COVID-19: FCA Business Interruption Test Case Judgment

Last week, the much-anticipated judgment in the FCA Business Interruption test case was handed down by Lord Justice Flaux.

With businesses across the nation having been disrupted by the Government imposed restrictions on the operation of certain trades and the closure of various business premises, the focus was on the insurance industry as to how they would respond to the inevitable surge of claims headed their way in reliance on business interruption clauses contained in insurance policies.

We have been advising a number of clients on whether their business interruption insurance policies are triggered by the Government imposed lockdown that was brought into force in early March of this year.  While this recent judgment provides assurance for some policy holders, there are still a huge number of businesses who have been left high and dry by their insurers.  As ever, the devil is in the detail…

The case was concerned specifically with non-damage business interruption clauses.  Key issues included whether the Coronavirus Regulations, that imposed the closure of business premises and brought in social distancing measures, constituted a “prevention” or “hindrance” of access to premises.  On the whole, it was accepted that most businesses had experienced a prevention of access, with certain exceptions for, e.g., restaurants that had always operated a take-away service.

Of particular interest was whether the existence of the wider COVID-19 pandemic could be considered either a “danger”, “disturbance”, “incident” or “emergency”.  In circumstances where many policies would only pay out where the closure of business premises had been ordered by a statutory body or local authority due to a “danger”, “disturbance”, “incident” or “emergency” (and often restricted by geographical limits), the precise wording contained in the policy was key.

While it was accepted that COVID-19 constituted an “emergency … likely to endanger life”, it was not accepted that the wider pandemic in itself was a “disturbance”, “incident” or a “danger” located within the vicinity of the business premises concerned.  It was held that policies containing such wording were intended only to cover incidents such as a bomb or gas leak in the vicinity of the premises concerned.

The most positive point to take from this decision is that, contrary to advice being distributed by many insurance brokers to their clients at the point of making a claim, the principle on causation contained in the Orient Express case (concerning material damage and business interruption losses suffered by a New Orleans hotel as a consequence of Hurricane Katrina) does not generally apply in COVID-19 claims.

Whereas in Orient Express it was held that the losses claimed for “business interruption” were in fact caused by the wider damage to the city of New Orleans, Lord Justice Flaux held that the wider COVID-19 pandemic and the enforced closure should be considered “composite” insured perils, and that they should not be considered competing causes of loss.

While we anticipate that elements of this judgment will be appealed, what may be of further interest is how the insurance industry seeks to deal with pandemic coverage in future policies.  In circumstances where the possibility of a further nationwide lock down is real and in the back of all our minds, will insurers recognise this new reality and offer suitable policies to cover this eventuality, or has the decision of Lord Justice Flaux provided a clear path for insurers to avoid having to pay out for such widespread disruption to businesses.

If you would like to discuss anything relating to this article, please contact Sara Roden at [email protected]