Have you suffered financial loss due to the COVID-19 pandemic and the resulting restrictions imposed by Government?

On Friday 15 January 2020 the Supreme Court released their judgment in the case of Financial Conduct Authority -v- Arch Insurance UK) Limited and others where they upheld the lower court decision that COVID-19 was a notifiable disease for business interruption purposes.

Businesses need to check their insurance policies to see if their cover is up to date and includes business interruption. Once satisfied on these points they may begin to consider what (if any) losses the business has suffered as a direct result of COVID-19. Unfortunately, this may have come too late for some businesses who may need insolvency intervention, although the court have made it clear insolvency is not grounds in itself for rejecting a claim as you need to consider the business trend following the effects of the pandemic.

The judgment, itself, goes on for 112 pages so this editorial is merely going to provide a broad overview.

The insurers’ arguments

The principal arguments appear to be:
• COVID-19 was excluded because any loss caused by an occurrence of a notifiable disease is excluded for cover where the disease amounts to an epidemic (“The disease clause”).
• Prevention of access to trading premises was not imposed by law (“The prevention of access clause”).
• Insurers’ are not liable to indemnify policyholders for losses which would have arisen regardless of COVID-19 (“The trend clause”).
• The Orient-Express Hotels decision.

The court interpretation

The disease clause.
The court noted policies will list notifiable diseases but may provide for adding to that list where a new disease emerges that is a threat to public health. The court saw no merit in the insurers’ argument as that would make overall policy wording inconsistent.

The prevention of access.
While the court acknowledged it is for the policyholder to prove their loss as a result of COVID-19, prevention of access to trade premises as a result of local authority intervention was sufficient to trigger claims and did not require a law ordering closure. It was also accepted prevention of using trade premises needed to be in compliance with Government instructions and social distancing rules and not purely on grounds of being a hinderance.

The trend clause.
This was designed to assist in quantifying losses. In dismissing the insurers’ argument, the court said the standard turnover and gross profit derived from previous trading is adjusted only to reflect circumstances which are inextricably linked with the insured peril. It was accepted some of the adjustment when comparing past trading trends should include circumstances unrelated to COVID-19 such as a change in management.

Orient-Express Hotels Ltd -v- Assicurazioni Generale SPA

The insurers appear to place reliance on this case, being the only known reported case on business interruption claims. In short, the hotel was insured in the UK but was based and operated in New Orleans. It was severely damaged by hurricanes Katrina and Rita and claims were made for losses suffered as a result of the damage and damage to the surrounding area (of the city) resulting in a decline of income from reduced visitor numbers. At both the arbitration and arbitration appeal the decision went in favour of the insurers whereby losses resulting from the damage to the hotel applied. The losses caused by the surrounding city damage fell outside of the policy.

The Supreme court disagreed and made it clear, had the matter gone to court it would have over-turned the decision of the arbitrators. In reaching this conclusion the court said business interruption arose because both (a) the hotel was damaged and also (b) the surrounding area of the city was damaged by the same hurricanes so were concurrent causes, each of which was, by itself being sufficient to cause the relevant business interruption but neither of which satisfied the ”But for” test because of the existence of the other.

In short, Prevention to access trading premises as a result of COVID-19 guidelines were concurrent causes for business interruption. You would not have been prevented from access to your trade premises had COVID-19 not arisen, causing the “Stay home” and social distancing instructions.

CONCLUSION

Firstly, it must be placed on record, the insurers involved with this vital test case scheme volunteered to be party to the matter under a framework agreement on 1 June 2020. With over 370,000 potential claims worth in excess of £1.2 billion, it was recognised that both the insurers and the policyholders needed clarity. Indeed, two working groups were also allowed to join the case as interveners.

Putting it bluntly, the insurance companies lost and have been ordered to treat COVID-19 as a notifiable disease for business interruption purposes. Indeed, the court said, “It is hoped that this determination will facilitate prompt settlement of many of the claims and achieve very considerable savings in the time and cost of resolving individual claims.”

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk