Business interruption (“BI”) insurance (also called business income insurance) is necessary part of fashion retail. It helps businesses protect against monetary losses due to periods of suspended operations when a covered event occurs and causes physical property damage. However, it is not confined to physical property damage.
The arrival of COVID-19 brought thousands of BI policies under scrutiny. For some fashion retailers the pandemic (and consequent government closures) decimated footfall and had a huge impact on those that relied on bricks and mortar retail. As a result, a vast number of BI policies across the UK came under scrutiny given that their purpose is to provide cover for business interruption where (for example) notifiable diseases are discovered at an insured location and cause closures, or as a result of enforced closure by a local authority or government agency for health reasons.
Three recent court judgments have brought such clauses into sharper focus following a test case decided in January brought by the Financial Conduct Authority on behalf of hundreds of thousands of affected policy-holders, establishing that many business interruption policies should have provided cover against the financial losses from the pandemic. The decisions will affect thousands with BI insurance who have suffered during the pandemic.
The cases before the courts explored whether an ‘event’ (eg. a forced government closure) was a single event, or whether business could claim for multiple events (e.g. closures of multiple stores on multiple dates) when considering claims for BI. This was important because the clauses in question were subject to a cap (£2.5m in this case) on any pay-out for a Single Business Interruption Loss (“SBIL”).
If the advent of COVID constituted a single event, the amount insurers were required to pay out would be greatly reduced. If, however, multiple government closures over multiple businesses and individual premises and on multiple different dates were to be treated as separate SBILs, the caps would apply to each individual instance, and the total amount paid out would be vastly larger.
Whilst the insurers did not dispute that a pay-out was due, unsurprisingly the parties’ interpretation of the relevant clauses was very different.
The businesses alleged that government closures and restrictions during COVID-19 triggered business interruption cover multiple times in relation to multiple lockdowns and multiple premises (and multiple separate events of disease at each individual premises). The insurers claimed a much narrower definition: a single even for which they had already paid out.
For their own part, the insurers also argued that the insured companies should have to account for the government grants which they had they received as a result of the pandemic and offset them against the amounts claimed. The insured argued that there was no provision for this in the policy and therefore they had no obligation to take those sums into consideration.
The court decided – broadly at least – for the insurers on the balance of the points referred to above. Not only did the court rule that insurers were entitled to credit for sums received by the insured in government furlough schemes, it also found (in relation to the cap issue) that there was a single occurrence (SBIL) at the outset of the original lockdown (from March – May 2020) followed by separate occurrences in each jurisdiction within the UK as the level of restriction in place was adjusted from time to time over the course of 2020. The court ruled that where regulations merely continued existing restrictions or made small changes, this did not constitute further occurrences providing additional £2.5 million limits. The effect of those findings was significantly to reduce the claims the insured companies could make.
Take home points
Whilst this latest chapter in the story would seem to constitute a victory for the insurance industry, it serves as a timely moment for fashion retailers (particularly those who were more seriously affected by the pandemic) to review their BI policies.
First, it may well be that claims are available to be made which were not thought to be valid prior to the test case brought by the FCA.
Second, whilst businesses will have to offset any government assistance they received against any insurance payout, these latest cases do underline the fact that whilst there may be arguments over the extent of any pay-out, Insurance companies do not seem to be arguing that no pay-out is due, and there is now precedent for the way in which the courts are likely to interpret BI clauses in general.
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