Local lockdowns—complex implications for coronavirus (COVID-19) business interruption insurance cover

Local lockdowns—complex implications for coronavirus (COVID-19) business interruption insurance cover

Insurance & Reinsurance analysis: As the national lockdown in the UK eases, non-essential businesses in the UK are gradually reopening and taking stock of the toll that coronavirus (COVID-19) and the national lockdown has taken on them. Meanwhile, business owners (and insurers) await the outcome of the Financial Conduct Authority’s (FCA) test case on business interruption insurance cover, which is due to be heard over eight days, starting on 20 July 2020. However, the introduction of local variations of lockdown rules, as we have seen recently in Leicester, may complicate already complex issues even further.

Much has been said about the plight of policyholders, and also of the invidious situation that the coronavirus pandemic has produced for insurers and brokers that sold business interruption insurance to SMEs. It is hoped by all concerned that the FCA test case succeeds in clarifying the contractual effect of the various ‘non-damage’ business interruption triggers that feature in the representative sample of policies in the test case.


The Swedish coronavirus experience and the Cambridge Analysis in the FCA test case

The parties have pleaded their respective cases, and oral submissions in two case management conferences have further illuminated how the parties will seek to develop their arguments. One issue that looks set to be particularly contentious is what evidence should policyholders be required to submit to insurers to establish the prevalence of the coronavirus at a particular place and time. This is of course a requirement for policies that require disease outbreaks to have occurred with a stated distance from the insured premises in order to trigger business interruption cover.

It is apparent from insurers’ submissions that they will argue that Sweden’s coronavirus experience, which did not entail any mandatory lockdown, is the relevant counterfactual to be used to assess what policyholders’ losses would have been but for the imposition of mandatory business closures.

The FCA is seeking to rely on the Cambridge Analysis to establish prevalence, which is the same model used by the government and Public Health England to establish ‘R’, which reflects the rate of coronavirus infection.

Then there is the related question of how causation must be established where it will be said (by counsel for insurers) that businesses would have suffered loss of market even if there had been no lockdown or mandatory closures. This is particularly relevant for those policies with business interruption triggers that depend on advice and/or orders to close, by a local authority, competent authority, the government, or the police.

So, the FCA wants to rely on the Cambridge Analysis as a basis on which to establish prevalence of the virus and insurers want to compare the UK’s experience with that of Sweden, to challenge the causal connection between mandatory closure and business interruption losses. Both of these approaches are logical at a very high level but it remains to be seen how effective they are when it comes to the detail.


Local lockdowns

The government imposed lockdown and mandatory business closures were, until very recently, applied nationally. Northern Irish, Scottish and Welsh governments acted similarly, barring only slight differences on timing and some other details. This has now changed. Secretary of State for Health and Social Care, Matt Hancock announced on 28 June 2020 that, due to a localised spike in infections, the first local lockdown was to be imposed in Leicester, commencing the following day. Suddenly, an already very complex situation has become even more complex.

Could the re-imposition of mandatory closures trigger business interruption cover anew or should the lockdown be regarded as having been extended in Leicester?

The answer will of course depend on policy wording but it is yet another question that requires answering if SME’s are to get clarity in relation to their business interruption claims. The prospect of more local lockdowns around the country at different times and quite possibly with varying scopes makes policyholders’ burden of evidencing their losses all the more daunting, not least for businesses with multiple insured locations.

The infections spike in Leicester also highlights just how different infection rates, R, can be in different parts of the country, even when comparing similarly populated urban areas. Hancock said Leicester had ‘10% of all positive cases in the country over the past week’ and that its infection rate for the relevant period was ‘three times higher than the next highest city’. Local infection rates go to questions of prevalence, of course, but they may also affect the causation analysis where insurers contend that losses were caused by people worrying about the prevalence of the virus as opposed to by mandatory closures and lockdowns. The correct legal test for causation is also in contention (including whether Orient Express Hotels was correctly decided).

R variations in the UK between urban areas and countryside are perhaps less surprising, but they are also an important part of the factual background to the complex problem the FCA is trying to solve. A hotel, for example, may be situated in a remote location, far from the nearest hospital or town. For that business, proving what ‘R’ was at a particular time in a particular remote location may not just be difficult, it may be impossible. This is partly due to the practicalities of obtaining data but also because ‘R’ is a number that is generated retrospectively, from various data sources. As such its basis is statistical and, as such, its reliability (and arguably its meaningfulness) diminishes dramatically when based on a small sample size, or no data at all.

The extremity of divergence as between infection rates in different areas of the UK, now with local variations as regards lockdown rules, can only complicate the causation issues. Despite the FCA’s best efforts to establish clear principles it seems inevitable that, for many claims, the devil will be in the detail. It will be interesting to see the extent to which the parties to the test case are able to grapple with this extraordinarily complex factual picture, and indeed what further evidence, if any, will be adduced in doing so. We remain optimistic that the FCA test case will make great progress and provide tremendous assistance to policyholders, as well as increased certainty for insurers—but there is a lot to be achieved, in not very much time.



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