COVID-19 - insurance payouts will reach £1.2 billion – will your insurer pay?
A substantial number of column inches have been devoted to the impact of COVID-19 on business interruption insurance. Policy extensions may cover denial of access to business premises, caused by outbreaks of disease or an order to close premises by a public authority. Given that the inability to conduct business for those reasons is exactly what companies were trying to insure against, the suggestion that these would not be covered can come as a surprise.
In assessing whether any rejection of cover is valid, it is critical to consider the exact wording of the policy – what is covered by one policy may not be covered by another and policy wording often changes year on year.
Mid-April 2020, the Association of British Insurers estimated that £1.2 billion will be paid out as a result of the coronavirus, albeit this is likely to be only a fraction of the damage suffered. This follows the Financial Conduct Authority’s guidance issued at the start of April that, whilst recognising many business interruption policies would not provide cover, in many cases it is “…clear that the [insurer] has an obligation to pay out on a policy…”. In such circumstances, the FCA expects insurers to assess and settle claims quickly and encourages interim payments to ease some of the burden on small businesses.
The FCA has also made it clear that firms must consider very carefully the needs of their customers and show flexibility in their treatment of them. They must ensure that they treat customers fairly and consider the needs of anyone potentially affected by the pandemic. Similar observations have been made by the Treasury Select Committee.
There is evidence, however, that the insurers’ default position has been to deny coverage, even in circumstances where the wording appears to respond to the current situation. We have already assessed several cases in which such claims were denied. Whilst the terms of each contract are critical, common themes are emerging.
The standard response seems to be that the policy extensions described above are not designed or priced to cover a pandemic scenario, but rather isolated incidents which impact a business (e.g. an outbreak of legionnaires disease at a hotel requiring it to close for some days, or the local police requiring a business to close whilst a crime is investigated on the premises). We think it unlikely that any court would be persuaded by such a broad brush statement. Instead, whether the coverage extends to the coronavirus-related losses will depend on the precise wording of the clause in question.
More specific grounds insurers are using (or are likely to use) to avoid cover include:
- Disease type. Often cover will be limited to “contagious” or “notifiable” disease/illness. Sometimes “contagious disease” is restricted to a specific list of diseases (if so, they are unlikely to include coronavirus). If it is not, government guidance is likely to be relevant. Notifiable disease usually refers to the Public Health England’s list of outbreaks. COVID-19 has been a “notifiable disease” in the UK since 5 March.
- Outbreak at or near the premises. Sometimes a condition of cover is that the disease/illness must have occurred on or near the business premises. The burden of proof is on the insured to show the policy is triggered. Insured businesses may be able to argue, given the widespread geographic nature of the COVID-19 outbreak and the small proportion of the population tested, that an assumption can be made that COVID-19 has been present on premises sufficient to meet the burden of proof on a balance of probabilities.
- Premises unusable or inaccessible. Some cover may be tied to the business premises being unusable or access being denied. In these circumstances, coverage may be influenced by the industry in which the business operates and the degree to which it is unable to use the premises (by reason of government order or otherwise). If the insurance includes cover for the action of a competent authority, the government’s announcement of 23 March 2020, which mandated many businesses to close, may assist.
- Coronavirus did not cause the loss. There are examples of insurers refusing cover on the ground that, even if all other criteria are satisfied, the loss was not caused by the coronavirus. The argument would be that a coronavirus victim being at or close to your business was not the cause of the business/premises having to close. Rather, the insurers could argue the loss was caused by the government regulations. This issue of multiple causes of damage is likely to be central to many insurance disputes.
Practical considerations for impacted businesses
A key starting point for any business that thinks it may have been impacted is to get legal advice to consider the scope of its policy’s wording. Each insurer has different clauses, so it is impossible to assess the merits of any claim without having examined the specific terms in place. Your lawyers will also need to assess the insurer’s response carefully.
The key takeaway for any business impacted is not to be deterred by any initial rejection – this occurs in many insurance disputes. When the insured makes clear it is not willing to accept refusal of cover and will stand up for its rights, insurers can often be persuaded to take a more lenient approach.
A business also needs to consider how to go about pursuing a claim against an insurer. The costs of proceedings in court can often be prohibitive. It may well be that to make a claim viable, an individual business would need to join a group action alongside others with similarly worded insurance cover, against the same insurer defendant. It may be possible to find a third-party funder to fund the costs of such claims. Further, if the annual turnover of the business is below £6.5m, and it has fewer than 50 employees or an annual balance sheet below £5m, it is likely to fall within the jurisdiction of the Financial Ombudsman Service, which can be a quicker and cheaper way to resolve a dispute with an insurer.
In April 2020, Hausfeld announced its £1 million COVID Commitment - £1million of its lawyers’ time allocated to assist businesses to consider commercial claims arising from coronavirus. If you have been impacted by this, or any other COVID-19 issue, please reach out to the authors Lucy Pert and William Towell.