The COVID-19 pandemic has caused substantial and widespread disruption to businesses across the UK, preventing many from operating in their entirety. Consequently, business owners may look to recover some of their losses by claiming under their business interruption ("BI") insurance policies.
However, it is currently unclear whether BI policies will provide coverage and, if so, what losses will be payable by insurers. Since the start of the Coronavirus outbreak, a number of policyholder claims have been reported in response to initial rejections by insurers. As a result, the Financial Conduct Authority ("FCA") has decided to commence a 'test case' in the English Court, in an effort to provide certainty to the market.
In broad terms, there are three key types of BI cover:
All of these types of cover may potentially be engaged in connection with COVID-19, although most businesses' focus will be on number 3 (non-physical damage BI cover).
Usually, the main loss protected under BI policies is the insured's lost income or reduction in turnover. In other words, the amount by which the insured's turnover during the crisis falls short of its standard turnover, less any costs – which would normally be payable from the turnover – that have ceased or reduced during the crisis.
Other types of loss that may also be recoverable include increased costs of working (e.g. a business having to operate from alternative premises), penalty sums that a business may be forced to incur under its contracts, and public relations/crisis management costs.
On 1 May 2020, the FCA announced its intention to start a test case in order to obtain Court declarations regarding: (i) the interpretation of a select group of BI insurance policies; and (ii) the validity of certain policyholders' COVID-19 coverage claims under those policies. Although the FCA's focus is on the position of Small and Medium Enterprises (or SMEs), the case is likely to effect the position of all businesses across a large number of sectors which hold BI policies and are impacted by the pandemic.
As part of its selection of the policy wordings, the FCA consulted with over 1,200 policyholders and brokers. 17 specific policies have been selected in the hope that they will be "representative of all the most frequently used policy wordings that are giving rise to uncertainty" . The list of the policy wordings being considered can be found here.
On 9 June 2020, the FCA started its expedited claim against 8 insurer defendants in the English Commercial Court under the Financial Markets Test Case Scheme. The parties' statements of case were served between 10 June and 3 July 2020. An 8-day Court hearing is scheduled to take place on 20 to 23 and 27 to 30 July 2020, with a Court judgment expected to be handed down shortly thereafter in August/September 2020.
The result will be binding on the defendant insurers in the case, and will provide guidance for the interpretation of similar policy wordings. Specifically, the action will provide certainty for policyholders at a lower cost than would be the case if policyholders took their own legal action.
The central issues being considered are as follows:
We consider that businesses who have BI policies in place should take the following important steps:
1. Check the terms of your BI policy to determine whether you may have cover in principle and, if so, whether there are any requirements or conditions to be satisfied. The precise wording of your policy will be critical. Specifically:
It is often an express condition that an insured needs to notify the insurer about the relevant insured event and/or loss within a strict time limit. The policy may also specify certain formalities to be followed when giving notice. Many policies permit notice to given by an insured through its insurance broker, if applicable.
After the outbreak of SARs in 2002, many policies now expressly exclude loss arising from contagious or infectious diseases.
The policy may have: (i) a maximum indemnity time period during which loss will be recoverable; and (ii) financial caps regarding the maximum sum that can be paid out. Moreover, many policies expressly set out the basis by which any loss of income, loss of profit or increased costs of working should be calculated.
2. Check whether your BI policy is included within the selected policies under the FCA test case. If so, the arguments presented in the FCA test will be particularly relevant to your position.
3. Keep, maintain and update documentary evidence of the losses that you are suffering or incurring. This may include: (i) up-to-date financial records and accounts (including for turnover and profit); (ii) records of employee absence and reduced staff costs; (iii) invoices for additional expenditure that you have incurred; and (iv) written records of business decisions that you have taken in response to the pandemic.
4. If you have coverage in principle, consider setting out your claim in writing to your insurer. Although insurers will be closely monitoring the progress of the FCA test case, that case does not prevent policyholders from advancing or settling their own claims against insurers.
5. If it is unclear whether your policy covers BI as a result of COVID-19 when you would have expected that it should have done, investigate the circumstances in which the relevant policy was placed – especially where the insurance was placed by a broker or other intermediary. One avenue to explore is whether your broker placed your insurance policy properly in accordance with your instructions.
6. Check whether your policy is due to be renewed in the short term. Insurers may seek to amend future policy renewals by excluding or limiting cover for contagious or infected diseases.
For further related disputes content please visit Disputes+, Bird & Bird’s dispute resolution knowledge portal.
 Business Interruption Insurance Test Case, Representative Sample of Policy Wordings, 9 June 2020 - https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-tracked-representative-sample-of-policy-wordings.pdf
 This is a scheme for financial claims that raise issues of general importance that require immediate Court guidance.