Business Interruption Claims
Written by Sean Kelly.
The current COVID epidemic has caused severe disruption to many businesses throughout the UK. Most businesses which had the foresight to include Business Interruption (“BI”) insurance within their usual insurance policies assumed that their BI insurance would cover all losses sustained as a result of the epidemic. However, there are many unusual features of the epidemic (and of the business interruption which has been suffered) which mean that the operative terms of the insurance policies and the methods of proving loss have to be considered carefully. These features include (1) the epidemic is general; (2) there has been a general reduction in economic activity which affects most businesses; and (3) limitations on the use of business premises are the result both of legislation or order and Government guidance.
On 9th June 2020 the Financial Conduct Authority (“the FCA”) commenced proceedings against eight leading insurers in order to seek “high level” guidance on construction issues relating to policies including BI insurance and on proof of loss. The high level approach was necessary because the FCA estimates that there are some 700 types of policy across 60 different insurers and 370,000 policyholders. Judgment was given on 15th September 2020 in FCA v Arch Insurance (UK) Ltd and others  EWHC 2448 (Comm). This case has been the subject of appeal to the Supreme Court and Judgment should be handed down at the start of the new year. The case was largely limited to factual issues arising up to and including 26th March 2020 when the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 were made. It does not deal with the effect of the fluctuating regulations and guidance which has been effect since then.
The case was commenced for a number of reasons. The FCA expects all insurers to comply with the Judgment when handling claims and complaints under their internal procedures. The Judgment will also assist the Financial Services Ombudsman (“the Ombudsman”) in its handling of referred complaints.
There are many articles dealing with the effect of the Judgment and whether the same is likely to be the subject of a successful appeal. This article is directed primarily at the procedural aspects of any business interruption claim and what an affected business (or its solicitors) ought to do in order to make the process as successful and speedy as possible.
It would be unusual for any business to take out BI insurance as something separate from its normal annual insurance. A standard policy of insurance on property against, for example, fire does not cover loss of profits. Accordingly, policies have developed to include BI insurance as an additional item of cover.
The indemnity afforded by BI insurance is a claim for damages (see Normhurst Ltd v Dornach Ltd  Lloyd’s Rep IR 27). The effect of this is that there can be no further claim for damages based on the insurer’s unjustified refusal to pay a valid claim. The practical effect of this rule is that the policyholder needs to submit a claim and proceed with the same as quickly as possible. If the business ceases to trade because payment is not made in sufficient time, there is no claim for that loss.
The indemnity afforded by BI insurance is intended to be as complete as possible and is usually based on the loss of gross profits which will arise as a result of (1) a reduction in turnover or (2) an increase in the cost of working. Modern policies include a “trends and variations” clause taking into account the period immediately before the event. Most policies will have an upper limit of claim.
The events giving rise to a claim are many and varied. In bringing the claim described above, the FCA attempted to provide broad categories for the types of BI insurance and the events giving rise to a claim. These were as follows:
- Disease clauses. Claims triggered by the occurrence of a notifiable disease within a specified radius (usually 25 miles)
- Prevention of access clauses. Claims triggered by closure of the business premises
- Hybrid clauses. Claims triggered by an inability to use business premises due to restrictions imposed by a public authority following the occurrence of a disease
There are obvious parallels between the classification of BI insurance into these broad categories and the classification of interest-rate swap products in the FCA Review.
The effect of the Judgment
Many of the points taken by the insurers would have deprived policyholders of any real practical benefit from their BI insurance. As regards disease clauses, it was argued that the liability was not triggered when there was an occurrence both within and outside the specified area. As regards all types of clause, it was argued that losses due to the economic downturn caused by COVID (or the restrictions imposed to prevent the spread of the disease) restricted quantum. These points were not accepted. In general, the Court took a purposive or (dare one say) common sense approach to construction
As regards disease clauses, the current position is as follows:
- There has been an occurrence of COVID within any area if at least one person is affected. The fact that there is an occurrence of COVID outside the area does not matter.
- The fact that losses were suffered as a result of the lockdown does not limit or extinguish the claim. The two causes of loss arise from the same event.
- There is no set method by which the occurrence of COVID in any particular area needs to be proven.
- Insofar as the policy includes an exclusion clause for “disease and epidemic” this cannot override the express indemnity provided.
As regards prevention of access clauses, the current position is as follows:
- There must be complete closure of the business premises
- The closure must be as a result of mandatory Government action having the force of law rather than mere guidance
- The claim cannot be reduced by reason of the general effect of the epidemic on the economy
As regards hybrid clauses, the current position is as follows:
- Only mandatory Government action will trigger a claim.
- Whether there is an “inability to use” business premises is fact sensitive.
- The claim cannot be reduced by reason of the general effect of the epidemic on the economy.
The process of making a claim
The obvious starting point is that the policyholder needs to submit a claim to the insurer. This provides the foundation for all that happens thereafter. BI claims are complicated and most rely upon some form of accountancy exercise. In most cases, some form of narrative will be required or will be helpful. The loss has to be matched to the event triggering the claim, which can be difficult. Losses need to be assessed on a week to week or month to month basis. More and more insurance is sold without brokers and so the most natural port of call may not be available. Insurers are suspicious by nature and there are difficulties if the claim evolves at the various stages of its resolution. Given that many or most BI claims will be subject to great scrutiny by the insurer, it is best to spend the time to make sure that the claim is properly formulated.
Response to a rejected claim or reduced quantum
There is no indication in FCA v Arch Insurance (UK) Ltd of the quantum of claims to be made by the 370,000 policyholders affected. It is realistic to proceed on the basis that the vast majority of the same will be for less than £350,0000. Indeed, this is why the case was brought. Large businesses can look after themselves.
Every insurer is subject to the regulation of the FCA and subject to its Principles, the most important of which are Principle 1 (integrity) and 6 (paying regard to the interests of customers and treating them fairly). In addition, there are voluntary codes of conduct such as those of the Association of British Insurers.
All insurers are required to investigate complaints in accordance with FCA DISP 1.4. This involves an obligation to investigate a complaint “competently, diligently and impartially, obtaining additional information as necessary”. Only the policyholder can make a complaint. The insurer does not merely address its contractual liability. It has to address the complaint by reference to general principles of fairness taking into account the law and any other relevant industry standard. The FCA oversees the process in the sense that it will intervene to require the insurer to deal with a complaint properly. There is no financial limit to the redress which can be provided. The making of an internal complaint is a condition precedent to a referral to the Ombudsman.
The complaint will be dealt with by an employee (case handler) of the insurer in its compliance department. Experience shows that in many cases a very satisfactory outcome can be achieved. The case handler looks at the matter from a compliance perspective and not that of a litigator or a claims handler. Case handlers have difficulty in reading between the lines of the complaint. A Judge might look at a poorly pleaded case and try to determine what is really being alleged. Complaints handlers do not have the experience or the time to do this. A complaint needs to be properly and comprehensively formulated.
The jurisdiction of the Ombudsman is set out in Chapter 2 of the FCA Handbook. All complaints relating to COVID business interruption will be post April 2019 complaints. The effect is this is as follows:
- Eligible complainants are not limited to “micro-enterprises”. A micro-enterprise is defined to be one with a turnover of less than Euros 2 million and less than 10 employees. Eligible complainants also include “small businesses”. A small business has an annual turnover of less than £6.5 million and has a balance sheet total of less than £5 million or employs fewer than 50 people.
- The financial limit for compensation is £350,000. This is a very substantial increase from the previous limit of £150,000. The Ombudsman can recommend a much high award. In practice, it is sometimes possible to persuade an insurer to accept such a recommendation even though it is not legally binding.
These alterations were made after a hard-fought battle and extend greatly the utility of the Ombudsman as a means of resolving disputes.
As the complaint will be made about a failure to pay a sum of money, the redress will be a sum of money. If the policyholder accepts the decision (and any payment made), it cannot commence a court claim in respect of the same matter to claim the remainder of its loss due to the application of the principle of merger (see Clark v In Focus Asset Management and Tax Solutions Ltd  EWCA Civ 118). There were conflicting first instance decisions before this decision.
A complaint to the Ombudsman has to be made within six months of the final decision by the insurer. The final decision must state that this is the case and must refer to the availability of the Ombudsman route even where it is clear that the policyholder is not eligible. The six month time limit goes to the jurisdiction of the Ombudsman and cannot be extended by consent.
For a customer which qualifies as a micro-enterprise or a small business and is seeking to recover less than £350,000, the Ombudsman provides an inexpensive and speedy route to the resolution of its claim. Although the Ombudsman is required to determine a complaint on the basis of what is “fair and reasonable”, it must do so by reference to the law and applicable codes of practice. Claims are usually decided on paper in a two stage process. The complaint is referred to an Adjudicator. Appeal from the Adjudicator is to the Ombudsman. Adjudicators in particular do not tend to read between the lines of any complaint. Accordingly, the referral needs to be drafted carefully and comprehensively. No adverse costs orders are made and (at least in theory) the process is capable of being undertaken by the policyholder without assistance.
Additional staff have been drafted in to deal with BI insurance complaints.
No policyholder can be required to make an internal complaint or refer the same to the Ombudsman. The Court is not entitled to stay any claim on the basis that the policyholder needs to exhaust other remedies. Unless the claim is for significantly more than £350,000, it is difficult to see why a policyholder would proceed by this route until all others have been exhausted. The Court will not have the technical knowledge of the Ombudsman and its resources have been stretched to the limit.
No specific Pre-action Protocol applies. Claims will normally be brought in the Business and Property Courts, Circuit Commercial Court.