Business interruption policies triggered by Covid cases at the insured premises, or within a defined radius, may come under closer scrutiny as city-centric lockdown confirms the local impact of the pandemic

According to the defence documentation submitted to the FCA for use in its upcoming test case, some insurers – such as Ecclesiastical and MS Amlin – have rejected business interruption (BI) claims on the basis that Covid-19 is a pandemic, affecting the UK and the world, therefore the outbreak does not constitute as a single local occurrence, or incident within a specified radius - this, in turn, means that Covid-19 is not considered an insured peril.

For example, within Argenta Syndicate Management’s defence paperwork, it stated: “The insured peril identified in Extension 4(d) is, for the purposes of these proceedings, ‘any occurrence of [Covid-19] within a radius of 25 miles of the premises’.

“The insured peril is not a global or national pandemic, or a notifiable disease as such. Rather, the insured peril is the occurrence of a notifiable disease in a particular locality, namely within 25 miles of the policyholder’s premises.

“There is a specific exclusion attached to Extension 4(d) that excludes any loss arising from premises which have not been ‘directly affected’ by a local occurrence of an infectious disease.”

Similarly, QBE’s defence read: “QBE wordings cover and are only intended to cover only such interruption or interference as is directly caused by a particular local, insured premises-related occurrence or manifestation of a relevant notifiable disease and do not cover interruption or interference caused by a nationwide or worldwide occurrence or spread of such a disease.”

But, could this line of thinking suddenly come under further scrutiny following the government placing Leicestershire in a localised coronavirus lockdown from 29 June, in response to a surge of Covid-19 cases? This includes implementing measures such as:

  • Non-essential shops that reopened on 15 June have been asked to close.
  • Bars, restaurants and hairdressers will not reopen on 4 July.
  • Schools will close from 2 July, except to vulnerable children and children of key workers. They will not reopen until next term.
  • The relaxation of shielding measures due on 6 July cannot now take place in Leicester.
  • People in Leicester are recommended to stay at home as much as they can.
  • The government advises against all but essential travel to, from and within Leicester.

The localised lockdown covers the Blaby district, Charnwood, Oadby and Wigston.

With such strict city-specific action now in place until at least 18 July, when the measures will then be reviewed by the government, could this impact on the BI claims of Leicestershire-based business owners since they can now cite a localised lockdown to trigger policy coverage?

Branko Bjelobaba, principal at general insurance FCA compliance consultancy Branko, said the city lockdown “will only be an issue for non-essential shops [that] were allowed to trade and have now had to stop, as most other classes could only open from 4 July or later. ”

He added that although clauses that reference radius become irrelevant in terms of a localised lockdown, claims will still be reviewed in the same way, asking whether Covid-19 is an insured disease and whether BI extensions cover non-damage-related denial of access.

“But, if the earlier claim was declined, no hope for a new one,” he said.

Difficult to argue

Garon Anthony, litigation partner at law firm Squire Patton Boggs, said that insurers will look to wriggle out of these coverage discussions, where insurance is triggered by an instance of Covid-19 at the insured premises or within a defined radius of the insured premises, by telling policyholders that coronavirus “was a local manifestation of a global or a national peril, and therefore it’s not covered”.

However, he added that Leicester’s local lockdown makes this line of argument less convincing.

He said: “My view is that it will be slightly more difficult for insurers to raise that kind of argument when you’re actually talking about a local lockdown because clearly the reason that there has been a lockdown in Leicester is because there has been an uptick in the number of Covid cases, as against the national average, [that] have been detected in Leicester.

“As a result of that, therefore, it strikes me that it should be slightly easier for an insured to be able to argue ‘well here you go, this is actually a local lockdown’ with regard to cases that are within a five, 10, 15 mile radius and therefore the BI policy will respond.”

Considering BI claims in relation to localised lockdowns could become the next hurdle for the insurance market here, as Anthony predicts more city-centric closures are on the cards.

“I don’t think we’re going to see a national lockdown again because of the devastating effect that it’s had on the economy, but the way in which the government’s probably going to approach this is to try and do it on a local basis or a neighbourhood basis, or in relation to specific factories or offices or housing estates,” he added.

Line of defence

Anthony continued that insurers will still be able to use the ‘but for’ reasoning to quash policyholder opposition regarding BI claims. “The fact of the matter is that your business would have been affected as a result of Covid regardless of whether or not you have a policy [where] coverage is triggered by a government or a local authority lockdown,” he explained.

Furthermore, if policyholders have already made a BI claim, then the development of a city lockdown will be unlikely to affect the outcome, as any action will be viewed by insurers as a continuation of the claim rather than chalked up as a new claim.

Anthony said: “[Insurers] may well say what this is in Leicester is still the tail end of a national or global pandemic and therefore Covid didn’t really go away in this area.

”Actually, what we’re talking about is a further manifestation of a train of events that have been ongoing since March, therefore it’s not a new claim; it’s a continuance of a claim that was already up and running when the lockdown first came in at the end of March.”

Plus, the insurer mantra that non-damage BI policy wordings were never intended to cover global pandemics still rings loudly as an additional barrier to receiving a claim pay out, added Anthony.