Big Case, Little Impact; FCA negates to deal with property damage trigger in finding BI coverage for Covid-19 by Yalda Aziz

Oct 06, 2020

As a result of the COVID-19 pandemic and the subsequent closures of numerous businesses, particularly in the hospitality industry, many of the affected businesses attempted to access their business interruption insurance for financial loss. However, insurers rejected these claims on the basis that business interruption policies did not provide cover for the effects of a global pandemic.

The recent decision of The Financial Conduct Authority v Arch Insurance (UK) Limited & Others [2020] EWHC 2448 (Comm) attempted to resolve some of the legal uncertainties around business interruption policy coverage. This was brought as a test case by the Financial Conduct Authority (“the FCA”) against eight insurers to seek clarity about the meaning and effect of selected business interruption insurance policy wording in the context of COVID-19 claims. The wordings of the policies fell into three broad categories:

  1. Disease Clauses: which provide cover for business interruption in consequence of or following or arising from occurrence of a Notifiable Disease within a specified radium of the insured premises
  2. Clauses covering prevention of access and similar peril: which provide cover where there has been a prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restriction
  3. Hybrid Clauses: which are combinations of Disease Clauses and Prevention of Access Clauses

Following an eight-day trial, on September 15, 2020, the High Court of England delivered its judgment on liability for business interruption insurance, finding largely in favour of the policyholders on most key issues. The Court found that most but not all of the “Disease Clauses” provide cover for business interruption losses due to COVID-19. The Court agreed with the FCA and concluded that the proximate cause of the business interruption is the Notifiable Disease of which individual outbreaks form indivisible parts. Therefore, the effects of a nationwide Notifiable Disease to local areas will trigger coverage.

As for “Prevention of Access” clauses, the Court accepted a more restrictive approach. These clauses are to be construed narrowly and such clauses have wordings that indicate cover for the effects of localised events rather than nationwide emergencies. The court concluded that such clauses would provide cover depending on the detailed wording and its impact on the business.

The United Kingdom judgment may be viewed as a victory for policyholders however, according to the FCA this does mean that all eight insurers are liable across all 21 different types of policy wording that were examined. Each policy will need to be reviewed against the wordings considered in the judgment. 

The judgment is subject to appeal and the parties have agreed to apply to leapfrog an appeal to the Supreme Court. Subject to the appeal, while the judgment on business interruption insurance in the context of COVID-19 is binding within the United Kingdom and could have an impact outside of the United Kingdom, Ontario would remain largely unaffected. This is because, despite the few rare policies with stand-alone business interruption coverage wordings that would likely follow the United Kingdom decision, business interruption coverage for most issued policies in Ontario are triggered by physical property damage. The wordings in such policies are clear in that physical damage requires actual damage to the premises which caused an interruption that resulted in a loss of business income. Therefore, since the policy wordings considered in the United Kingdom judgment was not in the context of physical property damage, the judgment will not impact the widespread denials of Ontario business interruption claims in the context of COVID-19.

Yalda Aziz is an articling student at ZTGH and author of this blog. If you have a question about the blog, please contact Yalda or Shanti Barclay at 416-777-5211.

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