In view of the recent Financial Conduct Authority announcement to seek a court declaration to resolve uncertainty over business interruption insurance claims, we take a look at some of the legal issues which businesses are currently facing and how those may be challenged.
The FCA has stressed that its legal action only seeks to resolve what it suggests as being some key contractual uncertainties. The caveat being that the FCA has already reaffirmed the insurance industry position that most policies have only basic cover and do not cover pandemics; therefore, it supports the notion that insurers have no obligation to pay out in relation to the COVID-19 pandemic.
That however may not be the end of the matter for businesses. As with any contract, an insurance policy must be interpreted upon thorough analysis of the contractual terms. The advent of the COVID-19 is so recent that the courts have yet to consider those issues in the context of such a pandemic. As to more recent cases involving disputes over contractual interpretation, the courts have concluded that it is not the role of the court to depart from the natural meaning of words, or find ambiguity which does not exist, or resort to commercial common sense where the words used have a clear and obvious meaning.
In the context of insurance, the courts have also found that if there is ambiguity in a clause, then such ambiguity ought to be found against the insurer. That said, businesses may find themselves in dispute with insurers over the term ‘damage’, which is oft used in insurance policies to what is, or what is not, covered in BI policies. The leading judgments in insurance-related cases point to the requirement for the meaning of ‘damage’ to require a “changed physical state” of property, which on first hand will not assist businesses which have incurred losses caused by COVID-19 through the closure of business premises.
As with the dynamic nature of how quickly the world reacts to COVID-19, a recent senior court decision in Canada (MDS Inc. v FM Global) provided for a broad definition of damage to include ‘the impairment of function or use of tangible property’. While that case was not directly linked to COVID-19, the circumstances were relative in that a business brought a claim against the insurer for lost profits on account of a shutdown, owing to safety reasons linked to a radioactive leak. The key here for businesses in the UK is that ‘physical damage’ came to be interpreted in a very comparable situation to COVID-19; that of forced closure and interruption of business premises.
While the decision is only persuasive on the UK Courts, rather than binding, where insurance policy terms for BI cover require the occurrence of ‘damage’ or ‘physical damage’, it provides a powerful basis to argue that the broader approach to ‘damage’ or ‘physical damage’ ought to be adopted, so as to give purposive effect to the risks that the policy was intended to cover.
Although each BI insurance policy will need to be considered on its own wording, and while it may take some time for the courts to make a declaration in the FCA proceedings, the arguments as to whether BI cover will cover losses sustained during the COVID-19 pandemic are open to more scrutiny and argument than the insurance industry may otherwise seek to claim.