Does business interruption insurance cover covid?

The covid-19 pandemic has profoundly affected the UK economy. At best, activities have been disrupted, or even have ceased altogether. In such circumstances, it is prudent to refer to cover afforded by any business interruption insurance policy that may have purchased. The importance to policy-holders of speedy settlement of claims in these circumstances cannot be underestimated. Thus, the decision of the High Court of 15 September 2020 in the insurance test case of the Financial Conduct Authority (FCA) vs Arch and Others is to be welcomed.

The FCA was advancing claims for policy-holders, considering 21 lead sample wordings from eight insurers. The judgment delivers advice on the proper interpretation of cover in certain non-damage business interruption insurance policy wordings. These apply without the prerequisite of physical damage, such as fire, for example. The decision of the court dealt with sample wordings only. This must be emphasised. However, the court identified key issues, assisting in the construction and interpretation of the very many different policy wordings in the market. The action by the FCA was largely successful on the policy-holders’ behalf. The insurers have stated that it is their intention to appeal against the decision, arguing that the financial effects of the pandemic fell outside the policy wordings.

The key events occurred in March 2020. On 5 March, covid‑19 became a notifiable disease in England and Wales and on 11 March the World Health Organization declared it to be a pandemic. On 16 March the UK government directed people to stay at home and to stop non‑essential contact and unnecessary travel, working from home wherever possible. On 20 March various categories of businesses had to close, followed by further lockdown measures introduced on 23 March. Critically, construction and manufacturing businesses were not expressly required to close, nor was it stated that they were expressly permitted to stay open. However, government guidelines were imposed to introduce safer working practices to include the required element of social distancing. These measures led to widespread considerations whether relevant construction contracts provided relief in terms of additional time or money, focusing in particular on force majeure clauses.

The court considered three categories of cover.

• Firstly, disease wordings. This provides cover for business interruption following the occurrence of notifiable disease within a specified radius of the insured’s premises. The notifiable disease is to arise from any human infectious or human contagious disease manifested by any person. A key element of the wording is the location of the disease and its vicinity to the insured’s premises. The policies considered provided for radiuses of between one mile and 25 miles. The court’s conclusion in this case was that the cause of the business interruption was indeed the notifiable disease. The insurers argued that the cover was limited to a local occurrence of a notifiable disease, thus excluding a pandemic such as covid-19. This argument was rejected. There would be cover where, as in this instance, a covid-19 outbreak in the relevant policy area was an indivisible part of the disease. Thus critically, cover was not limited to outbreaks wholly within the relevant area in the vicinity to insured’s premises.
• Secondly, the prevention of access or public authority wordings. These would apply if there were prevention, denial or hindrance of access to the insured premises as a consequence of government or other authority action or restrictions.
• Thirdly, there was reference to the hybrid wordings where there are restrictions imposed on the premises due to a notifiable disease.

The ability to work remotely by use of technology may largely mitigate the effect of covid-19 on any head office activities but the same cannot be said of those that are site-based

There may be bespoke policies or policy extensions designed specifically for the construction industry. Any interruption to a construction-focused business is more likely to take place not at the policy-holder’s premises but at the location of the performance of the building activities. The ability to work remotely by use of technology may largely compensate and mitigate the effect of covid-19 on any head office activities. The same, however, cannot be said of those that are site-based. Thus, in order to provide an indemnity for any losses sustained, the key is the definition of the policy-holder’s location. This should extend cover to the location of the site-based activities. Prevention of access wordings would likewise have to refer to being prevented or hindered in accessing the sites, as well as the policy-holder’s designated premises. Critically, the UK government has not as yet closed down building sites. This also limits application of the hybrid wording unless there has been an inability to use construction sites following an occurrence of a disease.

It is unlikely that many such bespoke policy wordings exist. The wordings, as reflected within the judgment, will have applied to businesses being conducted principally from the policy-holder’s premises. Construction in contrast includes site-based activities, which provide the main risks. The majority of sites continued to operate despite covid-19 and were allowed by the UK government to continue albeit with the introduction of social distancing measures. Restrictions and hindrance in access to sites are more likely to have arisen due to contractual disputes.

Covid-19 we now know has had major and fundamental impact. If insurance is to be sought in the future to cover this, or similar risks, specific policy wordings for use within the construction industry will need to be drafted. The corresponding premiums, taking into consideration the potential losses to be sustained are likely to be large.

Jeffrey Brown is a partner at Howard Kennedy