As we emerge from one of the most tumultuous periods in living memory, it perhaps comes as little surprise that insurance has been thrust into the spotlight. The unprecedented impact of the pandemic has brought a renewed focus to the issue of business security and, more specifically, business interruption coverage.
Business interruption coverage has been a lifeline for businesses for decades, and while it is most commonly used for matters such as break-ins or fires, many policies also cover interruption due to terrorism, riots and natural disasters like flooding and hurricanes. But last year presented an unprecedented situation for all. What would happen to businesses that were unable to operate as normal, left to navigate uncharted waters in light of coronavirus restrictions?
The developing pandemic meant that specific wordings within policy clauses were now scrutinised to the highest degree – how far did pre-existing contracts cover financial loss amid an unforeseen nationwide lockdown? Could a notifiable disease clause relate to Covid itself?
As the crisis unfolded, clauses in some business interruption policies were deemed “misleading”, which resulted in thousands of businesses being wrongly denied pandemic-related payouts. Ultimately the Financial Conduct Authority (FAC) brought the matter to court in a bid to “urgently clarify key issues of contractual uncertainty for as many policyholders and insurers as possible”.
What unfolded next was a journey of appeals and arguments that eventually found its way to the UK’s Supreme Court. Eventually, small businesses won the backing of the courts against insurance giants, though not without the guidance and advice of leading legal experts in the UK.
One such figure is David Berkley QC, one of the many barristers involved in supporting small and medium-sized businesses in the courts. Insurance Wire sat down with Berkley to find out more about his involvement in some of the most fascinating developments in modern insurance history. A barrister at 3PB chambers, Berkley and his team have helped advise some 500 businesses on their business interruption claims against over 30 different insurers.
One of the things Berkley and his team were immediately aware of when they embarked on this mission was that many businesses had put their trust in the fact that they had taken out, at an additional premium cost, specific cover in relation to business interruption. “And here, they were in a situation where their businesses suddenly imploded. A lot of things happened which they couldn’t control, which was partly due to health risk, partly due to the risk of infection, and also due to government instruction,” he says.
He adds that businesses across many industries found themselves adversely affected as a result of “perils that they might have thought they had insured against”, particularly across hospitality and catering. “They were met with these immediate problems, and to be honest, the response from the insurance industry as a whole was not satisfactory,” he says.
Berkley notes that confusion and trouble began “often with brokers, the people who actually were responsible for the sale of these policies, and who, supposedly negotiating on behalf of their own insured, were giving the message to their customers that they weren’t covered”.
“Similarly,” he adds, “insurers were seeking to interpret policies in a way that made it very difficult to progress claims. And when we’re dealing with something as fast moving as business interruption, if the insurer is going to delay, you may not have any business left to argue for. The likelihood is that a lot of these businesses were facing ruin.”
The FCA steps in
In light of this, he said there was a “clear need” for insurers to be able to respond and act upon the claims that they were receiving. “To their credit, the regulator of the industry, the Financial Conduct Authority, decided to be proactive. It’s unusual for the regulator to do that.”
He notes that the FCA does “occasionally intervene” in support of smaller businesses. According to Berkley, the regulator has been known to send out letters to CEOs advising them and providing “hard-edge” guidance. “However, here you had the FCA go one step further,” he says. “They said if you don’t do anything about this…then we will take action.”
Insurers were seeking to interpret policies in a way that made it very difficult to progress claims. And when we’re dealing with something as fast moving as business interruption, if the insurer is going to delay, you may not have any business left to argue for.
That is exactly what the FCA did. Last year, it made the decision to pursue a number of claims based upon 21 sample policies, which would represent a range of typical business interruption insurance policies across the sector. A number of major insurers were involved in the case. “That movement went very quickly. It was fast-tracked”, says Berkley. “There was a decision in September in the Divisional Court, and then it was leapfrogged on these appeals directly to the Supreme Court.”
The FCA’s action resulted in a four-day hearing last November, where the Supreme Court heard a number of appeals by the FCA and appeals by a number of insurers. A judgment was handed down 15 January, with the court ruling in the favour of small firms, potentially forcing insurers to pay out £1.2bn in CBI (coronavirus business interruption) claims. Following the judgement, thousands of policyholders could now have their claims for coronavirus-related business interruption losses paid out, a resounding success for business owners across the UK.
The question of contracts
“It comes as welcome news to a lot of people who are helping those currently pursuing claims as the insured party. However, you can’t approach any of this in a blanket fashion”, warns Berkley. “One of the differences between the lawyering aspect of this, as opposed to the public perception of it, is that ultimately we’re dealing with a contract in these cases. We’re dealing with an effective insurance policy which has its own terms. And although there’s a lot of social policies and other factors that weigh in the balance, the reality is, it’s an empirical exercise in determining whether there’s coverage or not. And so the policy is not uniform, and the facts aren’t uniform. That’s why none of this can be looked at formulaically.”
Whilst many claims were launched on an individual basis, Berkley notes that claimants can come together to consolidate claims, adding that some solicitors have been approaching cases in that way. “However”, he says, “I’m not being prescriptive about any of this, and I’m not in any way critical of any other approach. But what I want to emphasise is that no lawyer, no solicitor, who is assisting the SME client, would look at this formula as some sort of sausage machine, because it doesn’t work that way.”
Berkley then touches on the issues of interpreting specific policy wording within these contracts, which according to him, is a matter that requires the tools of interpretation construction in order to arrive at the meaning and effect of all the relevant clauses. “We’re concerned with an open range of clauses, extensions, qualifications and exceptions within the body of the document, which was ultimately produced by the insurer,” he says.
He adds: “Although it provides an insurance product to the customer, it’s also designed by the underwriter to evaluate the risk, because the premium is going to be set by reference to how much risk the insurer is willing to take. So again, we’ve got to look at an insurance policy like any other contract in terms of what the parties intend.”
He says this is based upon the natural order and meaning of the words insurers have used in the context of the factual matrix of the contract, and what the circumstances were at the time the contract was entered into. “That’s a key factor here because we’re dealing with contracts which were created when Covid-19 wasn’t anybody’s contemplation,” he says.
Epidemics, pandemics, and other infectious diseases have always been something of a risk, however. And indeed, as Berkley notes, in several of the policies that were in question, there are clauses that provide indemnity in relation to business interruption caused by disease. In the cases that came before the Supreme Court, however, it was discussed how these policies were to be interpreted and whether they should be interpreted narrowly or widely.
“These discussions are all matters of law”, says Berkley. “We did not only discuss whether there was a disease clause. We saw arguments arise that found policies only covered them in relation to business interruption resulting from infectious disease, but not as a result of losses occurred through public authority or government imposed restrictions, for example.”
While the disease clause itself varies between different policies, one of the issues seen by Berkley and his chambers was whether or not the losses resulting from measures taken in response to Covid-19 could be found in relation to the disease clause. As a matter of law, were the losses faced by businesses caused by the disease itself? “You see, most of the disease clauses anticipate an outbreak of a disease within a specified radius of the relevant insured premises,” he says.
We did not only discuss whether there was a disease clause. We saw arguments arise that found policies only covered them in relation to business interruption resulting from infectious disease, but not as a result of losses occurred through public authority or government imposed restrictions.
“And so, the way the Supreme Court has approached this is a helpfully wide interpretation in relation to the issues of causation,” he adds. “It has decided that the relevant measures that were taken in response to all the information in the UK concerning Covid-19 means that generally speaking, all individual cases of Covid, which occurred at any time, would be regarded as a proximate cause of those measures themselves.”
He added: “Where you have covenants or clauses within the policy that allow for business indemnity in relation to closures resulting from public authority measures, or restrictions, then there is certainly a launch pad for being able to bring claims. The approach to causation of loss is, to some extent, liberalised by the Supreme Court’s decision.”
Looking ahead, Berkley’s advice to business owners now would be that if they consider they’ve suffered financial loss, they should not immediately look to get out of their policy. He says: “They should look at that policy and identify what exactly the coverage is so they can see it within the relevant policy. So check the policy – it may not be immediately obvious to small businesses what the policy does cover.”
“Let’s cover business interruption, for example,” Berkley adds. “You must check the extensions, which might be on any standard cover. And if there is business interruption cover, then the first step would be to notify the insurer of the intended claim. If you can give some background to that and some vantage then that is so much the better. However, be careful about being too specific at this stage.
“You might also ask, what is the value of the claim and what are you putting forward as the coverage? There are a number of limits to the indemnity.” For example, Berkley notes there is almost always a limit in relation to time. “There’s a period of indemnity that follows and that period of dematerialising is defined by the policy as well. There may be limits on the indemnity, which has a cap on what’s recoverable. This may be based on a total sum, or may be based upon something pro rata.”
In cases where it is not obvious what a business’ loss is by reference to trends or historical performance, Berkley said there is likely to be a requirement in the higher value claims to some form of accountancy, “whether that is accountancy through the in-house management of the company, whether it’s using the company’s auditors or accountants, or in some cases, independent, professional, forensic accountants”.
He adds: “There’s obviously other professionals that we will be working with in conjunction with the lawyers to advance claims and maximise recovery for those clients where it is appropriate.
“In addition, when clients look to seek legal redress, make sure you go to competent lawyers,” he says. “In any cases that are going to involve litigation, we would generally recommend that people don’t act as unrepresented parties. In particular, it’s very important that good quality legal advice is obtained in circumstances where there’s been loss where the insurers are either delaying or refusing to cover.”
On whether Berkley believes government interventions should be included under the disease cover, he says: “We are dealing with many different businesses here. At the end of the day, this means the question of the regulator’s role is important because of the fact that selling insurance is a regulated activity. But the contractual position is still based upon a commercial contract between the parties.
The Supreme Court, in some of the statements they’ve made, has provided very helpful and useful assistance in relation to the interpretation of how we approach clauses.
“The part of the contract in relation to where it is often relevant to government measures is the access clauses. And that’s where there is cover provided for business interruptions resulting from public authority intervention,” he says. “Usually, that’s because the intervention is preventing access to use of insured premises. Now, the Supreme Court, in some of the statements they’ve made, has provided very helpful and useful assistance in relation to the interpretation of how we approach these clauses.
“We live in a society where lawyers are there, ultimately, to be proactive in representing their client’s interests. And just as our job is to persuasively put forward articulate arguments based upon sound logic and black letter law to advance claims on behalf of our claimants equally, we know that there is another side to the legal profession that is approaching this using the same skills and the same knowledge in order to seek to reduce the exposure of their clients who are the insurers. Through that dialectic of those two opposing forces, something like truth emerges. That’s the nature of the adversarial process.”
“And that’s how it works,” adds Berkley. “But it only works if there is a level playing field. The problem with a lot of consumer law is that very often there’s a David and Goliath syndrome. However, now the most senior court in the country, the Supreme Court, has also provided its view in relation to some of these contested areas and has done so largely in favour of the insured.”
He concludes: “There’s still a need for very good lawyering and lots of hard work, and I think people need to understand that litigation is fundamentally risky and uncertain in its outcome and very expensive. Nevertheless, there is a basis on which we can say that individual cases cannot be looked at, in a way where, ultimately, there is a level playing field.”