Covid-related business interruption claims – addressing the ‘elephant in the room’

Biba 2021: While there have been many comparisons between the Covid-19 pandemic and the Spanish flu, Ed Lewis, partner at Weightmans, said that “frankly, it’s no comparison at all” as the world was very different then. 

Speaking as part of a panel discussion about business interruption (BI) claims being the so-called “elephant in the room” during Biba’s Strengthening Resilience conference yesterday (12 May 2021), Lewis said: “I don’t think any of us can say that we have seen anything like Covid-19 in our lifetimes, or indeed any previous time in history.”

However he conceded that Spanish flu is still the “closest we have come to anything like the world health emergency we have seen” over the past year.

In a risk context, he said that “opinions were going to be extensively divided”, especially regarding policy wordings that had not been written with pandemic risk in mind. 

He admitted that the FCA test case on BI claims linked to Covid-19 and the associated lockdown measures was needed, as he believes this was the only way to resolve the matter and get to the bottom of the actual causation of claims.

‘But for’ test

In law, the ‘but for’ test asks: “but for the existence of X, would Y have occurred?”

Referring to this test, Lewis applied it to the example of two hunters in a forest that accidentally shoot a hiker at the same time as they mistake him for an animal.

“If you apply the ‘but for’ test, you end up with the reverse outcome that neither hunter is responsible for the death,” he said.

However, due to the fact that the pandemic was so prolific and manifested all at once nationally, as well as how insurers’ disease clauses were written, there were “many occurrences outside those defined areas as well as within”.

The government’s response to those occurrences was comprehensive and non-specific.

“Insurers rightly turned around and said ‘but for the occurrence of Covid-19 within a defined area, the same loss would have been suffered because of all the other occurrences outside the area and the government’s reaction [to] that. The test case had to grapple with that very tricky issue of causation,” he added.

More disputes and litigation

Despite the rulings from the High Court and Supreme Court on the test case, there are other issues outside of the judgments which need to be resolved, such as the qualification machinery to the claim that is presented, as well as how Covid-19 grants and furlough payments are considered for quantifying claims, Lewis noted.

“Yes, we are going to see a lot of disputes and litigation to come on that, I think. But the government is being clear what it expects and that is no deductions will be made. Those grants and furlough payments have been made to support businesses in a time of crisis that comes from the public purse.

”In effect insurers make deductions for those, they are managing to avoid having to make payment at the public’s expense. The government has been very clear ‘don’t make deductions, if you do, we will intervene’,” he added.

Lewis explained that “any insurer looking to make deductions for grants or furlough payments must document them at board exec level”. 

He continued: “From a legal standpoint, there is a bit of a problem. We obviously have the principle enshrined under insurance law that you shouldn’t be able to recover more than your losses, there shouldn’t be double indemnity.

”Where businesses are being made whole by grants and payments, it would be wrong for them to then claim the recovery of those losses from insurers.

“Here’s the dividing line in my view. Covid-19 grants for the most part are non-specific. Furlough payments, in contrast, have been [specific].

”I think any business taking the benefit of furlough who then presents a claim [including] staff costs [but] it has been made whole because of those furlough payments, would be wrong presenting a claim of that kind. In the context of grant payments, which are non-specific, that’s where the government’s rationale comes in.”

Clarity and reputation

David Williams, managing director of underwriting and technical services at AXA, agreed that for firms getting furlough payments, they are not suffering a loss.

When asked whether this upcoming spike in BI claims was good for the insurance industry’s reputation, Williams said: “No absolutely not. We were hoping that the test case would bring clarity quickly and that was the reason for the industry supporting it, as there was lots of inconsistency and confusion.”

In terms of grants, however, AXA and several other insurers issued a public letter stating: “we will not [deduct] those payments from any claims settlements”. However, AXA is trying to reach clarity and settle any claims that should be paid as soon as possible.

For Williams, the problem is that many businesses have been badly affected by the pandemic.

“Some of them had no BI insurance, some did but with cover that didn’t apply in respect of a global government lockdown,” he explained.

“There are a number of cases where clarity has been brought by the test case and the appeal. The FCA was very specific at the start of the test case about what was and what wasn’t included in that test case and when they went to appeal.”

Williams recommended that insurers need to get to certainty by being vocal and going public about what they are doing.

AXA began paying Covid-19-related BI claims in March 2020 and has paid out £70m so far on policies where the insurer has looked at the wordings and decided there was cover in place.

Aon’s head of technical commercial risk solutions Vivienne Hexter pointed out that although it has been more than a year since many of these Covid-linked BI claims were made, BI claims in general are complicated and faced issues long before the pandemic arrived.