Business Interruption Claims – What Losses Could Be Claimed? – The Relevance Of Hurricane Katrina?

We previously wrote about how the Financial Conduct Authority (FCA) is bringing a test case to be heard this month in an attempt to bring some much needed clarity as to whether businesses are able to claim on their business interruption policy due to the impact of the coronavirus on their commercial operations.

The FCA are seeking clarity from the High Court in relation to a sample group of 17 business interruption policies and the test case should help to clarify the position of businesses whose policies include extensions and ‘non-damage’ clauses and have suffered losses as a consequence of the coronavirus.

However, perhaps an even more important question will be addressed, which is if businesses can make a business interruption claim on their policies, what losses can they claim?

Although the FCA test case will not address detailed points about the calculation of loss, it is going to tackle the difficult issues of the degree to which damage has to be directly caused by Covid-19 and what lawyers refer to as “the counterfactual”.

Causation

The FCA is arguing that Covid-19 is, for the purposes of the policy wordings in question, a single national pandemic and the only proximate cause of assumed losses, or at least the dominant cause, and that it is not appropriate to single out separate causes, such as local lockdowns, public authority action, stay at home guidance or advice on social distancing. The FCA says that Government guidance and public authority actions were all part of an indivisible and interlinked strategy which it is impossible to divorce. It argued that in policy wordings “resulting from”, “due to”, “caused by”, “whereby” and “arising from” all have the same meaning and that all is needed to succeed on causation is for there to be some causal link.

In relation to clauses which specifically referred to disease, the FCA notes that the policy wordings could have been drafted to limit their application, for example by saying that cover was provided for “diseases occurring only at the premises” or “diseases only within a [x] mile radius”. In this way insurers could have excluded cover for wider epidemic/pandemic situations but they chose not to do so.

The FCA go on to analyse policy wordings which require the assumed loss to result “solely and directly” from an interruption to the insured’s business activities due to the national response to the pandemic. It makes the point that it is hard to see that there could be any other realistic cause of the loss.

The counterfactual

One of the questions the FCA has asked the Court to consider is the correct counterfactual.

There is a case (Orient Express Hotels v Assicuraziono Generali [2010]) where a hotel in New Orleans suffered physical damage as a result of the effects of Hurricane Katrina. That case represented a somewhat pyrrhic victory for the hotel owners, in that the Court upheld the owners’ claim that the policy should respond but then went onto hold that trading losses had to be based on the difference between a damaged hotel operating in post-hurricane New Orleans and a damaged hotel operating in the same situation rather than in an undamaged New Orleans.

The insurance company paid the hotel’s claims in relation to prevention of access and loss of attraction. However, they did not have to pay for the business interruption claim due to the fact that even if the damage to their premises had not happened, the hotel would still have suffered the same trading losses as the surrounding area was closed off.

Clearly if that view is taken in the business interruption cases it would have a potentially significant impact on the value of any claim. The FCA has put to the Court that the proper test is to assess damages based on a counterfactual where there was no Covid-19 in the UK and no Government orders, guidance or other measures relating to Covid-19.

What do the insurers say?

The eight different insurers have each produced a detailed Defence. Their main position is that a Covid-19 pandemic is not an insured peril.

Arguments they raise include the proposition that the proximate causes for any assumed losses, including the mere presence of Covid-19 in the UK and elsewhere and the measures taken by the Government to prevent the NHS from being overwhelmed, were not an insured peril. They say that for a business interruption policy to provide cover for losses consequent upon pandemics it would be expected that the policy contain clear words to this effect. They also say that simply because a policy wording does not expressly exclude loss arising from pandemics does not mean that insurers should be on the hook for the consequences.

Unsurprisingly, the insurers rely on the Orient Express case to argue that the correct counterfactual is one in which the insured peril is absent but everything else remains the same. They point out that after that ruling specific pandemic cover was available to insureds if they wished to buy that cover. They say that the assumed losses would have been suffered in any event and are therefore not recoverable.