insight

UK business interruption insurance test case

23 September 2020

The High Court in London has ruled largely in favour of the insured parties in an important COVID-related business interruption insurance test case brought by the Financial Conduct Authority (FCA). 

The decision clarifies the scope for insurance cover for losses that arose as a result of the COVID-19 lockdowns and will be influential in the New Zealand context.

The context

Business interruption insurance policies generally cover loss of profit resulting from physical damage to insured property but many also provide additional cover, or extensions, in particular situations not reliant on physical damage.

The test case was about non-damage business interruption insurance provided as extensions to business interruption policies, which cover against loss resulting from disease, or public authority action (such as lockdowns), and dangers or emergencies preventing access to business premises.

The decision

The FCA asked the High Court to determine the correct interpretation of a number of business interruption clauses where claimant businesses had not sustained physical damage but were seeking cover for loss of business due to COVID-19.  

The High Court’s extensive judgment interprets a range of different clauses focusing on three main categories:

  • disease wordings (loss arising from the occurrence of a notifiable disease within a specified radius of the insured premises)
  • prevention of access/public authority wordings (loss arising from the prevention of access to the insured premises as a consequence of a public authority action), and
  • hybrid wordings (loss arising from restrictions imposed by public authorities in response to a notifiable disease).

The High Court found that there was cover for losses under most of the sample disease wordings and some of the prevention of access/public authority wordings, although the extent of cover is very dependent on the precise terms of the individual policies.

Helpful findings were that there could be cover even if there was not a complete cessation of business and that the calculation of loss may take account of the effect of the public restrictions beyond those affecting the local vicinity of the insured’s business.

The Court also cast doubt over a well-known precedent 1 relating to a New Orleans hotel damaged by Hurricanes Katrina and Rita where the insurer successfully argued that there was no business interruption loss because the area around the hotel was so devastated that the losses would have been suffered even had the hotel not suffered any physical damage.

The High Court considered that the Orient Express decision would not apply to the policies in issue but in any event concluded that it was wrongly decided. This finding by the High Court should make it easier for claimants to demonstrate business interruption losses where there is an area-wide effect.

Meanwhile in Australia…

The Insurance Council of Australia (ICA) has indicated that it will be filing a test case to seek a ruling on certain business interruption policy wordings. The wordings of many Australian business interruption policies were not updated to reference the Biosecurity Act 2015 and instead include exclusions that refer to the now repealed Quarantine Act 1908. Claimants are hopeful that as a result the exclusions will not apply to their COVID-19 claims.

The ICA has agreed with the Australian Financial Complaints Authority to file a test case to determine the issue of whether the references to the repealed Quarantine Act should be interpreted as references to the Biosecurity Act.

We will monitor developments on the test cases. In the meantime we recommend that clients check their business interruption policy wordings if you think you may have cover and seek advice where needed.

1 Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm); [2010] Lloyd’s Rep IR 531