COVID-19 - Business Interruption Insurance – the FCA Test Case and Implications for Landlords and Tenants

• United Kingdom

• Litigation and dispute management
• Real estate
• Real estate litigation

21-09-2020

The Financial Conduct Authority (“the FCA”) brought a test case on behalf of policyholders against certain insurers in relation to COVID-19 related business interruption losses which is likely to impact upon claims under loss of rent insurance policies.

The FCA, as the conduct regulator of insurers in the UK, took a representative sample of insurance policy provisions to court and put forward policyholders’ arguments with the objective of obtaining clarity and certainty for all parties involved in potential disputes as to whether COVID-19 related business interruption losses were covered. The FCA had said that, in its view, most commercial insurance policies are focused on property damage (and only have basic cover for business interruption as a consequence of property damage) so, at least in the majority of cases, insurers are not obliged to pay out in relation to the coronavirus pandemic. The test case focused on the remainder of policies that could be argued to include cover.

Specifically, the Court was asked to decide, against a matrix of agreed/assumed facts, whether there is cover under certain “non-damage” extensions to business interruption policies. Judgment at first instance was handed down on 15 September 2020. In summary it is fair to say the judgment represents a victory for policyholders.

The Court found that policyholders will generally be able to establish cover under policies containing “disease clauses” which require the occurrence of a notifiable disease within a specified radius or vicinity of the insured premises (the “relevant area”) by relying upon the fact of the UK wide COVID-19 outbreak.

The disease clause cover was not limited to outbreaks wholly within the relevant area since (i) the relevant wording did not specify that and (ii) it is not a sensible construction either given the nature of notifiable diseases, such as the way in which they are spread and are responded to by national and local authorities.

The policyholders would not therefore have to distinguish the effects of the nationwide outbreak from the effects of the local outbreak within the relevant area, in order to establish that they had suffered a loss caused by the occurrence of the notifiable disease.

In relation to wordings where the trigger was the happening of a specific event (rather than the occurrence of a disease), the Court agreed with insurers that the cover was for specific and localised events such that the policyholders could only recover where they could show that the case(s) of disease in the relevant area had caused the business interruption losses.

By contrast, the “denial of access” clauses were interpreted more narrowly, particularly where they contain a requirement for an emergency/incident/danger or disturbance etc. to have occurred. The Court said those wordings were intended to provide narrow localised cover and that action taken in response to the nationwide pandemic would not therefore suffice.

The FCA won the key battleground of causation and trends clauses. Insurers argued that, given the insureds would have had no trade due to the pandemic even if they had been open for business, they did not suffer an insured loss due to the presence of the factors specified in the disease and/or denial of access clauses. The Court found that when analysing the “counterfactual”, one needs to strip out the effects of the insured peril itself. The Court had defined the insured perils under disease clauses broadly to include the impact of the nationwide pandemic, such that when analysing causation and trends clauses in relation to that cover, the counterfactual essentially includes a world without Covid-19. Insurers’ lawyers are already observing that the analysis in the judgment is an oversimplification of complex arguments on causation and trends clauses that were made in the case.

There will be a hearing in October 2020 at which (i) the parties will make submissions to the Court regarding the appropriate declarations to be made in light of its findings, and (ii) insurers are very likely to seek permission to appeal. Permission will be granted where the Court considers that the insurers’ arguments have a realistic chance of success or where there is some other compelling reason for the appeal to be heard. It is likely that the high volume of claims that remain in abeyance pending judgment in this case, and the general importance of obtaining contractual certainty for insurers and policyholders alike, will provide sufficiently compelling reasons for permission to appeal to be granted.

In the event that permission to appeal is sought, the Framework Agreement entered into by the parties to the test case clarifies that a party should seek to have any appeal heard on an expedited basis and that the possibility and appropriateness of seeking a ‘leapfrog’ appeal to the Supreme Court (i.e. bypassing an appeal to the Court of Appeal) must be explored.

Impact on Landlords and Tenants

So what does this have to do with insurance policies taken out by landlords and tenants? Well, many landlords and tenants are insured in respect of loss of rent receivable or payable under policies which contain “disease” and/or “denial of access” clauses similar to those which the Court ruled upon in the test case.

Insurers faced with claims by landlords and tenants in respect of loss of rent have typically raised identical arguments as those raised by the defendants in the test case as justification for not paying claims. As will be apparent from what we say above, the findings of the Court will assist many parties in being able to claim for loss of rent, subject to the particular policy terms.

Landlords with the benefit of “loss of rent receivable” cover may face other obstacles to recovery, however, if tenants have been obliged to carry on paying rent throughout the pandemic. Whilst not considered as part of the test case, it remains to be seen whether landlords who have granted rent concessions to tenants, such as rent deferrals or COVID-19 related rent free periods, will be able to establish that, notwithstanding those concession arrangements, that their loss of the full rent is covered under such policies. This is likely to be one of the key battlegrounds in relation to claims brought by landlords, as is how cover does or doesn’t compensate landlords for loss of turnover rents.

Meanwhile tenants, faced with ever mounting rent arrears, will no doubt be encouraged by this first round win in what might be a long process, but hoping that their businesses can survive to the outcome of the test case and beyond to pay-out under their policies.

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