Policyholders will be aware that 15 January 2021 saw the Supreme Court hand down its judgment in the COVID-19 insurance test case for business interruption losses - Financial Conduct Authority ("FCA") v Arch and others. This was the final judgment in the FCA test case that started in the High Court in June 2020, with the aim of providing clarity to policyholders seeking to recover COVID-19 related losses under their business interruption policies. Read our full article covering the test case: Business interruption insurance and COVID-19.
Following that judgment, the FCA has issued further guidance on how to prove and quantify affected claims. Our insurance experts have reviewed the guidance and summarised the key issues below.
A. Guidance on proving the presence of COVID-19
To simplify the claims process, the FCA has issued guidance to policyholders on how to prove the presence of COVID-19, where necessary when bringing a claim (the "FCA Guidance"). We summarise this guidance below, although when formulating a claim, policyholders should review the FCA Guidance in full.
1. Does the policy wording require the policyholder to demonstrate the presence of COVID-19 in a Relevant Policy Area?
The first step for a policyholder is to establish whether the wording of their business interruption policy requires them to prove the presence of at least one case of COVID-19 within a particular distance, zone or radius from the premises (defined as the "Relevant Policy Area").
This is not always the case. A business interruption policy may require either the occurrence of a notifiable disease, or the presence of the disease within the vicinity of the premises without specifying a particular area within which it must occur. In those circumstances, provided events that occur in the area would be reasonably expected to have an impact on the policyholder, the policyholder does not need to prove the presence of COVID-19 in a particular location.
In the first instance decision, the High Court confirmed that, in England and Wales, COVID-19 occurred within the "vicinity" of all premises on 31 January 2020, which is the date of the first positive COVID-19 test in England, and that the disease "occurred" on 5 March 2020 in England and 6 March 2020 in Wales. This part of the High Court judgment was not appealed and as a result, policies requiring the occurrence of a notifiable disease or the occurrence within the vicinity, are notifiable on these dates respectively.
2. How to prove the presence of COVID-19 in the Relevant Policy Area
Where a policy does require a policyholder to prove the presence of COVID-19 within the Relevant Policy Area, the FCA Guidance suggests different methodologies that policyholders can use. The first four methods are the most straightforward and policyholders should try to use one of these methods in the first instance, in the order set out below.
However, the difficulty of proving the presence of COVID-19 within a Relevant Policy Area will of course depend upon the size of the area and whether it is densely populated or rural.
(i) Specific evidence
The simplest methodology is to use specific evidence of a case or cases of COVID-19 in a particular location. The FCA Guidance sets out that reasonable evidence of this type would include:
- Personal knowledge of someone in the Relevant Policy Area having tested positive for COVID-19;
- Reports from reliable media outlets of cases of COVID-19 in a school, hospital, care home, restaurant or other business within the Relevant Policy Area;
- Personal knowledge of a staff member, customer or guest who tested positive within seven days of being on the policyholder's business premises;
- Contacting a local GP surgery to enquire as to whether they had a patient who tested positive or displayed COVID-19 symptoms within the relevant period; and
- Official statements from a university with the Relevant Policy Area confirming a case of COVID-19.
(ii) NHS Death Data
In order to prove the presence of COVID-19, policyholders can also use data published by the NHS about the number of people who died in each NHS Hospital Trust following a positive test result. The NHS Death Data for England includes a spreadsheet listing deaths by NHS Hospital Trust. The policyholder can then draw inferences from this data, to show there having been a case in the Relevant Policy Area at that time. General data related to a particular NHS Hospital Trust may only be used if all of the hospitals within that Trust fall within the Relevant Policy Area.
(iii) Office for National Statistics (ONS) Death Data
Policyholders can additionally rely on published ONS data which shows the number of deaths in England and Wales where COVID-19 is recorded on the death certificate. The policyholder can use the death data to show that there was a case in the Relevant Policy Area 13 days prior to the date of the death(s), based on the average time between symptom onset and death in cases of COVID-19. ONS data is also available at https://coronavirus.data.gov.uk/details/deaths.
Again, the policyholder can only rely on this ONS data if the local authority/ health board in question is entirely within the Relevant Policy Area. If the Relevant Policy Area is entirely within or straddles the local authority, the approach for demonstrating the presence of COVID-19 is more complicated (please see 'Geographical Distribution' below).
(iv) Reported cases
Reported cases refers to data published by the UK Government recording the number of positive COVID-19 test results in a particular area. In most cases, a policyholder will need to prove that there was at least one case of COVID-19 in the Relevant Policy Area prior to the interruption of their business. Policyholders can use the daily number of new cases, or work out the number of cumulative cases on a given date in order to establish this and make a claim.
A map of local authority districts can be found on the ONS website. As with the ONS data, if the Relevant Policy Area is entirely within or straddles the local authority, the approach for demonstrating the presence of COVID-19 is more complicated (again, see 'Geographical Distribution' below).
This method may be useful for policyholders with a one-mile Relevant Policy Area. These policyholders can use reported data for 'Middle Super Output Areas', which are small areas with an average population of around 7,200.
3. What if none of these four types of evidence are sufficient for a policyholder to prove the presence of COVID-19?
If a policyholder is unable to prove the presence of COVID-19 in their Relevant Policy Area using one of the above methods, the FCA Guidance sets out two further methods that can be used, namely Estimated Cases and Geographical Distribution.
The FCA has published a calculator to assist policyholders in proving the presence of COVID-19 in their policy area. This calculator supports the FCA Guidance generally, but is specifically aimed at assisting in proving the presence of COVID-19 through the use of estimated cases or geographical distribution, and to some extent reported cases.
(i) Estimated cases
Due to the lack of COVID-19 testing available in March 2020, there is likely to be a discrepancy between the number of recorded cases and the number of actual cases of COVID-19 at the time. The FCA Guidance confirms that policyholders can rely upon two scientific reports that estimated the likely number of COVID-19 infections in March 2020:
- Imperial College Report (the "Imperial Report"). Imperial College issued updated data on 18 March 2021 and it is this updated version that should be used by policyholders; and
- Cambridge University together with Public Health England - Report.
If a policy requires that COVID-19 was "manifested", then a reduction of 28% will need to be applied to the number of estimated cases taken from the Imperial Report, so as to account for those asymptomatic cases that have been included but do not count as "manifested" cases.
(ii) Geographical distribution
Policyholders whose Relevant Policy Area either sits entirely within a local authority, or straddles one or more local authorities, may use this method to identify which of the local authority data, according to either ONS Data, Reported Cases, or Estimated Cases, specifically occurred within their Relevant Policy Area.
The FCA Guidance sets out steps that policyholders can use to find the "weighted average" of cases within their Relevant Policy Area. These include (a) calculating what percentage of the population of each lower-tier local authority that falls within the Relevant Policy Area live within the Relevant Policy Area; and (b) adjusting the estimated number of infections on a given date accordingly. A reduction in the total number of cases will also need to be made by policyholders whose policy requires that COVID-19 was "manifested".
4. What is the specific guidance to insurers?
Where one policyholder has demonstrated that COVID-19 "occurred", or was "sustained" or "manifested" in any Relevant Policy Area, then other policyholders located in substantially overlapping Relevant Policy Areas should not be required to prove the same. Insurers are encouraged to display on their websites in which Relevant Policy Areas the presence of COVID-19 has already been evidenced.
B. Updated statement on non–damage Business Insurance settlements and deductions made for government support
The FCA has also released further guidance to help insurance firms assess under what circumstances it is appropriate for them to make reductions from business interruption claims to account for government support received by the policyholder in the form of, for example, Leisure/Retail/Hospitality Grants or Small Business Grants.
1. Is it appropriate to make deductions?
The overarching advice from the FCA to insurance firms is to treat each claim individually, as well as each type of government support. In each case the insurer will need to consider (a) the type and nature of the government support (b) how the policyholder used this support; and (c) the terms of the policy itself, in particular the method for calculating the value of the claim. In particular, the Government's treatment of certain grants for tax purposes is not a proper basis for insurers to treat these payments as turnover under the policies, and insurers should not apply these amounts as savings against fixed business expenses when policyholders use them for different purposes.
2. Expectations of insurers
The FCA expects insurers to treat policyholders fairly and be open in their communications to them regarding deductions and/or settlement offers made in respect of business interruption claims. The FCA may intervene if they consider that a firm is not following this guidance.
Policyholders will be pleased to note that the Association of British Insurers has confirmed that Ageas, Allianz, Aviva, Axa XL, Axa, Chubb, Covea, Direct Line Group, Ecclesiastical, Hiscox, NFU Mutual, QBE, RSA and Zurich have all agreed not to deduct the following grants:
- Local Authority Grant
- Small Business Grant
- Leisure/Retail/Hospitality grants
- Local Restrictions Support Grant (closed)
- Local Restrictions Support Grant (open)
- Additional Restrictions Grant (ARG) and
- Local Restrictions Support Grant (LRSG (Closed) Addendum)
or their equivalents in Scotland, Wales and Northern Ireland.
If you would like to discuss this article further, or you have any specific queries on it, or on any insurance issue, please contact Susannah Fink, Samantha Holland or Rachel Argyle.
 Financial Conduct Authority v Arch Insurance (UK) Ltd and others  UKSC 1