At the end of July, the High Court test case, which has been brought by the Financial Conduct Authority’s (FCA) in relation to business interruption insurance policies, reached it conclusion. The test case aims to provide some much-needed legal clarity for charities and companies in relation to how business interruption insurance should respond to losses suffered by organisations whose operations have been impacted by the coronavirus and the lockdown measures taken by the Government.
Many charities across the UK have been significantly affected with services being postponed and fundraising initiatives been halted. This had then led to some charities and other organisations attempting to make claims for the substantial financial losses they have suffered under their business interruption insurance policies. However, charities and a number of companies across the UK, who believe they have valid business interruption claims, have reported that their claims have been rejected by their insurers.
Consequently, the FCA has taken Court action and have brought forward a test case in the High Court. The FCA are seeking clarity in relation to a sample group of 17 business interruption policies and the test case should help to clarify the position of businesses and charities whose policies include extensions and ‘non-damage’ clauses and have suffered losses as a consequence of the coronavirus.
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 solicitors refer to as “the counterfactual”.
Are lost profits suffered by charities during the coronavirus pandemic covered by business interruption insurance? What does the FCA’s test case mean for charities?
The coronavirus has caused widespread disruption across the world. Charities and small businesses, in particular, have found the current economic environment hugely challenging and have placed their hope in being able to make a recovery of, at least, some of their losses under their business interruption policy.
However, many have been disappointed with the outcome of their claims, and there is a genuine uncertainty over whether specific policy wordings should respond to business interruption caused by the pandemic.
The intention of the FCA in bringing this test case is to provide clarity as to whether charities and businesses can recover losses under two extensions to business interruption cover:
- Infectious diseases – This extension provides cover in certain situations for business interruption where an infectious or notifiable disease has arisen at or within a given geographical perimeter of an organisation’s premises;
- Prevention of access – Which allows for cover where access to the commercial premises of a charity or business is not permitted or hindered due to action implemented by a public authority, e.g. lockdown measures.
The FCA’s test case will not provide a comprehensive solution to business interruption disputes, but the decision of the High Court is likely to settle some very important points of principle and its ramifications are likely to be felt outside business interruption and in other wider areas of insurance law.
What is business interruption insurance?
As mentioned above, business interruption insurance is often provided by way of an extension to an insurance policy – most commonly where there is property damage. It provides for insurers to pay lost profits and/or additional business expenses caused by an insured peril.
So, for example, if a property is damaged by flood and the charity cannot operate, cover may be provided for both the flood damage and any loss of profits while the premises are closed.
Is the coronavirus covered by business interruption insurance?
The majority of charities and organisations are not likely to have business interruption cover and, of those that do, there are a small number of policies that inarguably cover business interruption caused by the coronavirus pandemic. However, there are many more policies where the position is genuinely unclear.
It’s doubtful that coverage connected to property damage will cover losses incurred by a charity arising from COVID-19. But there may be other coverage clauses that do not require damage to a charity’s property, and, in those cases, the policy will usually set out a list of the insured perils, which can include infectious diseases.
For example, the diseases covered are often specifically listed and some policies include reference to ‘coronavirus’ or ‘SARS’. Insurers have tended to argue that such wording does not capture the ‘new coronavirus’. However, charities and companies have said that insurers had the option to define the terms in the policy precisely and chose not to do so, and they must, therefore, bear the cost.
There are a significant number of these types of arguments involving very detailed analysis of specific wording that are taking place between policyholders and insurers and, for that reason, the FCA decided to run a test case, seeking Court declarations as to whether cover is provided by the particular wording of some policies.
What should charities look out for in their contracts or individual policies to check whether the pandemic is covered?
Whether a claim for COVID-19 is covered by a policy will depend on the very precise wording of the policy and, now, the decision of the High Court in the FCA’s test case. At this stage, it may be easier to say if a claim is definitely excluded by the terms of the policy – e.g. ‘loss connected to pandemics’ may be a specific exclusion in some policies.
It may be worth looking to see if there is a more general provision in the policy, such as a non-damage denial of access clause, which typically covers losses arising from ‘an incident’. Under such a non-damage denial of access extension, the losses arising to the charity as a direct result of such denial of access due to the coronavirus could be covered by the policy.
There are differing legal views as to whether this type of clause is triggered by a pandemic and whether, if it is, there has to have been an outbreak at the charity or organisation’s premises or within a specified proximity of their premises to be able to make a claim, Again, the precise wording will be important.
What should charities do if they want to make claims on their business interruption insurance policies due to the effects of the coronavirus?
If you do believe you have business interruption cover, it’s important that the charity’s senior management team starts to keep careful documentary evidence of the way in which the charity has been interrupted by the coronavirus and the amount of the losses incurred.
How can Nelsons help?
If you are a charity and would like further advice in relation to business interruption claims, please contact Cathryn or another member of our expert team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.