Is business interruption as a result of Covid-19 insured? An important ruling in the UK and the state of affairs in other countries

By Evelyn Tjon-En-Fa, Linde Mayer

09-2020

Globally, many companies have been affected by significant business declines and/or closures as a result of the coronavirus measures. This has resulted in great financial losses for many industries and companies. In order to deal with this, some companies have tried to rely upon their Business Interruption (BI) insurance to cover their loss of revenue.

At first glance, this is not an unsound idea, given that, in principle, BI insurance insures organisations against loss of turnover due to business interruption. As a result of the coronavirus-measures, innumerable companies have understandably had to deal with an unexpected and often forced business closure. However, in the Dutch market BI insurance is usually more limited due to its link to building insurance or machinery breakdown insurance. The building insurance covers damage caused by fire, flood, lightning, etc. If the company comes to a standstill as a result, the insurer reimburses the repair of the building and the business damage caused by the standstill (with an excess period). If a machine comes to a standstill due to an unexpected cause, the insurer will cover both the repair of the machine and the business damage caused by the standstill (with an excess period) under the combination of machine breakage insurance/machine-incidental damage insurance. However, depending on the wording of the risks covered (all risks with exclusions), and especially concerning more complex risks, the range of causes of downtime can be greater. This is certainly the case abroad, including the highly relevant London insurance market.
 
Although the insurance market is very internationally oriented, and there is broad consensus on what BI insurance covers, we see different approaches emerging. For this reason, the International Dispute Resolution section has created a 'BI tracker'. This lets you see at a glance – and keeps up to date – how the regulators and courts in a variety of jurisdictions view these policies and the coverage claims that have been made. The BI tracker can be found via this link

The Netherlands

In the Netherlands, the market seems almost unanimous: business damage caused by the coronavirus is not covered by regular BI coverage.[1] In principle, business damage is only covered by insurance if there is material damage to insured goods (such as real estate or inventory), caused by a risk specified in the policy conditions (such as fire or storm). In general, damage that is the direct or indirect consequence of the pandemic - for example, loss of turnover due to a temporary or involuntary closure - does not qualify as property damage, or as another risk specifically mentioned in the policy.[2] Click here for our contribution on the Dutch situation, with further details.

As far as we have been able to ascertain, no discussion has (yet) arisen in the Netherlands. There is also no (test) procedure known yet to test the waters. However, this is different abroad, and precisely because of the international character of BI insurances, this is interesting. 

France

In France, discussions have now begun on insurance cover for the financial consequences of the coronavirus. Insurers take the view that they do not have to pay out, with essentially the same arguments as in the Netherlands and the UK.[3]  However, there is one fundamental difference: the French Government is actively intervening in the dispute and is trying to put pressure on insurance companies to change their policies.[4]  Very soon after the lockdown, on 23 March, the French Insurance Federation (FFA) announced its intention to work on a new regime that could intervene 'in the event of a future major health disaster'.[5]  In addition, on 22 May, a French judge in preliminary relief proceedings ordered an insurer to pay an advance of 45,000 euros to a Parisian restaurant owner who was confronted with business damage as a result of the coronavirus.[6]  The court found that the government measures, which prohibited restaurants from receiving guests and offering their traditional services, provided a sufficient basis of cover for business interruption. The Court rejected the insurer's argument that the pandemic was uninsurable and made it clear that if the insurer had wanted to exclude such a risk, it should have explicitly done so in its policy. Proceedings on the merits will have to be conducted in this case, so the final word has certainly not yet been said.

Germany

In Germany, there is another tendency. Although discussions have also arisen here and court cases have been initiated which have the same stakes as those in the UK and France, compromises already seem to be emerging here. For example, the Bavarian Ministry of Economic Affairs, trade associations and some insurers have worked out a solution for companies in Bavaria that have business damage insurance. They have jointly recommended that insurers should cover a certain (capped) amount of losses in the event of business closures due to the Covid-19 pandemic.[7] Many insurers have announced that they will apply this scheme in the rest of Germany and thus cover 10-15% of the losses. Some insurers have voluntarily declared that they will support their customers even more.[8] 

The UK: Significant FCA ruling issued on 15 September 2020

The discussion in the UK has been the most intense so far. There is much disagreement as to whether professional indemnity insurers should provide cover and, if so, what components of claims they will have to cover. An important reason for this is that there are different (policy) wordings in circulation. Some of these formulations could be beneficial for insured parties.[9]  Since the outbreak of the coronavirus, there have already been several lawsuits brought by policyholders as a result of a refusal of cover by insurers.[10]  However, experts in the UK have stated that they see the ongoing cases as an uphill battle[11] . They argue that the coronavirus has not caused any material damage to organisations and that insurers will, if necessary, use other tactics to avoid or minimise cover.

Following this discussion, the UK Financial Conduct Authority ('FCA') brought a test case before the English High Court in June 2020, in an attempt to provide market certainty. The test case serves to obtain statements from the High Court on the matter: (i) the interpretation of representative and widely used commercial claims policies and (ii) the validity of cover claims arising from the coronavirus of certain policyholders.[12] 

These proceedings have been extremely quick. The hearing of the test case took place in July 2020 and the ruling was published on September 15th. 

The verdict covers more than 160 pages. In short, the ruling provides guidelines for the validity of cover claims by policyholders. The High Court drew up these guidelines after considering 21 representative and common formulations in policy conditions of 8 different insurers. The High Court considers most of the policyholders' arguments valid with respect to the following standard clauses:

  • "Disease wordings: provisions which provide cover for business interruption in consequence of or following or arising from the occurrence of a notifiable disease within a specified radius of the insured premises.
  • Prevention of access / public authority wordings: provisions which provide cover where there has been a prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restrictions.
  • Hybrid wordings: provisions which are engaged by restrictions imposed on the premises in relation to a notifiable disease.” [13] 

The ruling is broadly favorable to insured parties suffering losses as a result of the corona pandemic.[14]  However, this does not mean that insurers must cover all types of damage. Each policy must be viewed against the background of the judgment to determine what it means for that policy (and policyholder).[15]  This may therefore differ from case to case. Nevertheless, the judgment provides a number of specific starting points for the interpretation of standard policy conditions used in the London insurance market. 

The FCA has already indicated the legal impact of the test case on its website:

"The result of the test case will be legally binding on the insurers that are parties to the test case in respect of the interpretation of the representative sample of policy wordings considered by the court. It will also provide persuasive guidance for the interpretation of similar policy wordings and claims, that can be taken into account in other court cases including in Scotland and Northern Ireland, by the Financial Ombudsman Service and by the FCA in looking at whether insurers are handling claims fairly.
The test case is not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and 'causation' issues to provide clarity for policyholders and insurers. It will not determine how much is payable under individual policies, but will provide the basis for doing so."

This means that the ruling is binding on the following insurers with regard to the question of whether a risk is covered, looking at examples of standard policy conditions:

Arch Insurance (UK) Ltd
Argenta Syndicate Management Ltd
Ecclesiastical Insurance Office Plc
MS Amlin Underwriting Ltd
Hiscox Insurance Company Ltd
QBE UK Ltd
Royal & Sun Alliance Insurance Plc
Zurich Insurance Plc

The most recent development is that on Friday October 2nd, interested parties sought the ability to appeal the High Court’s test case judgment directly to the Supreme Court by way of a leapfrog procedure. Usually, a party first appeals High Court’s judgments to the Court of Appeal but, under the leapfrog procedure, one can skip the Court of Appeal and go straight to the Supreme Court.  The High Court allowed the parties to seek permission to appeal to the Supreme Court, and such permission is likely to be sought in the coming weeks. Through this link you can access an article by our British colleagues regarding  the implications of the FCA ruling for the English market.

Since many large companies from the Netherlands and other EU countries insure their risks on the London market, sometimes even under English law, the binding nature of the ruling is essential for these internationally operating insurers. In a subsequent contribution, we will go into more detail about the FCA ruling of the English High Court and we will hone in on the most common conditions in Dutch BI policies. Through this link you can access an article by our British colleagues regarding  the implications of the FCA ruling for the English market.

 

[1] https://www.verzekeraars.nl/verzekeringsthemas/nieuwe-risicos/coronavirus 

[2] https://www.kvk.nl/corona/veelgestelde-ondernemersvragen-over-corona/#489653 

[3] https://www.ffa-assurance.fr/infos-assures/coronavirus-covid-19-et-assurance 

[4] https://www.twobirds.com/en/in-focus/coronavirus-covid-19/business-interruption-insurance-and-covid19-tracker/france 

[5] https://www.ffa-assurance.fr/en/news/coronavirus-insurers-mobilise-and-announce-new-exceptional-measures-protect-people-and 

[6] https://avocatsbcj.com/wp-content/uploads/2020/06/T-com-Paris-22-mai-2020-n-2020017022.pdf 

[7] https://www.bayern.de/betriebsschliessungsversicherungen-bayerische-loesung-fuer-hotels-und-gaststaetten/ 

[8] https://www.bayern.de/betriebhttps://www.twobirds.com/en/news/articles/2020/uk/is-business-interruption-as-a-result-of-covid-19-insuredsschliessungsversicherungen-bayerische-loesung-fuer-hotels-und-gaststaetten/ 

[9] https://lexlaw.co.uk/specialist-business-interruption-insurance-claim-lawyer-policyholder-insurance-covid-19-coronavirus-litigation-settlement-fca-advice/ 

[10] https://www.twobirds.com/en/news/articles/2020/uk/coronavirus-and-business-interruption-bi-insurance 

[11] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3639589 

[12] https://www.twobirds.com/en/news/articles/2020/uk/coronavirus-and-business-interruption-bi-insurance 

[13] https://hsfnotes.com/insurance/2020/09/15/judgment-handed-down-in-fcas-covid-19-business-interruption-insurance-test-case/

[14] https://hsfnotes.com/insurance/2020/09/15/judgment-handed-down-in-fcas-covid-19-business-interruption-insurance-test-case/ 

[15] https://www.fca.org.uk/news/press-releases/result-fca-business-interruption-test-case