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Business Interruption?

Saturday, May-21, 2022

Business Interruption?

Hayley Carr

We are all too familiar with the difficulties posed by the pandemic and the unprecedented challenges it brought to our day to day lives; particularly, how we work, communicate and travel. Many businesses in the UK faced extreme challenges and suffered financially as a result. Litigation Executive Hayley Carr looks at the role of business interruption insurance.

Has your business suffered?

The pandemic has and remains the cause of significant loss and distress that has detrimentally impacted UK businesses through decreased annual turnover and, in many instances, forced closures.

According to data from the Office for National Statistics in 2021, approximately 396,155 firms closed in 2020. As of January 2022, roughly 32 per cent of all businesses currently trading reported decreased turnover compared with normal expectations.

Rules and regulations were implemented to combat the health and safety concerns posed by Covid; the consequential and harsh reality being that such regulations caused businesses immense disruption and financial strain. As a result, a large number of claims were brought under business interruption insurance policies. Many insurers disputed liability, leading to widespread concern and contractual uncertainty surrounding the validity of business interruption claims.

The landmark Supreme Court judgment on business interruption insurance policies offers greater clarity and certainty to both insurers and policyholders and removes the need for the affected parties to debate key issues of causation that are pertinent to thousands of claims brought off the back of the pandemic.

Test case

The Financial Conduct Authority (FCA) recognised the complex plethora of issues surrounding business interruption policies and the need for contractual certainty over the validity of business interruption claims.

A key concern for businesses during and post pandemic was whether insurance policies covered pandemic-related business interruption.

In the public interest, the FCA brought a test case in the High Court of England and Wales in 2020. The test case commenced proceedings for a declaratory judgment as to the interpretation and effect of a representative sample of 21 business interruption policies, issued by six insurers.  The High Court issued its judgment in July 2020. The FCA and insurers appealed some aspects of the judgment to the Supreme Court.

Supreme Court judgment

The Supreme Court judgment, handed down in January 2021, provides authoritative guidance on the interpretation of similarly worded policies to those considered in the test case. Depending on the wording of the individual policy, the judgment entitles policyholders to claim in respect of losses arising out of the presence of Covid in their local area and the related restrictions imposed by Government bodies.

The judgment provides the basis for determining how much is payable under individual policies and has been distilled into a set of declarations that culminate the test case judgment and stipulate whether the representative policy samples cover losses arising from Covid. Despite the widespread application that the judgment was designed to achieve, each claim must be determined on a case-by-case basis.

Key clauses

Three common clauses were examined within the representative sample of policies: disease clauses, prevention of access clauses and trends clauses.

Disease clause

The disease clause typically provides cover for losses caused by the occurrence of notifiable human infectious or contagious diseases within a specified radius of the insured’s premises. The Supreme Court held that cover will be provided if there has been at least one incident of Covid reported within the radius specified in the policy. This is evidently a low threshold given the outbreak of Covid across the UK, entitling many policyholders to claim cover.

Prevention of access clause

Government restrictions that prevented or hindered access to or use of the premises are covered by this type of clause, which had previously been interpreted narrowly.

The Supreme Court however adopted a less narrow approach. It determined that even a partial interruption of premises will generally satisfy the terms of an insurance policy. By way of example, it was determined that restaurants will generally be able to claim under its business interruption insurance even during periods where they were allowed to open as a take-away but not a restaurant.

Similarly, when sports clubs played matches but were unable to have fans in attendance, cover will be provided. The broad principle is that the loss of income will be assessed by predicting what the income would have been (in the hypothetical scenario of no Covid) and comparing it to the actual income figure.

Trends clause

This type of clause allows for adjustments to be made to profit figures as necessary to account for any trend/circumstance that would have affected the business, either before or after the event, regardless of whether the insured event arose.

The Supreme Court held that in adjusting the amount paid, all variations or special circumstances affecting the business should be considered in order that the amount paid reflects as nearly as practicable the results which would have been expected if the damage had not occurred.

Conclusion

Although the analysis of the standard clauses highlighted above arose as a result of the pandemic, it is likely that the public can rely on their wider application to similar policies in the business interruption insurance market. For example, the impact of the recent storms, Dudley, Eunice, and Franklin may be covered by the prevention of access clause within your business interruption insurance policy.

With the benefit of the Supreme Court judgment, affected parties can rest assured that their policy will be interpreted in line with the decision, thus offering contractual certainty in this uncertain economic time.

If your business has been interrupted, causing you to suffer loss and you require advice generally or on the interpretation of your specific policy wording, please get in touch with the Litigation Team at McCormicks Solicitors on 01423 530630.

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