Since the designation of COVID-19 as a notifiable disease in England on 5 March, and the subsequent ratcheting of measures to slow the spread of the disease, business owners large and small have incurred catastrophic losses which, for the time being, continue to mount up on a daily basis.
Those with business interruption insurance have turned to their insurers for assistance, but have by and large been met with outright rejection of their claims.
Matters have escalated rapidly in the course of the last two weeks as thousands of declined claims pile up, with action groups being formed, ‘class actions’ announced, and regulators adopting an increasingly interventionist stance, culminating with the FCA’s announcement on 1 May 2020 that it intends to take legal action to obtain a court declaration on the disputed wordings.
This update takes stock of developments so far, considers the positions of the market and policyholders in relation to the disputed issues emerging, and sets out the options for policyholders wishing to pursue their declined business interruption claims.
What is the market’s position on COVID BI Claims?
As the representative body of insurers in the UK, the ABI has unsurprisingly sought to manage the expectations of policyholders and government as to the extent to which the insurance market can be expected to shoulder a share of the burden currently being suffered by the nation, stating that “no country in the world is able to provide widespread pandemic insurance, and the UK is no exception”, “only a very small number of businesses choose to buy any form of cover that includes business interruption due to a notifiable or infectious disease”, and “such policies often only apply when the disease is present at the premises.”
Some insurers have taken an even more extreme approach than the ABI, announcing that “[our] policies do not provide cover for business interruption as a result of the general measures taken by the UK government in response to a pandemic”, and “these extensions are intended to cover danger and disturbance and are not expected to cover a pandemic (or similar) breakout of disease.”
This has been reflected in insurers’ responses to claims notified, which have largely been to issue blanket declinatures using cut-and-paste standard responses, often with no apparent consideration of the facts of the claim submitted.
Unlike the steps being taken by regulators in some other markets, notably some US states, there has been no attempt by the FCA to mandate retrospective coverage for COVID-19 losses on existing policies. Taking a relatively measured approach, the FCA wrote a ‘Dear CEO’ letter to CEOs of London market insurers on 15 April 2020, specifically in relation to SME BI insurance, acknowledging that many policyholders would have no cover, but noting that some policies do give rise to a clear obligation to pay out, and encouraging insurers to comply with their legal and regulatory obligations to pay claims promptly. Following the escalation of the situation over the following fortnight, and the entrenchment of insurers’ coverage positions, on 1 May 2020 the FCA took the bolder step of announcing that it intended to “obtain a court declaration to resolve contractual uncertainty in business interruption (BI) insurance cover.”
The Financial Ombudsman Service, which handles complaints for individuals and SMEs up to maximum claim value of £350,000 has also issued its own guidance in relation to the anticipated high volumes of disputed BI claims. On 14 April 2020 it indicated that it would “expect the insurers to think beyond a strict interpretation of the policy terms and consider carefully what’s fair and reasonable in each case, taking into account the unprecedented situation”. Interestingly that language has now been removed from the latest version of its guidance provided online.
What are the disputed coverage issues?
In the absence of extended cover, most policyholders will need to establish that any business interruption losses arise from insured damage to property. At first sight that may appear to have no relevance to COVID-19 BI claims, since there has been no obvious property damage that would trigger the cover. However, under English law, a number of cases have found that only very small changes in physical state can amount to property damage, leading to suggestions that viral contamination leading to loss of use can amount to damage. Much has been made of a recent decision in Canada, in which the court adopted a broader interpretation of the term physical damage, which incorporated such things as the loss of the function or use of a building, even if only temporary. Whether this can successfully be argued under English law will depend in part on the definition of property damage in the policy (some policies refer to ‘physical’ damage, which requires a permanent and irreversible change in physical condition, while others refer only to ‘accidental loss or damage’, which extends to transient and reversible changes in physical condition), and the application of any contamination or pollution exclusions. Insurers will certainly resist paying any claims on this basis, but it is quite possible that litigation will be pursued on this point which, if successful, could dramatically widen the scope of cover under traditional BI policies.
Many policies that do contain extended cover for losses caused by infectious disease, prevention of access, or public authority action, under which cover is now sought, will include some form of reference to an occurrence of the insured peril on the premises, in the vicinity, or within a specified radius, commonly 1 mile or 25 miles.
Insurers’ response has broadly been that these provisions mean that the extensions will only respond to localized incidences of disease, and not to widespread epidemic or pandemic circumstances where the whole country (or in this case the world) is affected.
Policyholders on the other hand might reasonably question why, in the absence of any pandemic exclusion, the presence of the disease elsewhere can have any effect on the local coverage provided by their policy. Perhaps insurers’ decisions on coverage are being driven by concerns over their likely overall exposure rather than the actual cover provided by a policy? The correct answer will as ever lie in the drafting of the policy wording in question, but this is set to be one of the key contested issues.
The second broad category of issues on which disputes will turn are various forms of causation argument. Insurers are arguing that, even if the relevant policy trigger can be demonstrated to have occurred, the losses suffered by the policyholder are not caused, or are not solely caused, by the insured peril.
Although such arguments may be couched in various different terms, they all effectively seek to apply the controversial principle established in the case of Orient Express Hotels v Generali, in which the losses of an insured hotel in New Orleans following Hurricane Katrina were found not be insured because they were caused not by the relevant trigger (property damage), but by damage to the wider area, i.e. the losses would have happened anyway even if the insured property damage had not occurred.
Again the outcome of such arguments will depend on application of the policy wording, including the relevant causation language in the insuring clause, and any ‘Trends Clause’ to the facts of any given claim. Causation arguments are generally complex and difficult to generalise in relation to multiple claims, and we can expect to see some hard-fought litigation in this field.
A perennial issue that is not unique to COVID-19 claims is whether losses suffered at multiple insured locations should be aggregated for the purpose of applying limits of liability and deductibles. As a general rule, the cover provided by the non-damage BI extensions tends to be sub-limited to a level which may be a small fraction of the total policy limits. Whether policyholders may claim for multiples of the specified sub-limit will depend on the existence of any express aggregation clause, and whether for example the sub-limit is expressed as applying to any one ‘loss’, ‘occurrence’, ‘event’, or arising from the same ‘originating cause’. For those policyholders with multiple locations insured under the same policy, for example restaurants, pubs and shops, this issue may determine whether whether a claim is worth £1 million or £100 million (and beyond), and as such will no doubt give rise to some hotly contested claims.
What happens next?
Policyholders whose BI claims have been rejected have various options open to them at this stage, and it is important to note that there is no one-size-fits-all solution for all policyholders.
As a general starting point, negotiations through open dialogue with the insurer are always advisable, either directly or through a representative such as a broker or lawyer. For the many thousands of SME businesses this is unlikely to be a realistic option at this stage, but for those larger businesses with more significant losses reaching seven, eight, or nine figures, insurers are more likely to be willing to engage in constructive discussions.
For eligible policyholders, the FOS provides a cost-free and fair solution to resolving disputed insurance claims. However, the prescribed timescales may frustrate some policyholders in the current situation, since they are required to make a complaint following an insurer’s rejection of any claim, following which the insurer has eight weeks to each a ‘final decision’. Only then may the policyholder refer the matter to the FOS. Following those timescales, policyholders are prevented from taking any action for the next two months unless the insurer agrees to issue an expedited ‘final decision.’
Any policyholder with an arbitration clause in their policy will be required to pursue private arbitration proceedings to resolve their dispute, unless they are FOS-eligible. This may be an appropriate option for some larger policyholders with bespoke coverage issues, and the resources to pursue lengthy and expensive arbitration proceedings, but for many smaller policyholders the prospect of having to arbitrate will be a significant barrier to pursuing their claim. Further difficulties with arbitration in the present situation are the absence of effective procedures for aggregating claims, and the lack of any system of binding precedent.
There has been much talk of ‘class actions’ or other group litigation being pursued against certain insurers, and several action groups have been formed for this purpose. Whilst this remains a possibility, there are significant downsides to policyholders in attempting to pursue their claims as part of a group, not least that each of their claims will have factual, if not legal, issues that are specific to their own circumstances. The ability of group legal proceedings to determine large numbers of complex BI insurance claims is doubtful, and the procedural complexities and timescales are unlikely to be attractive, not to mention the funding necessities that will see policyholders sacrificing a significant proportion of any damages in return for representation as part of the group. Moreover, this option may now have been rendered largely redundant by the FCA’s announcement of its own legal action.
FCA legal action
The FCA’s proposal to seek a ruling on the disputed coverage issues is an unusually interventionist but potentially welcome step. The action sensibly stops short of over-reaching the FCA’s remit, and preserves the role of the English courts as the proper arbiter of matters of contractual interpretation. The FCA has indicated that it intends to invite the participation of a select group of insurers in the process by 15 May 2020, and further details are awaited on the proposed process.
It is not known at this stage whether policyholders or their representatives will have any opportunity to make submissions or representations in the proceedings, or what procedural mechanism will be followed, although a claim for a declaratory ruling under CPR Part 8 seems likely. Provided that the right issues are put before the court, supported by appropriate representations on both sides of the fence, this may well be the most cost-effective and efficient way to resolve the common issues. The proceedings will not and cannot provide an answer to all of the questions, and some disputed claims will inevitably still proceed to litigation or arbitration. But for a large majority of policyholders, particularly those whose claims do not justify the pursuit of independent legal proceedings, this development may provide the best opportunity to overturn the rejection of their claim, without requiring any active participation on their part.
For most policyholders, a wait-and-see approach is likely to be advisable at this stage. Any attempt to negotiate with insurers or take more formal steps such as commencing arbitration or litigation is unlikely to produce results until all parties have a better understanding of the proposed FCA legal action, including the likely timetable and the scope of the issues for determination.
For now, policyholders’ focus should therefore be on ensuring that effective notification has been given to insurers in sufficiently broad terms (usually via brokers), taking steps to mitigate losses where possible, and keeping records of any costs reasonably and necessarily incurred in doing so.