When The World Shut Down: Lessons from COVID-19 BI Insurance Battles
COVID-19 exposed the fragility of business interruption cover, leaving thousands of firms in dispute with insurers over what was really protected. This article explores the battles, the FCA Test Case, and the lasting lessons for businesses and insurers alike.
COMMERCIAL LAW
In the fateful year of 2020, the COVID-19 pandemic knocked the global order off its feet as health crises, service malfunctions and government lockdowns impacted communities and economies on an immense scale. Amidst this societal turmoil, many businesses, most prominently those in the field of entertainment and relations (sports, hospitality, dining), faced catastrophic financial downturn. Indeed, as any sensible person would do in such a situation, these businesses turned to their insurance providers as a way of cushioning their economic loss. However, to their horror, in many cases businesses faced a rude awakening in learning that their insurance fell short of the damages caused by the pandemic, causing a flurry of legal claims, settlements and litigations in the years to come.
This article, through the lens of perhaps the most notorious Business Interruption (BI) insurance dispute, the FCA test case, aims to decipher the root causes of this fiscal and legal crisis and highlight the key lessons learned by businesses with regards to the extent and shape of their insurances.
The devil is in the detail
Come the beginning of government lockdowns and business restrictions during the pandemic, businesses found that their insurers did not cover losses that occurred due to the pandemic (i.e. losses faced due to impeded operations and decline in consumers). This was due to the fact that many insurers had neither anticipated the pandemic in the months before it became widespread, nor did they choose to cover all bases in terms of their general policy wordings because of the seemingly frivolous cost. And so, when the government began to implement restrictions on economic activity, businesses were effectively hung out to dry by their insurers due to narrow and unforgiving policy wordings.
Yet, the tide was soon set to turn, as around when the UK government lockdown was first implemented in March 2020, a test dispute arose between the Financial Conduct Authority (FCA) and Arch Insurance Ltd and others. FCA brought a test case against multiple insurers to clarify whether Business Interruption (BI) insurance policies covered the losses invoked by the COVID-19 pandemic. They argued in court proceedings that various clauses of BI insurance indicated that insurance should cover the losses caused by COVID-19, namely: disease clauses, prevention of access clauses, and other hybrid clauses.
Disease Clauses
BI Disease Clauses typically include cover for specific infectious diseases that occur within a certain proximity of a business's premises; they are generally designed to insulate businesses in the event of a local or internal outbreak, but not necessarily a global pandemic. In the FCA Test Case, the claimants contended that, despite COVID-19 should be included in this list of diseases, and, whilst not directly inflicting harm at the premises of a business, its nationwide regulatory and economic implications caused loss to businesses nevertheless. In other words, the FCA interpreted the relevant Disease clauses as not necessarily demanding physical damages, but rather anything causing a level of financial loss.
Prevention of Access Clauses
These clauses tend to cover losses if access to insured business premises is hindered or prevented completely. In the case of COVID-19, many businesses were given closure orders for their brick-and-mortar locations, instead working remotely when possible, and in those cases it would seem as though these clauses are applicable, However, in the case of more composite businesses, such as sports clubs, hotels and schools (to name a few), where a large portion of their operations would be forced to cease despite some smaller facets still functioning as normal (e.g a football club whose fixtures are cancelled but are still able to sell merchandise and market their brand) the pertinence of Prevention of Access clauses gets put into question. The FCA argued in their test case that government lockdowns, starting in March 2020, legally prevented access to business premises. As a result of this restriction, said businesses faced significant losses and as such, they should be entitled to a level of insurance as a form of cover.
Judgement
The court's final judgement on the FCA Test Case released in January 2021, interpreting disease and prevention of access clauses far more broadly and therefore making the claims in line with policy wording. This meant that insurers would be obliged to cover the losses faced by nearly all businesses as a result of the pandemic and set a clear precedent that BI insurance should cover losses that occurred due to multiple factors and which may not always be direct or local.
Precedents
Following the FCA Test Case, businesses began using its reasoning as basis for their own litigation pursuits against their insurers, with many soon receiving substantial settlements as a result. Due to the Supreme Court's practically unanimous opinion, the wind was largely with the businesses in their claims against the insurers: it was not overly difficult to win their cases. However, it goes without saying that, by the time of the settlements hitting the companies' bank accounts, most of the damage was already done, and any kind of settlement would never recover the losses experienced completely.
Indeed, the entire BI Insurance claim ordeal not only resulted in a legal precedent from within the walls of the Supreme Court, but it served as a valuable cautionary tale to both businesses and insurers alike to do their due diligence without exception. Whilst prior to COVID-19, other similar diseases had caused a level of economic fallout (i.e. SARS, MERS), nothing in recent history had been witnessed on the scale of coronavirus in terms of the economic harm it inflicted. As such, in many ways insurance companies fell short of their duty, and businesses were left in the dark as to the implications of a pandemic on the scale of COVID-19. This is not to say that the virus should have been anticipated, but rather that all possibilities should be considered by insurers and businesses despite the potentially excessive cost.
Conclusion
Ultimately, the COVID-19 business interruption disputes revealed a hard truth for many companies: when crisis struck, their insurance policies did not offer the safety net they expected. The FCA Test Case brought much-needed clarity, but it also highlighted the importance of reading the fine print, questioning assumptions, and understanding the limits of cover. For insurers, the case was a wake-up call on the need for clearer drafting and products that reflect modern risks. For businesses, it was a reminder that risk management cannot stop at buying insurance — it requires vigilance, foresight, and a willingness to plan for the unexpected