Recovering Your Loss

The Covid-19 pandemic, and the government controls and restrictions put in place as a result, have led to widespread disruption for individuals and businesses alike.  For many, this has resulted in financial loss.  On 15 January 2021 the Supreme Court handed down its landmark decision (FCA v Arch Insurance (UK) Ltd and others [2021] UKSC 1) in a judgment that paves the way for those with business interruption insurance (“BII”) policies to claim pay-outs as a result of loss suffered due to the Coronavirus pandemic and the resultant lockdowns.

The Scope of Business Interruption Policies

BII policies traditionally cover losses suffered by a business that have arisen from unexpected events, such as fire or water damage to physical property.  However, BII policies can be extended to cover specified events including (1) loss caused by the occurrence of a notifiable disease at or within a specified distance of the policyholder’s business premises; (2) loss caused by the prevention of or hindrance of access to, or use of premises as a result of public authority closures or restrictions; (3) hybrid clauses – being loss due a combination of (1) and (2) above.

The Effects of the Covid-19 Pandemic

In March 2020 many businesses were forced to close by the government-imposed lockdown.  This resulted in businesses sustaining enormous losses.  Many with BII policies attempted to make a claim, however, a number of insurers initially denied cover with many seeking to rely on very narrow or vague policy wording.

In response to numerous complaints by policy holders, and in an attempt to ensure policyholders were treated fairly by insurers, the Financial Conduct Authority (the “FCA”) asked the High Court to give clarity on the meaning and effect of 21 different types of policy wording in a representative sample of selected BII policy wordings from eight insurers in the context of Covid-19 claims as a test case.   There were two main issues in dispute:

(a)   Coverage – the insurers believed that certain BII policies which provided cover without the need for physical damage to property, may not cover losses resulting from the Covid-19 pandemic;

(b)   Causation – the insurers disputed whether, as a matter of law and fact, the necessary causal link could be established between the covid-19 pandemic and the loss suffered by the policyholders.  Of particular relevance under this head was the impact, if any, of trends clauses or similar equivalent provisions.

The Decision

The High Court handed down its complex judgment which runs to over 150 pages on 15 September 2020 in which it found in favour of the FCA (and therefore policyholders) in most cases.  However, the Judgment did not say that all of the insurers in the test case were liable across all of the 21 different types of policy wording and each policy needs to be considered against the Judgment to understand its effect.

Following the High Court decision many insurers decided to pay claims on some BII policies.  However, once it became clear that the FCA were not going to be able to resolve all of the outstanding issues with the defendant insurers to enable pay-outs on eligible claims, an appeal was made to the Supreme Court. 

In a major boost to policyholders, the Supreme Court delivered a landmark ruling in January 2021, in which it unanimously dismissed the insurers’ appeals and held that in interpreting insurance policies, like any other contract, an objective interpretation must be taken by asking what the reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean.

Whilst the policy wordings considered by the Supreme Court were representative the ruling is likely to affect other policies that have identical or similar wording. 

Key Points

What should I do?

If you have the benefit of a BII policy that covers your business for loss of income during periods when the business cannot trade as usual due to an unexpected event, and your business performance has declined due to the Covid-19 lockdown, you should consider making a claim. 

When should I do it?

You must be mindful of any specific time limits that might apply in notifying your insurer of a claim and act quickly to avoid unnecessary delay.

What if my claim has previously been refused?

Even if your insurer previously notified you that you were not covered you should consider whether that position has changed in light of the recent ruling from the Supreme Court.

Do I need to mitigate my loss?

Yes.  You should continue to consider the availability of remote working, implement protective (social distancing) measures, distance selling and reducing costs to the business in order to demonstrate that you have done all you can to mitigate your loss.

How can I value my claim?

A review will be needed to compare the actual performance of the business with the anticipated performance that would have been achieved had it not been for the outbreak of Covid-19.  It is likely that financial assistance will be needed to assist with the computation of these calculations.

What losses can be claimed?

The type and amount of loss you can claim for under the policy depends on your policy wording including any limits or exclusions.  Depending on the wording of your policy the following non-exhaustive heads may be recoverable either in part or in full:

·       loss of revenue or loss of gross profit

·       Increased business costs/expenses caused by the pandemic.

Can I claim if I obtained a government grant?

Whilst some insurers have been making deductions from claims payments for some types of Government support that policyholders have received during the pandemic, the FCA have encouraged insurers to consider the appropriateness of such deductions on a case-by-case basis in the context of the insured’s policy and reminded insurers of the need to treat their customers fairly.  As such insurers should consider the precise terms of the policy, the claim that is made and how the policyholder applied any support received before determining whether receipt of such funds has an impact on the pay-out.

Summary

Whilst the Supreme Court’s ruling is a major boost to policyholders, it is important to realise that the ruling provides helpful guidance only.  Although the judgment is binding on the eight insurers that agreed to be parties to the test case, for others, whether a particular insurance policy provides cover for losses resulting from Covid-19, will need to be considered on the wording of the policy itself, against the facts and in light of the Supreme Court’s ruling.

We are able to provide specialist advice to policyholders on making claims and work with accountants to calculate losses.  

For advice, please contact our commercial dispute resolution specialist Erica Simpson.