By Nick Sutton
Nick Sutton recently joined Fletcher Day as a Partner in the Dispute Resolution team and specialises in insurance law. In this article, he explores the key issues and considerations arising out of the Supreme Court's landmark decision in Financial Conduct Authority v Arch Insurance & Others  UKSC 1 regarding business interruption insurance claims and what this means for many of Fletcher Day's clients who are financially distressed and potentially facing insolvency in the wake of COVID-19.
The Supreme Court's decision undoubtedly provides clarity and guidance on important principles of business interruption ('BI') insurance law in favour of policyholders, which means that insurers will now have to pay out on thousands of claims where there is deemed to be cover.
However, there is still scope for interpretation in relation to the construction of a considerable number of other policy wordings that were not specifically considered in the case and there remains uncertainty in relation to the extent of indemnity and quantification of loss of profits under policies, which is likely to give rise to disputes.
If policyholders do not receive the entirety of their lost income resulting from the COVID-19 pandemic, then many businesses are unlikely to be unable to recover from the economic impact of the lockdown restrictions and may have no choice but to cease business and seek bankruptcy on winding up or will find themselves subject to a creditor filing a petition against them.
Therefore, it is critical that businesses seek proper legal advice and support in order to recover the maximum compensation that they are entitled to under their BI insurance policy.
THE COURT'S DECISION
In respect of disease clauses, the Court held that cover should generally be provided for loss of profit and expense resulting from:
- interruption or interference with the business following / arising from / as a result of any notifiable disease / occurrence of a notifiable diseases / arising from any human infectious or human contagious disease manifested by any person within 25 miles / 1 mile / the 'vicinity' of the premises / insured location.
In respect of prevention of access clauses, it was determined that some, but not all, policies should respond if there has been:
- Prevention / denial / hindrance of access to the Premises due to actions / advice / restrictions of / imposed by order of a government / local authority /police / other body due to an emergency likely to endanger life / neighbouring property/incident within a specified area.
And finally, in respect of hybrid clauses, the Court confirmed that cover would usually be provided if there has been:
- An interruption to the business / due to an inability to use the premises / due to restrictions imposed by a public authority / following an occurrence of disease.
Each of these clauses contains a series of sequential causative elements which must all be satisfied to trigger an insurer's obligation to indemnify a policyholder.
Although the Supreme Court construed the disease clauses more narrowly than the High Court, it gave wider interpretations to key coverage words in relation to the prevention of access / hybrid wordings to include partial closure of a business as well as closure of an entire business. Most importantly, the Court's findings on causation mean that it will be very difficult for insurers to refuse cover, or reduce an indemnity payment otherwise due to a policyholder, on the basis that losses were caused by some other uninsured peril, the underlying cause of which was also related to COVID-19. The Court's findings in this regard will have significant implications on the amount of compensation that an insured can recover under their policy.
Under many 'disease' policy wordings, cover is limited to a notifiable disease occurring in a prescribed radius (such as within 1 mile of the business premises). In such cases, you will need to prove that coronavirus was actually present within your locality in order for the policy to respond and provide cover. Whilst on first reading of your policy it might seem obvious that you do or do not have cover, there are often exclusions to certain provisions and/or exemption clauses which may be 'buried' in the policy and may or may not trigger or negate cover, depending on the particular wording. As such, it is critical that clauses determining whether you have cover under the policy are carefully considered before deciding to proceed with or abandon your claim.
Unfortunately for many businesses, COVID-19 is usually not covered under standard commercial 'all risks' policies but only extensions of such polices. However, as with most types of insurance, there may be exceptions to this general rule and occasionally some policies will offer cover, albeit limited or capped (see below).
The High Court (commercial division) has recently confirmed in the case of TKC London Ltd v Allianz Insurance PLC  EWHC 2710 (Comm) that BI cover contingent on property damage or physical loss will not provide cover in relation to COVID-19 related losses. As such, you will only have cover for COVID-19 related losses under your BI policy if it provides for non-damage business interruption i.e. pure financial loss, rather than business interruption cover based on property damage and/or physical loss to stock and/or the premises.
If you believe that your business has BI cover but have been told by your broker and/or insurer that the policy does not cover COVID-19, then the policy wording may not have been properly interpreted. If you believe you may have been misadvised in relation to your commercial insurance programme and/or the policy does not provide the cover you thought it provided, you should seek independent legal advice as soon as possible.
QUANTIFICATION OF LOSS
When calculating the indemnity under the policy, you should have in mind the fundamental purpose of BI insurance, which is to put your business back in the position it would have been but for the insured peril i.e. the pandemic, subject to any limit of indemnity under the policy. An insurer is not necessarily required to put your business in the same financial position it was in before the pandemic, if it is clear that your business was already in financial difficulty or there is some other good reason (backed up by cogent evidence) as to why your business would not have been doing so well in March 2020 and beyond in any event.
To deal with this 'unknown' factor, most policies will contain 'trends clauses', the aim of which is to ensure that figures are adjusted to represent, as accurately as possible, the results which would have been achieved during the period covered by the policy had the insured peril (and its underlying or originating cause) not occurred. Accordingly, the indemnity payment should be calculated by reference to what would have been generated in terms of revenue had there been no COVID-19.
Likewise, the Supreme Court has ruled that pre-trigger losses should not be subject adjustments under a trends clause to reflect a measurable downturn in the turnover of a business due to COVID-19 before the insured peril was triggered. In accordance with its interpretation of the trends clauses, the Court held that adjustments should only be made to reflect circumstances affecting a business which are unconnected with COVID-19.
In other words, if there is evidence that there are other reasons for the downturn in business e.g. losing a valuable customer before the pandemic, then those amounts of lost revenue will not be included in calculating the indemnity payment.
There are other ways that insurers will seek to reduce claims, which could include, but are not limited to, arguing that:
- Your business was financially underperforming and/or making a loss before the consequences of the pandemic and lockdowns took effect;
- You suffered a downturn in business before or during COVID-19 by reason of a valuable customer or client ceasing business or simply deciding to no longer conduct business with you;
- COVID-19 was not present in your locality (unlikely to apply to businesses based in larger towns or cities);
- Your financial performance projections for FY20/21 are inaccurate or overstated;
- There is a limit of indemnity or capped payment under the policy i.e. the policy will pay out no more than £100,000 during the given policy year;
- Job retention scheme (furlough) payments, Government business loans and/or grants should be deducted from the indemnity payment;
- Any reductions in rent and business rates should be deducted from the calculation of loss as 'savings';
- The impact of Brexit would have caused significant disruption and loss to your business in any event.
Assessing the total loss can often be complex and will typically require experienced insurance law and claims experts to determine the appropriate indemnity payment under the policy.
Whether or not your business has adequate BI cover will depend on the interpretation and application of specific policy wording and will be fact sensitive. You will need to take into account the location and type of business you are running, the extent and impact of any denial of access and/or inability to use the premises and how your business was performing financially prior to the various restrictions and lockdowns starting in March 2020.
Further, your indemnity (the amount to be paid out) will depend on any limitation of liability, the application of trends clauses and the counterfactual evidence of how your business was likely to have performed had the pandemic not occurred. Many policyholders will be looking for much-needed cash quickly and may under-settle their claim as soon as possible having been faced with the need to litigate if such a reduced offer is not accepted.
However, for the medium to long-term survival of your business, refusing any initial offer made and negotiating an increased amount could mean the difference between recovering the monies needed to redeploy staff, pay outstanding debts and ultimately put your business in a strong financial position as opposed to facing insolvency due to the inability to discharge all liabilities.
For the time being, companies based in the UK will continue to benefit from the Government's suspension of the use of Statutory Demands and Winding Up Petitions until 31 March 2021, as prescribed by the Corporate Insolvency and Governance Act 2020, save in cases where the debts arose before COVID-19 or are not related or directly referable to the pandemic. However, if policyholders do not take action to obtain the capital injection they require (most of which may come from a recovery under their BI insurance policy), they are likely to face creditor actions from April onwards.
Assuming that your business has no pre-pandemic debts that you were unable to pay before the impact of COVID-19 took hold, then a successful BI insurance claim may, in many cases, offer your business a way out of potential insolvency and allow you to begin trading as a going concern again, once lockdown restrictions have been lifted.
There is no doubt that BI insurance indemnity payments can offer an essential lifeline to many businesses that are financially distressed. However, establishing cover is just the start of what is likely to be a highly contentious and protracted battle with insurers and many businesses will only be able to survive and avoid insolvency if they maximise the compensation for their loss of profits resulting from the pandemic.
It is, therefore, absolutely critical that you are sure your insurer is offering to pay out the correct amount under the policy before agreeing any settlement and recommended that you get the right legal advice and support to achieve the best outcome for your business.
KEY QUESTIONS FOR YOU TO CONSIDER
If your business has been impacted by local and/or national lockdowns, then you should consider the following questions:
- Has your business suffered a loss of income and/or profit, or a shortfall in projected profits, solely as a result of the pandemic and restrictions imposed on your business?
- Do you believe that you have BI insurance, but your insurer is refusing to provide cover?
- If cover has been agreed, or indemnity granted, have you been offered the amount you believe you are entitled to under the policy?
- Has there been full and proper consideration of business trends, profit and loss accounts, as they apply to your individual business?
- Do you believe you have been 'short changed' and not been adequately compensated for your pandemic-related losses?
- Have you been properly advised in respect of your commercial insurance programme generally and appropriate cover for your business (both before the pandemic and upon renewal of your policy)?
- Did you believe that you had BI cover for events such as a pandemic, but are now being told that you do not?
- If your insurer were to pay out and compensate your business for its losses under the policy, could this potentially mean avoiding insolvency?
If any of the above questions arise in respect of your particular BI insurance claim and/or you are unsure of the answer, then contact Fletcher Day for advice.
HOW FLETCHER DAY CAN HELP YOUR BUSINESS
At Fletcher Day, we are here to support the business communities and individuals we serve who have been financially affected by the pandemic.
We understand that the purse strings are very tight for many businesses at the moment and funding your case might be difficult. We can offer affordable fixed or flexible funding options to assist you in progressing your claim and to suit your business needs, depending on the merits, prospects and value of your claim. In some cases, we may be able to offer a Conditional Fee Agreement (also known as a 'no win, no fee').
We will assist you in obtaining and putting into place an After The Event ('ATE') insurance policy , which means that if you are unsuccessful in your claim, you will not have any liability to pay your insurer's legal costs of defending any court action.
If you instruct us to act in your claim, you will receive commercial, impartial, and transparent legal advice and support from approachable insurance litigation specialists, giving you peace of mind and enabling you to concentrate on running your business and avoiding the stress and inconvenience of having to manage your claim.
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No liability is accepted by the author for any errors or omissions (whether negligent or not) that this article may contain. The article is for information purposes only and is not intended as legal advice. Professional advice should always be obtained before applying any information to particular circumstances.