While Business Interruption insurance policies normally cover a business's loss of profit or revenue together with certain costs following damage to a property (such as a flood or a fire), some businesses also take out extensions to Business Interruption cover for incidents such as closure of premises or denial of access, and/or disease. It was the cover under these “non-damage BI” wordings that was the focus of the Financial Conduct Authority’s test case for which judgement was handed down on 15 September. Since then policyholders, insurers, lawyers and loss adjusters (amongst others) as well as economists and forensic accountants like me and my team at AlixPartners have been pouring over the High Court judgement to work out exactly what it all means.
There is a possibility that the judgement will be appealed but in the meantime some of the challenges that will face policyholders, insurers and their advisers include:
- Assessing individual policy wordings against the samples used in the test case and the High Court’s findings for each category;
- Increased complexity in identifying counterfactuals and in the calculation of covered losses;
- Increased scrutiny of the methods used by underwriters and speed with which relevant business interruption claims are processed; and
- Increased incidence of challenge and potential litigation.
Undoubtedly, there will be many disputes over the value of claims. These could be lengthy and costly for all concerned, so it will be in everyone’s interest if policyholders and insurers can quickly reach agreement on how losses should be calculated.
However, the judgement itself is complex and while the Court has provided guidance for determining the correct counterfactuals for three categories of policy wording, there is no “one size fits all”. Even where there is guidance, the wide range of different wording in policies and the different circumstances that individual policyholders face will inevitably create complexity and nuance.
As one would expect, understanding how to calculate losses associated with COVID-19 is not going to be straightforward.