What’s the “Damage”?: High Court to decide if business interruption insurance owed to shut down businesses
June 25, 2020
2 min read
What's going on here?
In July, the Financial Conduct Authority will ask the High Court to determine whether business interruption insurance is liable for loss of revenue caused by the lockdown.
What does this mean?
The nationwide shutdown of non-essential business has prompted firms throughout the UK to turn to their business interruption insurance (BI) in hope of a lifeline. Almost all have had the door slammed in their face. Most policies only insure against an inability to trade due to physical damage to business premises, e.g. by fire and flood. The FCA agreed that most policies “have no obligation to pay out in relation to the COVID-19 pandemic”. Nevertheless, in the interests of “clarity and certainty”, the FCA will ask the High Court to decide for certain whether the COVID-19 pandemic falls within the definition of “damage” to business premises. Because the wording used in BI policies is often very similar amongst insurers, the FCA will submit a “representative” pool of phrasing to establish whether insurers have to cough up. The declaration will be legally binding on the eight insurers defending the action, and persuasive to the interpretation of similar policy wordings.
What's the big picture effect?
This story is of particular interest to lawyers because it presents an exciting opportunity to challenge the current interpretive approach of the British judiciary.
At present, the prevailing interpretative wisdom is that it is not the role of the court to depart from the natural meaning of words or to infer conclusions from a wider contractual context where the words have an unambiguous meaning. This philosophy would therefore not construe the policies to include COVID caused losses. Insurers have also stressed that they never intended to cover pandemics and that a decree of liability would cripple the industry.
But these are no ordinary times. The courts have never interpreted such terms in the context of a nationwide business shutdown. Furthermore, in a recent Canadian case, the Ontario Superior Court of Justice stretched the interpretation of “physical damage” in a BI insurance policy to cover the “impairment of function or use of tangible property”. This meant that, when the insured had to shut down the business due to a radioactive leak, they were entitled to compensation for their loss of profits.
If the High Court is similarly inspired to broadly interpret “damage” to extend to our own government-decreed shutdown, businesses could recover from their insurers.
In the mean-time, the FCA has asked for a show of compassion in these trying times. It has asked the few insurers who have admitted liability to pay out quickly. For the less fortunate, it has suggested waiving charges for missed premium payments, and suspending premiums if customers’ insurance is rendered pointless during lockdown.
So will the High Court stick to the plain meaning and harsh reality of BI policy wording; or not let a good crisis go to waste, and revert back to Lord Hoffmann’s purposive interpretative approach?
Report written by Rory Crawford
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