Property and business interruption

In this chapter of our Annual Insurance Review 2021, we look at the main developments in 2020 and expected issues in 2021 for property and business interruption.

Key developments in 2020

July 2020 saw the trial of a claim by the FCA against eight insurers involving COVID-19-related business interruption claims. This was the first ever test case under the Financial Market Test Case Scheme. Whilst considering only selected wordings, the aim was to provide guidance of general application.

The test case considered clauses providing business interruption cover for

(i) notifiable/infectious diseases ("disease clauses");

(ii) prevention of access to/public authority closure of insured premises ("POA clauses") and/or;

(iii) a hybrid form of the two. Issues of causation and application of trends adjustment clauses were also considered.

The Court individually analysed each wording. Careful consideration of the judgment is therefore required when assessing its relevance to other wordings. The disease clauses were triggered by the presence of a person with COVID-19 within the vicinity or a geographical radius, between 1 and 25 miles. The Court held that they would provide cover for the effects of the pandemic, save for those wordings in which factors such as a reference to there being an "event" indicated an intent to provide local-only cover. Hybrid clauses were viewed similarly.

The Court's findings were more mixed in relation to POA clauses, reflecting the variety of wordings used by the Insurers. By way of example, clauses requiring an emergency in the vicinity were found to indicate an intention to cover local-only emergencies. POA clauses requiring an order to close premises, or similar, could be triggered by a legal requirement such as the Regulations introduced the nationwide lockdown in March, but were not triggered by the Government advice which preceded it.

Insurers argued that a "but for" test for causation applied (e.g. business interruption losses did not occur "but for"  COVID-19 within the area specified in certain disease clauses because they would have occurred in any event as a result of the wider effects of the nationwide epidemic). The Court expressed doubt about, but ultimately distinguished, precedent as to the application of a "but for" test. Furthermore, where the disease, POA or hybrid clause was triggered by COVID-19 or a composite peril of which COVID-19 was part, the "but for" test for causation or adjustment for trends would not carve out the wider effects of the pandemic.

An expedited hearing of a "leapfrog" appeal directly from the High Court to the Supreme Court in the test case took place in November 2020, with the judgment expected around the turn of the year. Many (but not all) aspects of the High Court's decision will be the subject of the appeal.

As well as addressing issues arising on particular wordings, the appeal may help answer unresolved questions in connection with causation, including as regards the Court's negative remarks regarding a case in which the "but for" test was previously applied (Orient Express Hotels Ltd v Assicurazioni Generali SpA [2010]). This will be of interest not only in relation to COVID-19 claims, but also cases involving wide area damage.

What to look out for in 2021

Further litigation regarding the interpretation and application of Disease, Hybrid and POA clauses is expected. The Commercial Court has set up a dedicated team of Judges headed by Mr Justice Butcher to deal with these. This litigation is expected to expand to include reinsurance issues particularly in relation to aggregation and also binder disputes. 

More generally, COVID-19 has brought to the fore a number of interconnected issues that have been simmering for the past few years: the need to review the wording of BI wordings first highlighted by the IIL/CILA Wording Review in 2012, the question of wide area damage and also the issue of insuring systemic risk more generally. As such, we expect to see widescale review and re-writing of non-damage BI policy wordings with emphasis on the limit wording and market discussions about appropriate risk solutions for systemic risk more broadly.