The High Court’s keenly awaited decision in the Financial Conduct Authority’s (FCA) business interruption insurance test case may be seen as a victory for policyholders (FCA v Arch Insurance (UK) Ltd and others [2020] EWHC 2448 (Comm)). The FCA sought clarity over the scope of cover for business interruption losses occurring as a result of the 2019 novel coronavirus disease (COVID-19). In a lengthy and complex judgment, the court found that most, although not all, of the relevant policy wordings that it considered would cover business losses related to the pandemic. The decision is also likely to affect claims under loss of rent insurance policies.

However, the High Court has granted leapfrog certificates for an appeal to the Supreme Court. It is likely that the high volume of claims that remain in abeyance pending judgment in this case, and the general importance of obtaining contractual certainty for insurers and policyholders alike, will provide sufficiently compelling reasons for permission to appeal to be granted and the appeal to be heard on an expedited basis. Until any successful appeal, the decision is legally binding on the eight insurer defendants.

The court was asked to decide, against a matrix of agreed and assumed facts, whether losses related to COVID-19 were covered under certain “non-damage” extensions to business interruption policies (see box “The test case”). These included:

The court was also asked to consider issues of causation; that is, whether the necessary causal link between the COVID-19 pandemic and the policyholders’ losses could be established, in particular when taking into account trends clauses. Trends clauses allow insurers to adjust profit figures in order to take account of any trends or other circumstances that would have affected the relevant business even in the absence of the insured event.

In general, the court favoured the FCA’s interpretation of the relevant policy wordings.

Disease clauses. The court held that policyholders will generally be able to establish cover for COVID-19 related losses under policies that contain disease clauses. The disease clause cover is not limited to outbreaks wholly within the relevant area as:

The policyholders would not therefore have to distinguish the effects of the nationwide COVID-19 outbreak from the effects of a local outbreak within the relevant area in order to establish that they had suffered a loss caused by COVID-19.

In relation to wordings where the trigger was the happening of a specific event, rather than the occurrence of a disease, the court agreed with the insurers that the cover was for specific and localised events, so the policyholders could recover only where they could show that the cases of disease in the relevant area had caused the business interruption losses.

Denial of access clauses. By contrast, the court interpreted more narrowly the denial of access clauses, particularly where they contain a requirement for an emergency, incident, danger or disturbance to have occurred. The court said that this wording is intended to provide narrow localised cover and that action taken in response to the COVID-19 pandemic would not suffice.

Causation and trends. The FCA won the key battleground of causation and trends clauses. The insurers argued that, as policyholders would have had no trade due to the pandemic even if they had been open for business, they did not suffer an insured loss due to the presence of the factors specified in the disease or denial of access clauses.

The court found that, when analysing the counterfactual, it is necessary to strip out the effects of the insured perils. The court had defined the insured perils under disease clauses broadly to include the impact of the nationwide pandemic, so when analysing causation and trends clauses in relation to that cover, the counterfactual essentially includes a world without COVID-19. Some commentators have already observed that this analysis in the judgment is an oversimplification of the complex arguments on causation and trends clauses that were made in the case.

Many landlords and tenants are insured in respect of loss of rent receivable or payable under policies containing disease or denial of access clauses that are similar to those the court ruled on in the test case. In some cases, the wording in these policies is identical to the wording reviewed in the test case. Insurers faced with claims by landlords and tenants in respect of loss of rent have typically raised identical arguments as those raised by the defendant insurers as justification for not paying claims. The court’s findings will assist many parties in being able to claim for loss of rent, subject to the particular policy terms.

Landlords. Landlords with the benefit of “loss of rent receivable” cover may face other obstacles to recovery. While not considered as part of the test case, it remains to be seen whether landlords that have granted rent concessions to tenants, such as rent deferrals or COVID-19 related rent-free periods, will be able to sustain their claims as the insurers may argue that the loss was created voluntarily and deny cover on that basis. The counter argument is that the rent concessions were a mitigation step that was necessary to minimise losses. This is likely to be one of the key battlegrounds in relation to claims brought by landlords.

Loss of turnover rent is a specific area of interest. Where turnover rents have fallen as a result of COVID-19, the wording in some landlord policies would appear to include this in their scope as the occurrence of COVID-19 can be argued to be the cause in the reduction in turnover rent.

Tenants. Tenants with their own business interruption insurance, when faced with ever-mounting rent arrears, will no doubt be encouraged by this first round win even though securing a settlement with their insurers may seem never-ending. The hope is that these businesses can survive long enough to see the ultimate outcome of the test case and to secure payment from their insurers.

Where tenants have no business interruption cover and are required to continue to pay their rent, there would appear to be little respite. Rent cesser provisions allow the tenant to cease paying the rent during a given period. As most rent cesser provisions are linked to damage by insured risks, tenants will not benefit from rent cesser clauses as COVID-19 does not constitute “damage”. If a landlord did have some element of disease-related cover, this may be lost if rent concessions are granted. In these situations it is difficult to see how tenants can do anything other than seek a negotiated settlement with their landlords; this is especially the case where the tenants are in financial hardship and cannot wait to see how the test case and possible insurance claims may pan out.

Practical impact. The test case and the reaction of insurers to claims has highlighted a structural flaw in the insurance arrangements for business interruption. At the time when tenants most need help, the test case is being used as a reason by almost all insurers to delay their decision on claims until the outcome has been settled, even though the FCA’s motives in bringing the claim were well-intentioned and the claim has been fast-tracked as rapidly as possible.

During this time, even tenants that have the benefit of cover may suffer severe financial hardship or even insolvency. This is hardly the result that would have been anticipated when these policies were bought. This position may encourage tenants to seek more wide-ranging rent suspension arrangements in their leases and will see a debate as to who is best to bear business interruption risk as between landlords and tenants. Regardless of the final outcome of the test case, on the basis that insurance in relation to future pandemics may not be available, there may not be an easy answer.