide comments by 3pm on Friday 5 June, to biinsurancetestcase@fca.org.uk
Comment
Taken together, the FCA’s proposed sample of policy wordings, sets of assumed facts, and questions for the court amount to an ambitious and comprehensive set of issues for determination. With eight insurers invited to participate and make submissions across such a broad set of issues in such a compressed timetable, case management will be challenging. Nonetheless, if successfully completed, and not subject to a protracted appeals process, the exercise has the potential to provide insurers, policyholders and intermediaries with a welcome degree of certainty in relation to the vast majority of outstanding COVID-19 business interruption claims. Disputes over discrete issues such as aggregation and quantification of loss will remain, particularly in relation to those policyholders with significant and more complex losses, but even for these policyholders the FCA’s test case should narrow the issues in dispute and reduce the overall costs and time incurred in pursuing claims through formal proceedings.
FCA Takes the Lead - Fenchurch Law Covid-19 Business Interruption Briefing Note
Since the designation of COVID-19 as a notifiable disease in England on 5 March, and the subsequent ratcheting of measures to slow the spread of the disease, business owners large and small have incurred catastrophic losses which, for the time being, continue to mount up on a daily basis.
Those with business interruption insurance have turned to their insurers for assistance, but have by and large been met with outright rejection of their claims.
Matters have escalated rapidly in the course of the last two weeks as thousands of declined claims pile up, with action groups being formed, ‘class actions’ announced, and regulators adopting an increasingly interventionist stance, culminating with the FCA’s announcement on 1 May 2020 that it intends to take legal action to obtain a court declaration on the disputed wordings.
This update takes stock of developments so far, considers the positions of the market and policyholders in relation to the disputed issues emerging, and sets out the options for policyholders wishing to pursue their declined business interruption claims.
What is the market’s position on COVID BI Claims?
ABI
As the representative body of insurers in the UK, the ABI has unsurprisingly sought to manage the expectations of policyholders and government as to the extent to which the insurance market can be expected to shoulder a share of the burden currently being suffered by the nation, stating that “no country in the world is able to provide widespread pandemic insurance, and the UK is no exception”, “only a very small number of businesses choose to buy any form of cover that includes business interruption due to a notifiable or infectious disease”, and “such policies often only apply when the disease is present at the premises.”
Insurers
Some insurers have taken an even more extreme approach than the ABI, announcing that “[our] policies do not provide cover for business interruption as a result of the general measures taken by the UK government in response to a pandemic”, and “these extensions are intended to cover danger and disturbance and are not expected to cover a pandemic (or similar) breakout of disease.”[1]
This has been reflected in insurers’ responses to claims notified, which have largely been to issue blanket declinatures using cut-and-paste standard responses, often with no apparent consideration of the facts of the claim submitted.
FCA
Unlike the steps being taken by regulators in some other markets, notably some US states, there has been no attempt by the FCA to mandate retrospective coverage for COVID-19 losses on existing policies. Taking a relatively measured approach, the FCA wrote a ‘Dear CEO’ letter to CEOs of London market insurers on 15 April 2020, specifically in relation to SME BI insurance, acknowledging that many policyholders would have no cover, but noting that some policies do give rise to a clear obligation to pay out, and encouraging insurers to comply with their legal and regulatory obligations to pay claims promptly. Following the escalation of the situation over the following fortnight, and the entrenchment of insurers’ coverage positions, on 1 May 2020 the FCA took the bolder step of announcing that it intended to “obtain a court declaration to resolve contractual uncertainty in business interruption (BI) insurance cover.”
FOS
The Financial Ombudsman Service, which handles complaints for individuals and SMEs up to maximum claim value of £350,000 has also issued its own guidance in relation to the anticipated high volumes of disputed BI claims. On 14 April 2020 it indicated that it would “expect the insurers to think beyond a strict interpretation of the policy terms and consider carefully what’s fair and reasonable in each case, taking into account the unprecedented situation”. Interestingly that language has now been removed from the latest version of its guidance provided online.
What are the disputed coverage issues?
Damage
In the absence of extended cover, most policyholders will need to establish that any business interruption losses arise from insured damage to property. At first sight that may appear to have no relevance to COVID-19 BI claims, since there has been no obvious property damage that would trigger the cover. However, under English law, a number of cases have found that only very small changes in physical state can amount to property damage, leading to suggestions that viral contamination leading to loss of use can amount to damage. Much has been made of a recent decision in Canada, in which the court adopted a broader interpretation of the term physical damage, which incorporated such things as the loss of the function or use of a building, even if only temporary[2]. Whether this can successfully be argued under English law will depend in part on the definition of property damage in the policy (some policies refer to ‘physical’ damage, which requires a permanent and irreversible change in physical condition, while others refer only to ‘accidental loss or damage’, which extends to transient and reversible changes in physical condition), and the application of any contamination or pollution exclusions. Insurers will certainly resist paying any claims on this basis, but it is quite possible that litigation will be pursued on this point which, if successful, could dramatically widen the scope of cover under traditional BI policies.
Locality
Many policies that do contain extended cover for losses caused by infectious disease, prevention of access, or public authority action, under which cover is now sought, will include some form of reference to an occurrence of the insured peril on the premises, in the vicinity, or within a specified radius, commonly 1 mile or 25 miles.
Insurers’ response has broadly been that these provisions mean that the extensions will only respond to localized incidences of disease, and not to widespread epidemic or pandemic circumstances where the whole country (or in this case the world) is affected.
Policyholders on the other hand might reasonably question why, in the absence of any pandemic exclusion, the presence of the disease elsewhere can have any effect on the local coverage provided by their policy. Perhaps insurers’ decisions on coverage are being driven by concerns over their likely overall exposure rather than the actual cover provided by a policy? The correct answer will as ever lie in the drafting of the policy wording in question, but this is set to be one of the key contested issues.
Causation
The second broad category of issues on which disputes will turn are various forms of causation argument. Insurers are arguing that, even if the relevant policy trigger can be demonstrated to have occurred, the losses suffered by the policyholder are not caused, or are not solely caused, by the insured peril.
Although such arguments may be couched in various different terms, they all effectively seek to apply the controversial principle established in the case of Orient Express Hotels v Generali, in which the losses of an insured hotel in New Orleans following Hurricane Katrina were found not be insured because they were caused not by the relevant trigger (property damage), but by damage to the wider area, i.e. the losses would have happened anyway even if the insured property damage had not occurred.
Again the outcome of such arguments will depend on application of the policy wording, including the relevant causation language in the insuring clause, and any ‘Trends Clause’ to the facts of any given claim. Causation arguments are generally complex and difficult to generalise in relation to multiple claims, and we can expect to see some hard-fought litigation in this field.
Aggregation
A perennial issue that is not unique to COVID-19 claims is whether losses suffered at multiple insured locations should be aggregated for the purpose of applying limits of liability and deductibles. As a general rule, the cover provided by the non-damage BI extensions tends to be sub-limited to a level which may be a small fraction of the total policy limits. Whether policyholders may claim for multiples of the specified sub-limit will depend on the existence of any express aggregation clause, and whether for example the sub-limit is expressed as applying to any one ‘loss’, ‘occurrence’, ‘event’, or arising from the same ‘originating cause’. For those policyholders with multiple locations insured under the same policy, for example restaurants, pubs and shops, this issue may determine whether whether a claim is worth £1 million or £100 million (and beyond), and as such will no doubt give rise to some hotly contested claims.
What happens next?
Policyholders whose BI claims have been rejected have various options open to them at this stage, and it is important to note that there is no one-size-fits-all solution for all policyholders.
Negotiation
As a general starting point, negotiations through open dialogue with the insurer are always advisable, either directly or through a representative such as a broker or lawyer. For the many thousands of SME businesses this is unlikely to be a realistic option at this stage, but for those larger businesses with more significant losses reaching seven, eight, or nine figures, insurers are more likely to be willing to engage in constructive discussions.
FOS
For eligible policyholders, the FOS provides a cost-free and fair solution to resolving disputed insurance claims. However, the prescribed timescales may frustrate some policyholders in the current situation, since they are required to make a complaint following an insurer’s rejection of any claim, following which the insurer has eight weeks to each a ‘final decision’. Only then may the policyholder refer the matter to the FOS. Following those timescales, policyholders are prevented from taking any action for the next two months unless the insurer agrees to issue an expedited ‘final decision.’
Arbitration
Any policyholder with an arbitration clause in their policy will be required to pursue private arbitration proceedings to resolve their dispute, unless they are FOS-eligible. This may be an appropriate option for some larger policyholders with bespoke coverage issues, and the resources to pursue lengthy and expensive arbitration proceedings, but for many smaller policyholders the prospect of having to arbitrate will be a significant barrier to pursuing their claim. Further difficulties with arbitration in the present situation are the absence of effective procedures for aggregating claims, and the lack of any system of binding precedent.
Group Litigation
There has been much talk of ‘class actions’ or other group litigation being pursued against certain insurers, and several action groups have been formed for this purpose. Whilst this remains a possibility, there are significant downsides to policyholders in attempting to pursue their claims as part of a group, not least that each of their claims will have factual, if not legal, issues that are specific to their own circumstances. The ability of group legal proceedings to determine large numbers of complex BI insurance claims is doubtful, and the procedural complexities and timescales are unlikely to be attractive, not to mention the funding necessities that will see policyholders sacrificing a significant proportion of any damages in return for representation as part of the group. Moreover, this option may now have been rendered largely redundant by the FCA’s announcement of its own legal action.
FCA legal action
The FCA’s proposal to seek a ruling on the disputed coverage issues is an unusually interventionist but potentially welcome step. The action sensibly stops short of over-reaching the FCA’s remit, and preserves the role of the English courts as the proper arbiter of matters of contractual interpretation. The FCA has indicated that it intends to invite the participation of a select group of insurers in the process by 15 May 2020, and further details are awaited on the proposed process.
It is not known at this stage whether policyholders or their representatives will have any opportunity to make submissions or representations in the proceedings, or what procedural mechanism will be followed, although a claim for a declaratory ruling under CPR Part 8 seems likely. Provided that the right issues are put before the court, supported by appropriate representations on both sides of the fence, this may well be the most cost-effective and efficient way to resolve the common issues. The proceedings will not and cannot provide an answer to all of the questions, and some disputed claims will inevitably still proceed to litigation or arbitration. But for a large majority of policyholders, particularly those whose claims do not justify the pursuit of independent legal proceedings, this development may provide the best opportunity to overturn the rejection of their claim, without requiring any active participation on their part.
Next Steps
For most policyholders, a wait-and-see approach is likely to be advisable at this stage. Any attempt to negotiate with insurers or take more formal steps such as commencing arbitration or litigation is unlikely to produce results until all parties have a better understanding of the proposed FCA legal action, including the likely timetable and the scope of the issues for determination.
For now, policyholders’ focus should therefore be on ensuring that effective notification has been given to insurers in sufficiently broad terms (usually via brokers), taking steps to mitigate losses where possible, and keeping records of any costs reasonably and necessarily incurred in doing so.
[1] https://qbeeurope.com/media/8685/covid-19-qbe-faqs.pdf
[2] MDS Inc v Factory Mutual Insurance Company (1 April 2020)
Coronavirus – Am I Covered? A Routemap to Recovery for Policyholders, Part 2
Part 1 of this review examined the availability – or otherwise – of cover for losses under Business Interruption and Event Cancellation insurance. With the UK government now moving to follow other countries in restricting, but not yet banning, mass gatherings and personal interaction, those policies remain firmly in the spotlight.
However, given the potential obstacles to recovery highlighted in Part 1, and the far-reaching consequences of the pandemic that are only just starting to become apparent, businesses will inevitably incur many other direct and indirect losses that will not fall for coverage under these first response policies. Part 2 of our review therefore investigates what coverage for COVID-19-related losses may be available elsewhere under a variety of other policies.
A general caveat is that these are specialty commercial lines of business, which are often highly bespoke and tailored to the risk in question. Whilst we have highlighted some of the issues that we anticipate arising, any question of coverage will be entirely dependent on a detailed review of the facts in the context of the policy wording.
Trade Credit
What might be covered?
With global markets tumbling and the FTSE 100 at its lowest level since 2008 at the time of writing, the economic consequences of COVID-19 look set to be universally felt, and not just by front line industries such as travel, hospitality, entertainment and sports. As supply chains are disrupted and customer funds are squeezed, credit arrangements and solvency margins across all sectors will be severely stress tested.
Businesses with trade credit insurance may be protected from customer defaults within specified criteria, cushioning them from the indirect effects of COVID-19 on their cashflow.
What are the difficulties?
The cover here is narrow and limited specifically to customer defaults. Trade credit insurance will provide no protection for losses suffered as a result of supplier insolvency or a general downturn in the market.
A further issue is that coverage of customer defaults in COVID-19 circumstances may be affected by force majeure provisions in the underlying contracts, governmental actions in relieving contractors from their payment obligations in certain sectors, or (in common law jurisdictions) arguments of contract frustration. Where any of these mechanisms acts to relieve the customer of their contractual obligations, or extends payment periods, it may be arguable, depending on the policy wording in question, that there has been no default and that the policy does not therefore respond.
Political Risk
What might be covered?
Often setting side by side with trade credit insurance, political risk insurance can provide coverage for broader – although highly tailored – circumstances affecting a business’ investments, usually in cross-border circumstances, where the regulatory, economic or political environment is considered to be sufficiently volatile to require a degree of risk transfer. Political risk policies respond to specific triggers including expropriation, currency inconvertibility, and contract frustration.
Where trade credit policies fail to respond to defaults due to force majeure or frustration, political risk policies may potentially step in to bridge the coverage gap, particularly where payment defaults are the direct result of government intervention. For example, in China the Council for the Promotion of International Trade has already issued force majeure certificates worth over $53 billion to relieve businesses of specified contractual payment obligations at a local level. However, the effects of such actions on the underlying contracts will need to be analysed under local and applicable international laws in order to understand the impact on cover under any political risk policy.
Depending on how broadly the insuring clauses are drafted, other governmental edicts such as travel bans, restrictions on public gatherings, and closures of public places may also potentially trigger political risk coverage.
What are the difficulties?
Although there may be ‘silent’ cover to be found in political risk policies, the product is generally not designed specifically to protect businesses from pandemics or circumstances outside the control of government. Broadly drafted exclusions and narrowly drawn insuring clauses may therefore limit the recoverability of losses under the policy, even where losses may be linked to government actions taken in response to the COVID-19.
Environmental Risk
What might be covered?
Whilst standalone environmental policies are generally intended primarily to respond to cleanup costs and third party liabilities arising from pollution or contamination events caused by the insured business, there may be limited cover provided for disinfection or decontamination costs associated with an outbreak of an infectious disease at the insured premises.
What are the difficulties?
Again these policies are highly specialised, with significant variance and no standard coverage. Where coverage is provided for decontamination or disinfection of premises, the trigger is likely to require an outbreak on or near the insured premises; costs of prophylactic cleansing are unlikely to be covered. Some policies may only be triggered where decontamination is required by order of a competent regulatory authority.
Similarly to our earlier discussion of event cancellation and BI covers, the policy may provide an express list of covered or excluded infection diseases which will determine whether the policy responds to COVID-19.
Contaminated Products / Product Recall
What might be covered?
If a manufacturer of food & beverage or other consumer products suffers an outbreak of COVID-19 at their factory or elsewhere in the supply chain, leading to concerns over possible contamination, a decision may be taken to recall the potentially affected products. If Contaminated Products or Product Recall Insurance is in place, cover may be provided for the manufacturer’s own costs incurred in recalling the products, as well as costs of managing the reputational damage, and potentially cover for loss of profits caused directly by the recall.
What are the difficulties?
The policy trigger will usually require a reasonable expectation that the use or consumption of the products will cause bodily injury, sickness or death. In the case of a COVID-19, which appears to be transmitted by contact with infected persons rather than by consumption of contaminated products, it may be challenging for the insured to prove as a matter of fact that the coverage is triggered. The insuring clause will need to be examined carefully, as language such as ‘may cause’, ‘would cause’, or ‘likely to cause’ will all set different bars to be met. In any case, voluntary recalls carried out primarily as brand protection exercises, where there has been no actual contamination, will not usually be covered.
Product Liability
What might be covered?
In the event that a contaminated product in the recall scenario considered above should actually infect consumers, this could obviously lead to personal injury claims that would fall for coverage under a product liability (or general public liability) policy. However, given the apparent mode of transmission of the virus, as well as the likely causation difficulties that would arise, the likelihood of these type of claims may be remote. Any significant exposure is more likely to lie with manufacturers of pharmaceutical, medical and sanitary products used to prevent transmission or treat the symptoms of the virus, which may be alleged to be defective in failing to prevent or treat the illness, or by causing side effects.
What are the difficulties?
As with public liability claims (which may be covered under the same general liability policy), pollution exclusions may be relevant. More importantly, coverage issues are likely to arise in respect of any claims regarding the products’ efficacy i.e. their ability to perform the intended task of preventing transmission or treat symptoms. Many policies will contain efficacy exclusions, meaning that only liability for injury or damage caused by the product would be covered, not for the product failing to fulfil its intended or advertised function. In that case, a claim for injury caused by side effects of a medicine or vaccine would likely be covered, whilst a claim that a vaccine or device had failed to prevent infection, or that a medicine had failed to treat or cure the illness, would normally not.
D&O
What might be covered?
In the face of direct operational restrictions, and in the shadow of an imminent recession, all businesses face stark choices about how best to continue trading and manage the myriad difficulties. As share prices tumble and markets contract, some businesses will inevitably fail to survive, particularly where insurance cover is absent or inadequate to cover losses caused directly and indirectly by the COVID-19 crisis.
Directors of companies may find themselves in the firing line for failing in their duties to manage the company for the benefit of the shareholders, or for misleading investors by failing disclose the nature and extent of the business’ exposure. In insolvency situations, D&O policy limits may be seen as a potential source of recovery for disgruntled shareholders and liquidators seeking to maximise assets for distribution to creditors.
What are the difficulties?
Most D&O policies will contain a bodily injury exclusion, the effect of which will depend on how broadly the exclusion is drafted. Those with ‘absolute’ wording (e.g. ‘based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving bodily injury’) may give rise to coverage challenges in the context of claims flowing from COVID-19, whilst those drafted on a narrow basis (‘for bodily injury’) are unlikely to act as a bar to recovery.
Similarly, pollution or contamination exclusions may come into play, depending on the facts of the claim and the wording of the exclusion. Although these exclusions were introduced primarily to avoid exposure to cleanup costs following environmental disasters, any exclusion using ‘absolute’ wording may potentially be argued to exclude follow-on claims arising from COVID-19-related losses.
Public and Employers’ Liability
What might be covered?
Any business with public exposure, and all businesses with employees, may have concerns over potential liability issues arising from an outbreak, particularly where a decision is taken not to cancel gatherings or events. Establishing causation will be a significant and perhaps insurmountable hurdle for any employee or member of the public seeking to establish liability for illness or even death caused by COVID-19, in that it seems unlikely to be possible to prove when and where the disease was contracted. Nonetheless, it is certainly conceivable that claims may be brought, particularly in more litigious jurisdictions. If so, defence costs at the very least should be covered under the appropriate public or employers’ liability policy.
What are the difficulties?
As in the case of D&O, public liability policies often include pollution exclusions which, if widely drafted, may potentially bar coverage of claims made in respect of COVID-19 contamination and infection. If excluded under a company’s public liability insurance, cover may instead be provided under any standalone environmental insurance that has been purchased.
As a compulsory insurance in the UK, Employers’ Liability cover tends to be more standardised and give rise to fewer coverage issues. However, potentially relevant exclusions include intentional or reckless acts, which might be invoked where an employer is accused of knowingly or recklessly exposing its employees to infection, or failing to protect them
Comment
This is a far from comprehensive review of the coverages that may or may not be available to meet the wide-ranging losses that may be suffered by businesses in connection with the spread of the COVID-19 virus, but it can be seen that all industry sectors and lines of insurance business are likely to be affected, with many potential overlaps and gaps in coverage.
As with the advent of any novel peril, there is no single insurance product designed to address the losses caused by the COVID-19 pandemic, and businesses should therefore consult with their advisors to investigate the availability of cover in their existing programs, and just as importantly to ensure that notification and other claims conditions are complied with in a timely manner.
Coronavirus – Am I Covered? A Routemap to Recovery for Policyholders, Part 1
As the spread of COVID-19 gathers pace, there is increasing concern over not just the potential public health impact, but the financial consequences anticipated by businesses within all sectors. Containment measures implemented by public authorities will hopefully manage the spread of the disease effectively and minimise the physical impact on public health, but may themselves lead to substantial economic losses across the economy.
Most businesses will have comprehensive insurance programs in place, but where should policyholders look for coverage of anticipated losses associated with the spread of the Coronavirus?
The first in this two-part series looks at the two primary policies which may respond to economic losses caused directly or indirectly by the COVID-19 virus – Business Interruption and Event Cancellation.
BUSINESS INTERRUPTION
What might be covered?
Business Interruption cover for loss of profits and increased costs of working was traditionally attached to property insurance only, but can now be found in a variety of commercial policies. This will be a primary focus for businesses facing a reduction in income and increase in costs as they try to cope with containment measures in the first instance and, in the event of the escalation of a pandemic, potentially severe supply chain disruption and the mass absence of employees and customers.
What are the difficulties?
Coverage Trigger
The first challenge to establishing a BI claim is the trigger for coverage. In a property policy, BI cover will usually only be triggered where covered property damage has occurred. That is unlikely to be relevant in the present circumstances, so policyholders will need to examine any extensions available, or the existence of standalone contingent BI cover. In some cases, express Infectious Disease cover may be provided. If not, other extensions, for example suppliers and customers, denial of access and loss of attraction covers may all be relevant, but the availability of cover will be entirely dependent on an analysis of the factual cause of the loss in the context of the specific wording.
Those policyholders with an express Infectious Disease cover or extension might appear to be well-protected, but the scope of cover tends to be very tightly drafted and may not extend to novel pathogens such as the coronavirus.
Notifiable Diseases
Some policies provide cover for losses caused by any ‘notifiable’ disease, which may give rise to difficulties in the case of a novel disease that does not become notifiable until some way in to the period of loss. A decision of the Hong Kong Court of Appeal in the aftermath of the SARS pandemic established that such a clause had the result of reducing the amount of loss covered in two ways. First, losses suffered before the date on which the disease became notifiable were not covered. The decision of a competent authority to make the disease notifiable did not act retrospectively. Secondly, the starting point for establishing the amount of profit lost was the period after the advent of the disease, but before the disease became notifiable, not the period before the first incidence of the disease. To the extent that the business’s profitability has already suffered before the disease becomes notifiable, this will therefore affect the amount the business is able to claim as loss of profit going forward.
COVID-19 became notifiable in Scotland on 22 February 2020, and in Northern Ireland on 29 February 2020, whilst in England the authorities only took the decision to make it notifiable on 5 March 2020. The wording of any policy will therefore need to be checked carefully to establish which date acts as an effective trigger for BI cover. If multiple triggers apply, calculating the amount of covered loss will be complex and no doubt contentious, given the staggered approach in different regions of the country.
Excluded Diseases
Even where broad coverage for notifiable diseases is provided, policies frequently include an express list of excluded diseases. Whilst this is unlikely to include any reference to Coronavirus or COVID-19 specifically (unless issued very recently), it may include catch-all language such as ‘or any mutant variant thereof.’ We have already seen some suggestion that losses from COVID-19 are excluded as a mutant variant of ‘SARS or atypical pneumonia’ (which was itself a form of coronavirus) and the medical definition or categorization of the disease will no doubt give rise to disputes over coverage.
Specified Diseases
Conversely, some policies provide cover for a specified list of infectious diseases, rather than any notifiable disease. Such policies are unlikely to provide coverage from Coronavirus losses, unless it can be established, as a matter of scientific or medical fact, that the COVID-19 virus does fall within the list of defined diseases where ‘variant’ language is used, as in the case of excluded diseases.
Causation
Even where cover for BI losses is established, there will inevitably then be disputes over causation and measurement of loss. Where a business elects to implement or follow certain measures for the protection of its employees or customers, the position will be different from that where it is following mandatory orders from a public authority. Even where a business is forced to close or scale down its operations, there will be arguments over to what extent the losses are caused by the immediate effects on the business, rather than the effects on the wider marketplace and the absence of customers.
We can therefore anticipate ‘wide area damage’ type arguments being raised by insurers, relying on the principle in the Orient Express case, where a hotel in New Orleans was prevented from recovering its lost profits following Hurricane Katrina, on the basis that damage to the wider area meant that even if the hotel had been able to continue operating, it would have had no custom anyway.
The insuring clause, formula and any trends clause will need to be examined very carefully in order to understand whether such principles have any application to a claim for BI losses in the aftermath of a COVID-19 outbreak.
EVENT CANCELLATION
What might be covered?
Where business interruption cover is unavailable, or inadequate to meet losses suffered, policyholders in certain industries may be able to turn to event cancellation policies to protect them for some of the same losses. These policies cover losses caused directly by the cancellation of a specific event as a result of one of a list of specified perils (or alternatively by any cause not expressly excluded), and where triggered are intended to compensate the business for its lost profits and increased costs as the result of the cancellation.
Event cancellation policies provide coverage for a wide variety of losses suffered by the organiser of the event following cancellation. Cover is not provided for the losses of attendees of cancelled events, who will need to rely on the terms and conditions of the relevant ticketing, travel and accommodation providers, as well as any applicable statutory provisions, to recover their lost costs as a result of the cancellation.
What are the difficulties?
Trigger
The terms of cover provided in event cancellation policies are highly bespoke and there is no standard approach. Some event cancellation policies may simply not provide – or may exclude - cover for cancellation caused by infectious disease. For those that do, the cover may only extend to an outbreak on the insured premises or within a specified radius, and may exclude pandemic circumstances. The reverse can also be true, in that an exclusion may only preclude cover of cancellations due to local outbreaks. As ever, the policy wording is determinative.
Mandatory or voluntary cancellation
The decision to cancel an event is not taken lightly. Even so, insurers may argue that cancellation of an event was not ‘necessary’ or ‘unavoidable’ (depending on the specific policy wording in question) in the absence of any direction or recommendation from a competent authority. Similarly, coverage is unlikely to be provided if a decision is taken to cancel simply because of low ticket sales caused by COVID-19 concerns.
Infectious diseases – excluded, specified, or notifiable.
The comments above in relation to business interruption losses apply equally to event cancellation cover, which may contain broadly equivalent definitions and trigger provisions. The notifiable date of the disease becomes even more critical in the context of event cancellation cover, since any event cancelled before the disease became notifiable will simply be uncovered. The divergent dates on which COVID-19 became a notifiable disease in Scotland, Northern Ireland and England may therefore become particularly relevant to claims in this area.
COMMENT
It can be seen that whilst most businesses face potentially significant, but as yet unknown financial losses flowing from the impacts of the spread of COVID-19, the availability of insurance coverage for such losses is far from certain and likely to be contested. Public comments by insurers indicating that they consider their aggregate exposure to be low, and that most losses will be excluded, confirm this to be case.
Business Interruption and Event Cancellation insurance may not respond at all, or may not be adequate to meet the actual losses suffered by the business. Part 2 of this series will therefore examine potential coverage for specific losses which may be available under a wide range of other existing policies.
Aaron Le Marquer is a partner at Fenchurch Law
Ciara, Dennis and Ellen – an ABC (and CDE) of BI Claims
As storms Ciara, Dennis and now Ellen batter extended parts of the UK, with some areas suffering the worst floods in 200 years, insured losses have already been estimated at £200M and will continue to rise. For individuals whose homes are damaged the effects can be devastating, but effectively addressed by adequate property insurance. Businesses may face more complex insurance issues in order to recover losses arising not just from damage to property and machinery, but to the business itself, whose turnover and profits may be reduced or even eliminated in the immediate aftermath of a flood or other severe weather event. Whilst revenue may take an immediate hit, wages and other overheads must continue to be paid, and in the absence of timely and sufficient financial support, the business’s ability to continue trading may be threatened.
Business interruption cover is therefore an essential component of any business’s property insurance programme. But claims for loss of profit, which must be calculated on a hypothetical basis with many variables, are inevitably complex and drawn out, making Business Interruption claims fertile ground for disputes.
What issues do businesses and their brokers need to consider in order to make sure they are adequately covered and their claims are paid in full?
Wide Area Damage
The notorious issue of wide area damage, following the decision in Orient Express Hotels Ltd v Assicurazioni Generali SPA is a recurrent headache for any insured bringing a BI claim following a catastrophic weather event, and particularly affects those operating in the hospitality industry or other sectors relying on customer footfall. We have previously discussed the merits of the Orient Express case as part of our series “The Good the Bad & the Ugly: 100 cases every policyholder needs to know" but in summary, the claim was brought by a hotel in New Orleans, which suffered significant damage from Hurricane Katrina, leading to its closure for a period of two months. The surrounding area was also devastated by the storms, with the entire city shut down for several weeks. The court found that the hotel was prevented from recovering its business interruption losses on the basis that they were not caused not just by the damage to property, but by the damage to the wider area. Even if the hotel had not been damaged, it would have suffered the same loss of profits since New Orleans was effectively closed for several weeks due to widespread flooding.
In our view the approach taken in the Orient Express case is wrong in principle, and represents an unmerited windfall to insurers in catastrophic event circumstances: the more severe the event, the less insurers pay. However, until challenged in the higher courts, it remain a potential trap that must be addressed. Insureds and their brokers should therefore ensure that they have a clear understanding of how any business interruption coverage will respond in the event of a catastrophic weather event that will affect not just the insured property, but the area at large. It is important to ensure that the insuring and trends clauses are drafted as broadly as possible, so as to respond to losses caused by an insured peril, not just those arising directly from damage to insured property. Where possible, Denial of Access, Suppliers and Customers, and Utilities extensions (also known as contingent business interruption cover) should be incorporated - without sublimit - to ensure that loss of profits remains insured even where the business itself suffers no damage to property.
Underinsurance
An apparently straightforward issue, but one that leads to significant reduction of BI recovery perhaps more than any other, is underinsurance. Reaching the correct value for the sum insured is not a straightforward matter, and is often misunderstood. For example, Business Interruption losses are often insured on a Gross Profit basis, but care needs to be taken to ensure that the Gross Profit declared to insurers is calculated according to the gross profit definition in the policy wording, which is likely to differ significantly from the method of calculation used by businesses in their internal or published accounts. In particular, wages are not normally included in an accountant’s gross profit figure, but should be included in the insurable Gross Grofit. However not all cover is written on a Gross Profit basis, and alternative specifications (methods of calculation) include Turnover, Gross Revenue, and Increased Costs of Working. Each of these specification categories appears in many varieties with subtle differences. A detailed understanding of the cover provided by the insuring clause and specification is therefore vital in order to calculate the correct sum insured, and the advice of insurance brokers in making sure that cover is tailor-made to the business is crucial.
Indemnity Period
Underinsurance in BI claims can arise not just from an inadequate sum insured, but from selecting an insufficient indemnity period. Businesses must ensure that they insure for an indemnity period that is long enough for the business to recover in catastrophic circumstances. This will depend on the nature of the business of the question, but will often extend beyond the standard 12-month indemnity period. Likewise, the insured should be aware that any specified waiting period i.e. the period immediately following the insured event, will act as a deductible and remain uninsured.
Delays in Payment
When a business suffers business interruption losses from a catastrophic weather event, time is of the essence in seeking insurers’ immediate engagement with the adjustment of the claim. Whilst complex business interruption claims may take many months or even years to crystallise, it is critical that interim payments are sought from insurers at the earliest stage. Without financial support at the time when they most need it, many businesses will struggle to recover. Additional losses suffered as a result of late payment may now form the basis of a damages claim under the Enterprise Act 2015. If the business is likely to suffer further loss if insurance proceeds are delayed (whether that be because the business is forced to borrow at high interest rates, or loss of growth or investment opportunity) brokers and insured should ensure that insurers are aware of this as soon as possible in the claims process. It may affect the behaviour of insurers who wish to avoid potential liability for damages in excess of policy exposure.
Whilst businesses might feel confident that they are fully covered for any BI losses suffered as a result of increasingly frequent flooding and other extreme weather events, there is a complex matrix of issues affecting the recoverability and valuation of losses under the policy, and careful attention needs to be paid to these potential pitfalls by businesses and their brokers both at the time of seeking cover and in the preparation of any claim.