Law360 is providing free access to its coronavirus coverage to make sure all members of the legal community have accurate information in this time of uncertainty and change. Use the form below to sign up for any of our weekly newsletters. Signing up for any of our section newsletters will opt you in to the weekly Coronavirus briefing.
Sign up for our Commercial Litigation UK newsletter
You must correct or enter the following before you can sign up:
Thank You!
Law360, London (April 17, 2020, 1:04 PM BST ) Lawyers are preparing arguments to contest a broad refusal by insurers to pay out on claims for business interruption made by companies shuttered under the government-ordered coronavirus lockdown, setting up litigation over liability that could change how the industry writes future policies.
Lawyers could be arguing over the wording of policies to cover business interruption after the lockdown brought much of London to a halt. (AP)
Nearly a month on, and with British businesses fighting for financial survival, battle lines are drawn for legal debate over how specific coverage must be to cover claims that do not arise from physical damage, legal experts said.
Commercial insurer Hiscox Ltd. has emerged as an early target for legal challenges after a public relations company said this week it is looking into launching class action litigation to cover pandemic-linked losses.
Aaron Le Marquer, a partner at Fenchurch Law, said his specialist insurance law company is responding to multiple claims against Hiscox.
"It's certainly not the only insurer that has turned down claims that we think are valid and should be pursued," he told Law360. "I'd say there are between 10 and 15 insurers we are looking at closely now."
Business Interruption
Business interruption is protection against closure of a location because of damage to property. Multiple "non-damage" extensions can be added to standard policies, including over denial of access — because of a police cordon thrown up during an investigation, for example— or communicable disease.
A communicable disease extension will typically cover losses arises from closure resulting from an outbreak of a virus or bacteria on site or nearby. It might bed used by restaurants or hotels forced to close temporarily due to an outbreak of Legionnaires' disease, a lung infection.
Many policy wordings include a defined list of diseases covered under the terms of the policy, which range from the deadly SARS virus to smallpox. Others are less specific, offering cover for any "notifiable disease" outbreak, a disease required by law to be reported to public authorities. COVID-19 became a notifiable disease in the U.K. on March 5.
Sometimes communicable disease extensions contain exclusions, which state that an outbreak must have occurred on the business premises or in a defined vicinity.
The PR company Media Zoo, for example, says that the policy it was sold by Hiscox covered the inability to use its premises because of the order of a public authority, following "an occurrence of any human infectious or human contagion disease."
Hiscox has denied the claim, but the wording is more open-ended than many others sold by other insurers, lawyers say.
Causation
Hiscox said in a statement responding to Media Zoo that the clause was designed to cover losses "solely and directly" from restrictions imposed by a public authority. It would not apply in this case because losses would have still occurred even if businesses had not been closed, because the government has ordered the public to stay at home.
That justification has echoes of an earlier contentious judgment in the English High Court case of Orient Express Hotels Ltd. v Assicurazioni Generali SPA in 2010.
In that case, Orient Express— based in New Orleans —was seeking to claim against its business interruption policy after storm damage arising from Hurricane Katrina meant its hotel was closed for two months in 2005.
The commercial court, and later the Court of Appeal, found that, because New Orleans was effectively forced to shut down after the hurricane, the hotel would have suffered losses to business even if it had been undamaged.
Instead of the $2.15 million it was seeking from insurers, it was therefore allowed to claim only a limited amount on its policy, as if it had been an undamaged hotel in a damaged city. It was however able to claim on several non-damage clauses, such as denial of access.
The ruling is still a hot topic in the legal community and several claimant law firms have called for the judgment to be revisited.
"It's been relied upon by insurers ever since to reduce or deny claims in ways that perhaps do not meet the FCA's principles of treating customers fairly," Le Marquer said.
Orient Express was able to claim successfully against its non-damage denial of access cover, he said. That fact meant the case could count in the favor of claimants.
"I can see ways in which claimants themselves may be relying on that case to establish that there is good coverage on their policy," he added.
Lawyers believe there will also be litigation over vicinity clauses in communicable disease extensions.
If a policy offered cover only when an outbreak occurred within 10 miles of the premises, it would be much easier to find a COVID-19 case if the claimant was a restaurant in central London rather than an isolated restaurant in the Scottish Highlands. Yet the underlying cause— a nationwide lockdown— remains the same.
"You're going to have your restaurant closed regardless of whether there are people suffering in the vicinity or not," said a London-based partner at a major firm, who declined to be named because he was working on COVID-19 responses on behalf of insurers.
He said he knows of at least one insurer that is facing significant claims over denial of access because of the policy wording.
"Most insurers are saying there's no cover," he said. "There will be litigation over this, I guarantee it."
More claims could come from direct damage to property under standard business interruption cover. If an employee had COVID-19 and coughed on a desk, causing the premises to be closed temporarily for cleaning, the owner could potentially claim for property damage, although the compensation is likely to be limited.
Lawyers believe there could also be claims from denial of access cover, in which a business becomes inaccessible because of the action of a public authority. Most denial of access clauses however contain exclusions over communicable diseases.
Avenues Beyond The Courts
Many rejected claims under business interruption could eventually result in litigation, but many more will be filed through the Financial Ombudsman Service.
The service is available to companies that have an annual turnover of less than £6.5 million ($8.1 million) and which employ fewer than 50 staff. Compensation is limited to £355,000.
The Financial Conduct Authority said the Ombudsman was consulting with businesses over the type and volume of cases it was expected to receive in the coming months.
"In due course, the Ombudsman will share details of the approach it will be taking to deciding complaints about business interruption insurance, most likely through a series of lead cases," the FCA said in a letter to insurance bosses on Wednesday.
The regulator urged insurers to pay coronavirus-related business interruption claims quickly when there is a clear obligation in the policy. Insurers should make interim payments when liability was accepted but the settlement was disputed, the FCA said in its letter.
Many insurers sometimes delay making any payment whatsoever, pending a court decision, if the settlement is disputed, Guy Wilkes, partner at Mishcon de Reya LLP, said.
"Sometimes an insurer might use that withholding of payment as a sort of tactic, to try and get the insured to agree to settle at a figure that is perhaps lower than they would," Wilkes told Law360. "The FCA is firing a shot across the bows and saying that litigation tactic is not fair to customers."
The FCA said it would not intervene if there was no clear obligation for insurers to pay out because of lack of pandemic-related cover. That effectively put to rest worries that the U.K. could follow controversial proposals in several states of the U.S. that would see all business interruption policies amended to retrospectively cover losses resulting from COVID-19 shutdowns.
Media Zoo called on Wednesday for the FCA to pressure Hiscox to "do the right thing" by its customers. Wilkes said the way the regulator handled payment protection insurance complaints, there was a potential precedent.
"If firms are not handling complaints properly they may step in," he said, adding though that the regulator was unlikely to weigh in on determining liability. "The FCA tends not to get involved in that sort of thing, they leave it to the Financial Ombudsman for smaller claims or the courts for larger claims."
Wilkes said the regulator could take an interest if an insurer, having lost in a claim brought through the Ombudsman, ignores the result and doesn't take a similar approach to handling other claims.
Gross domestic product in Britain is expected to shrink by 35% this year and 800,000 small businesses ar teetering on the edge of insolvency. And insurers have come under sustained criticism in the national press over their perceived refusal to pay claims.
Le Marquer said concerns about damage to reputation should weigh on insurers as they decide whether to refuse claims over technical nuances.
"When you look at the losses being suffered across the whole economy, the position of insurers, sitting back and folding their arms and saying they have no exposure, does not look great," he said.
--Editing by Ed Harris.
For a reprint of this article, please contact reprints@law360.com.
