The Covid-19 pandemic has had a significant impact on many businesses across the country. It has brought into sharp focus the question of available insurance cover for losses under Business Interruption (BI) insurance policies and the extent of that cover.

Business Interruption Insurance and Covid-19

Traditional BI policies are not often a comfortable fit for Covid-19 related claims. Many BI policies operate in conjunction with a material damage policy requiring physical damage before the policy will respond, or exclude losses caused by human disease. Some policy extensions may not require physical damage, and could potentially respond to Covid-19 related losses under clauses that cover the actions of civil authorities, the closure of business due to an outbreak of a notifiable disease, or closures of transport routes. However, these may be site specific or linked to an outbreak within a specified geographical area (e.g. within 10 km of the premises).

In reality, Government responses to try to manage the pandemic have been multifaceted, ranging from advisory to mandatory measures, and may be imposed on a regional or national level. Questions on the proximate cause of the loss and the application of the policy wordings are not easy to resolve.

Financial Conduct Authority Test Case

In the United Kingdom, the Financial Conduct Authority (FCA) announced on 1 May 2020 that it intended commencing a test case seeking declarations aimed at resolving the contractual uncertainty around the validity of many BI claims during the Covid-19 crisis.

The trial started on 20 July and ran for eight days. Lord Justice Flaux expressed hope that judgment will be available by mid-September. The case addressed 17 BI policy wordings used by 16 insurers, eight of whom participated. The English High Court considered a representative sample of policy wordings along with the FCA’s proposed assumed facts, proposed issues and proposed questions for determination.
The FCA seeks declarations that losses from the Covid-19 pandemic are covered by certain insurance extensions or other coverage clauses that do not require damage to the insured’s property. The Court will not decide issues relating to the measure of indemnity, quantum, aggregation or issues that are only of individual or specific application.

The outcome of the test case will be legally binding only on those insurers who were parties to the action. However, the FCA says the case will provide “persuasive guidance” for the interpretation of similar policy wordings.

The insurers who are parties to the test case have declined claims in respect of the policy wordings before the Court. The main grounds for refusing cover were:

  1. Unless a business was ordered to and did close completely, there was no prevention, denial or hindrance of access or inability to use the premises within the relevant wording.
  2. Unless the business ceased to trade completely, its activities were not interrupted.
  3. Guidance (e.g. social distancing and stay at home) are not ‘restrictions’ ‘imposed by’ a public authority.
  4. The wordings are not designed to and do not provide cover in the case of pandemics.
  5. An exclusion applies.
  6. Interference, interruption, loss or public authority-imposed restrictions were not sufficiently caused by the necessary local disease occurrence or danger but were instead caused by the wider-area pandemic, the fallen economic activity resulting from a general loss of confidence, or national government measures.
  7. As to the causation and quantum of any claim, all or most of the loss would have been suffered anyway, despite the insured peril/business closure. For example, because of the broader Covid-19 pandemic, the lockdown, self-isolation, social distancing, the fallen economic activity resulting from a general loss of confidence, or other national measures imposed by the UK Government.

Causation is a key issue. The FCA argued that there is only one proximate, effective and dominant cause of the business interruption and resulting loss, which is the nationwide Covid-19 disease and the Government’s response in the form of advice, instructions, legislation and restrictions which prevented access to premises and interfered with business activities. It argued that it is not appropriate to separate out and treat as distinct and independent causes the disease, the local manifestation of the disease, the public authority action, the local action or advice and business closure orders, and other measures such as social distancing and advice that people should stay at home.

The insurers dispute this. They say that if there is a case of Covid-19 within the radius of the insured premises, the insured must show that this was the proximate cause of the business interruption claimed under the relevant policy in order to trigger the cover. They deny the presence or occurrence of the disease within the relevant area of an insured’s premises was the proximate cause of the interruption to or interference with the business. They say human action and/or intervention in relation to the Covid-19 pandemic action, including the UK Government’s response to the virus, caused the interruption or interference to the business. The human action and/or intervention took place without reference to and was not dependent on whether the disease was present or had occurred within the relevant area.

Furthermore, the insurers argue that if the local occurrence or manifestation of Covid-19 was a proximate cause of the interference or interruption, it was separate and independent from other potential causes such as the nationwide and worldwide occurrence of Covid-19 and/or human action and intervention. They say that in most cases, the loss would have occurred by an independent cause in any event.

The insurers also say there is no cover where interruption would have occurred ‘but for’ the occurrence of certain specified insured perils. The only counterfactual which can and should apply is whether ‘but for’ the occurrence of the insured peril (i.e. the occurrence or manifestation of Covid-19 at the insured premises and/or the relevant policy area), would the insured have suffered the interference and/or loss in any event. If the answer is ‘yes’, the claim must fail.

The test case raises interesting and complex questions. Whilst Government may have imposed restrictions on businesses, it permitted many to stay open. For example, some restaurants were able to operate takeaway services while food retailers and other essential services were expressly allowed to remain open by the Government and other retail businesses were able to continue to trade virtually or by distant means.

Effect of the Test Case in New Zealand

The FCA test case is likely to be highly persuasive when the New Zealand Courts come to consider business interruption claims related to Covid-19. The wording of the insurance clauses selected by the FCA are broad, generic and representative, allowing a wide range of issues to be covered. Given the number of policies under consideration, there is likely to be overlap with New Zealand BI policy wordings. If the outcome of the test case is favourable to insureds, it is likely to encourage business owners to pursue claims. We will report further on the outcome of the FCA test case when the decision is released.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.