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Many tenants have had their business income stifled by covid-19 and, therefore, lost their ability to pay their rent – or at least some of it.
This pandemic-induced interruption to the business community has been felt in many areas, but the financial impact on commercial property has proved significant. Commercial tenants and their landlords have spent many months in significant difficulties, not least because of uncertainty around whether non-damage business interruption insurance covers rental income losses in these circumstances.
So the clarity given by the High Court in an important, expedited test case – held via Skype in the Autumn - on the issues, brought by the Financial Conduct Authority (FCA) on behalf of policyholders is reassuring.
The FCA won on most of the key issues. However, not all of them were clarified so the FCA then took it to the Supreme Court, which heard the case in November. Judgment is not expected until early in the new year. Many thousands of small and medium sized firms in particular will be relying on the outcome for additional clarity and certainty as to their futures.
What’s the background?
Many claims made by businesses from March 2020, when national lockdown commenced, were being rejected by insurers. Many insurance policies extend coverage beyond damage to matters other than physical damage, such as business interruption losses relating to infectious or notifiable diseases.
However, some insurers insisted that the pandemic was beyond scope of most policies and was not, therefore, an event triggering payment under the policy. In its claim, the FCA raised 21 sample wordings from eight insurance companies and asked the court to determine issues of principle on coverage and causation under those wordings.
The High Court ruling (which is complex covering many issues) decided that most, but not all, of the disease clauses in the sample did provide cover.
It also ruled that certain denial of access clauses in the sample provide cover. However, this depends on the detailed wording of the specific clause and to what extent the business was affected by the government response to the pandemic.
An important clarification from the judgment is that the pandemic and the response of both government and the public amounted to a single cause of the covered loss. Commenting on the ruling, the FCA highlights the fact that this is a key requirement for claims to be paid - even if the policy provides cover.
In light of the ruling, the FCA interim CEO Christopher Woolard, urged insurance companies to consider what steps they can take to progress claims which the judgment indicated should be paid.
To muddy the waters somewhat, the judgment did not say the defendant insurers were liable across all the 21 samples of policy wording. This means policies need to be checked carefully. If, for instance, covid-19-related losses appear to be covered, commercial landlords need to consider putting their insurance company on notice of potential claims.
Rent suspension clauses may, in some cases, also be triggered by covid-19 – even if that is an uninsured risk.
1The Financial Conduct Authority v Arch and Others [2020] EWHC 2448 (Comm)
