Several insights into U.S. business interruption coverage litigation can be gleaned from the outcome of the UK Financial Conduct Authority’s test case.
On September 15, the UK High Court issued a ruling involving business interruption claims against 21 representative policies issued by 8 insurers. The ruling is a mixed bag for UK policyholders and insurers. For their U.S. counterparts, the decision provides only a few relevant insights.
While the 165-page opinion digs into the unique wording of each of the 21 policies, the fundamental theme running through the insurers’ defense was that the policies only covered localized outbreaks not global pandemics. The insurers generally lost that argument with respect to the policies containing Disease Coverage and generally prevailed with respect to policies containing only Prevention of Access / Public Authority Coverage.
These are not the points driving U.S. policyholders and insurers into court. U.S. business interruption disputes so far have turned on two key policy features. First, U.S. business interruption coverages (including coverage extensions such as civil authority coverage) almost always require property damage to trigger a payout. For standard business income coverage, the property damage must be at the insured location. For civil authority coverage, the property damage must be away from but within a certain distance of the insured location. Second, all but two COVID-19 court rulings in the U.S. have involved policies with virus exclusions.
The UK court did not address either the question of property damage or the applicability of a virus exclusion. In fact, the policies at issue in the UK case contained “non-damage” coverages specifically encompassing business interruption losses resulting from the outbreak of disease.
UK Public Authority Coverage is somewhat similar in nature to civil authority coverage available in the U.S. The attached presentation looks for reasoning within the UK court’s decision that could be applied to interpret similar wording in the U.S., including whether:
• Governmental guidance or recommendations amounts to an “action of civil authority”;
• Stay at home orders “prohibit access” to an insured location;
• The “area immediately surrounding” the insured location includes the entire state; and
• The insured location is “not more than one mile” from the property damage where similar property damage exists outside of that radius.
These are important but nitty-gritty questions that will only need to be answered for civil authority claims that make it past the “property damage” hurdle and any virus exclusion attached to the policy.
