One of the many challenges COVID-19 has created for businesses around the world has been the lack of clarity as to whether their insurance cover for business interruption (BI) responds to interruptions resulting from COVID-related lockdowns and other restrictions. The insurance industry has often said no, but as we have discussed previously, courts in several jurisdictions have interpreted policies in ways that are more favourable to the insured. The latest such decision comes from the United Kingdom Supreme Court. Most BI policies in New Zealand require physical damage to premises and/or exclude losses from notifiable diseases, and so differ from those considered by the Supreme Court.
However, the Supreme Court decision will inform the construction of BI policies more generally, and could well provide helpful guidance for at least some New Zealand policyholders. As always, we recommend that insureds carefully review their policies and discuss cover with their broker or other advisers when considering a claim and/or at policy renewal. With COVID expected to run for some time yet, policy renewals this year will take on increased importance.
Financial Conduct Authority v Arch
The Supreme Court's decision comes in a test case brought by the Financial Conduct Authority on behalf of policyholders and addresses a number of different policy wordings. Some key aspects of the decision are summarised below.
Geographic limits do not preclude cover so long as one case occurs within those limits
Some of the policies considered by the Supreme Court contained a specific extension to cover losses resulting from notifiable diseases occurring within a specified geographic radius of the insured property. The insurers argued that losses resulted from the national crisis, not from specific instances of disease within the required geographic boundary. The Supreme Court held that cover was triggered if a single instance of the notifiable disease occurred within that area, even if:
- most cases were outside that limit; and
- lockdown decisions were made having regard to the totality of cases across the country.
Government restrictions on access do not have to have the force of law
Insurers argued that initial restrictions did not trigger cover for prevention of access to the premises because they did not carry the "force of law". The Supreme Court held that it was enough that the Prime Minister instructed specified types of businesses to close, where the businesses would reasonably understand that the instruction had to be obeyed. That was even though the instructions were not legally enforceable until regulations were brought into effect shortly afterward.
This finding has wider implications where "instructions" are provided that lack the force of law. It could, arguably, be of relevance to the early stages of the New Zealand lockdown, which the New Zealand High Court has found lacked lawful authority for its first nine days. Where a BI policy otherwise applies, the Supreme Court's approach would mean that it might not be necessary to establish that government instructions/directions were lawful or otherwise enforceable.
What amounts to an inability to use business premises?
The Supreme Court was of the view that if the policyholder is unable to use either the whole or a discrete part of its premises for either the whole or a discrete part of its business or activities, this constitutes an inability to use. For example, where a restaurant is required to close its dining area but is able to continue to provide takeaways, this would constitute an interruption and it could recover for the loss of its in-restaurant custom. This approach will be relevant to BI policies generally.
What losses can be claimed as BI?
Insurers argued that business losses were not caused by the triggering event (eg a case of COVID within 25 miles of the premises), but by wider disruption and national lockdown. The Supreme Court rejected those arguments, finding that:
- Quantification of a BI claim requires an assessment of the income that would have been earned but for the insured event. Adjustments for other causes of revenue reduction are only to be made for matters that are not inextricably linked to the insured event. Here, losses from COVID-related loss of business were inextricably linked to the insured event (COVID cases within the specified radius) and such reductions were not permitted.
- Even where there are two causes of loss, being physical damage to the premises and widespread damage preventing access, the insured will generally be entitled to recover. This is on the basis that one of the causes was covered by the policy. In reaching this finding, the Supreme Court overruled previous authority, which has been relied on by some insurers in New Zealand. The earlier Orient-Express case had held that where there is widespread damage, the physical damage to the premises did not cause the loss, because no one could access the premises anyway. The different approach of the Supreme Court in Arch will be of assistance to New Zealand insureds seeking compensation following events causing widespread damage.