So we now have the first instance decision of the High Court in the FCA test cases exploring the true construction of certain non-damage extensions to a range of Business Interruption policies. As the dust starts to settle, subject to any appeals, what might concerned BI insurers be considering next?
Well, firstly the position is much more nuanced than any headlines about the policyholders’ “victory” might suggest. The decision is a perfect reminder that in insurance coverage cases one must always start with the closest consideration of the particular policy wording and it becomes dangerous to generalise.
It is certainly correct that the high point of the decision for policyholders is in regard to those policies featuring “Disease/Notifiable Disease” extensions. We have reasonable clarity now that there will usually be cover, in principle, for Covid 19 closure losses within the Disease extension limits. This is because of the Court finding that one cannot separate local impact of the pandemic from the nationwide impact. There is one mechanism of composite causation and even though many policy wordings incorporate an ostensible test of an occurrence of notifiable disease within a defined area local to the insured premises, any approach of separating and distinguishing the causation of loss on a “but for” test does not survive the first instance decision.
But even that is not the end of the story for many concerned insurers because there is nothing within the judgment that affects the position in two common instances where there will still be no cover. The first of those is where Notifiable Disease is defined by a set list of recognised illnesses which stands as a closed class, as opposed to an open class into which new Notifiable Diseases can be admitted upon becoming officially designated as such. The second of those is where the cover under the extension is dependent on the occurrence of the Notifiable Disease specifically at the Insured Premises. The High Court recognised the importance of particular language in the policy which gave emphasis to local “events” and so it is unlikely that a test of Covid 19 at the Insured Premises would be satisfied just by premises being affected by the wider lockdown.
That does not detract from the fact that there is often now likely to be cover under Disease extensions but raises the importance of not simply assuming there will be cover.
The need for scrutiny of the actual policy is even greater where the wrangle arises in regard to Denial of Access or Public Authority (Restriction) Extensions. Where such wordings are concerned the High Court very significantly upheld that there was likely to be a much more localised test of causation for cover. There were typically aspects of these Extensions as considered by the Court which meant that the emphasis was on a localised event giving rise to the BI losses rather than just a response to the national pandemic. These wordings were found to operate much more literally both as to causation and the required adverse consequences on the business if cover were to be triggered.
Most insurers should be able to assess potential “new” exposure under Disease extensions quite quickly by satisfying themselves that their particular Extensions are “open class” and not specifically dependent on Covid 19 at the Insured Premises. Much closer consideration is going to be required to other extensions.
And what about the underwriting review that needs to be put in hand – again subject to appeals? This obviously depends on whether insurers are prepared to live with the High Court having found that cover, certainly under the Disease extensions, is wider than the Market would have perceived. If not then amendments to standard wordings need to be made to bring the position back in line with underwriters’ subjective intention. The blunt instrument would be the addition of exclusions to remove from the scope of cover BI losses incurred because of the operation locally of the relevant insured peril when the same BI losses would be incurred regardless, because of the wider operation of any cause including that same peril. Some careful drafting would be required. The same result could be achieved with more subtlety perhaps by adjustment of the Trends Clause.
It will take time for the dust to settle but beware rushed or generalised decision making. The detail of the full judgment and candidate polices simply have to be considered side by side.
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