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Business Interruption Insurance (COVID-19) – Quantum Wars Part 2 - The Policyholder Case

16 June 2020

I posted my first article in this series in late April which included my thoughts around the potential quantum issues relating to COVID-19 Business Interruption claims.

Since that article was published, the FCA has announced that they are bringing a comprehensive test case which will seek to bring legal clarity on the most common areas where insurers have denied coverage and where this is being challenged by policyholders.

The FCA is effectively bringing the action on behalf of policyholders, and on 10 June submitted Particulars of Claim setting out the policyholders’ case – I will briefly summarise some of the key liability arguments, and then explore the “causation” arguments put forward which are relevant to the quantum of any claim. This article serves as an update to my first article which provides further background on the principles being considered.

To be clear, this is the policyholders’ case – the insurers’ case has been put forward in broad terms in the coverage denials (referred to in the Particulars of Claim), but further detail will be found when insurers submit their Reply which is due on 23 June. I will provide further commentary on the insurers’ case in a subsequent article.


The test case involves representative wordings from 91 distinct policies, with various permutations on the precise wording of the non-damage extensions being considered. In very broad terms the policyholder case is that:

  • Certain non-damage covers (notifiable disease and denial of access) should give rise to business interruption cover;
  • That all of the advice, instructions and regulations given by the UK Government should be considered together as the “authority action” and not be separated when considering causation;
  • Where there is no express exclusion for pandemics, no exclusion should apply; and
  • Where the policy refers to a “vicinity” to trigger cover, it is averred that COVID-19 can be found in all areas of the UK and that the policy wordings do not limit cover to loss caused by disease or other trigger only where it occurred within the relevant proximity.

In summary, policyholders believe cover is triggered by the test case policy wordings.

Causation and Quantum

Wide Area Damage - Recap

Firstly, a quick recap on the principle of Wide Area Damage:

In any Business Interruption claim the ultimate measure of a loss is a comparison to the “but-for” scenario i.e. what would the results of the business have been “but-for” the insured event. For the more common perils – fires and floods – this normally entails a projection of “business as usual” save for any trends in the business.

This principle is complicated when the cause of the damage also leads to “wide area damage” e.g. widespread flooding which causes both damage to the insured’s premises and also to the wider area in the vicinity.

This issue came to the fore in the UK when dealing with the Cockermouth floods in 2009, but more certainty was brought to bear by the judgment in Orient Express Hotels (OEH) V Generali SA 2011 which concerned the wide area damage effects of Hurricane Katrina on the Windsor Court Hotel in New Orleans in 2005.

In simple terms, this case determined that the impact of the wider area damage must be considered in assessing the trend of the business but for the incident (in this case damage to the property caused by the hurricane). But-for the insured damage, guests would not have visited the area, and so the expected revenue – and therefore insured loss – was minimal.

Insurers’ position per declinatures

The Particulars of Claim reference the main grounds of refusal that have been given in insurers’ declinatures. In regard to causation, insurers argued:

“20.5 The interference, interruption, loss or public authority-imposed restrictions did not ‘follow’ or ‘result from’ (or similar) or were not sufficiently directly or ‘solely and directly’ caused by the necessary local disease occurrence or danger but instead were caused by the wide-area pandemic, the fall in economic activity resulting from a general loss of confidence, or national government measures, and so cover is not triggered.”

In effect, insurers are seeking to separate out the “authority closure” as the policy trigger leaving all the other Government measures in place in the “but for” position i.e. the business would be open, but there is still a travel ban, social distancing etc.

There are some nuanced legal issues at play here in relation to the triggering language (“result from” and “solely and directly”) but it appears that it is the insurers’ position that taking account of other factors, businesses would not have generated any revenue (based on Wide Area Damage principles) and so there would be no loss. I question whether this is a sustainable position but will address that in more detail once insurers’ Reply has been issued.

Policyholders’ primary case

On behalf of policyholders, the FCA has put forward the following primary case:

“4.3 Moreover, if and to the extent that it is necessary and appropriate to consider what would have happened but for the insured peril (whether under an applicable ‘trends’ clause or otherwise), the correct counterfactual is a world in which there was no COVID-19 and no Government intervention related to COVID-19

I discussed this in the first article in this series, and it would seem an obvious position where two triggers are required – the authority closure and a notifiable disease or danger / emergency. The but-for position would be the absence of both triggers which is “no COVID-19 and no Government intervention related to COVID-19” which can best be described as “business as usual”.

Policyholders’ alternative case

However, in addition to the primary case, the FCA has also put forward an alternative case as follows:

79. Alternatively, if the FCA is wrong and the proper counterfactual is not as set out above, then in cases of disease or action required to be within the Relevant Policy Area the correct counterfactual is to assume that there is no disease or action (as applicable) within that Area but that the disease or action continued outside it. Accordingly, there remains cover for losses that would not have been suffered had the Relevant Policy Area been disease/action-free, including on the counterfactual (which in some cases may increase the indemnifiable amount) that there was an ‘island’ of normal disease free trade in a ‘sea’ of disease/public action

In some respects, this is not dissimilar to the insurers’ case, but the differences between the two will likely have a substantial – and potentially transformative – impact on the quantum of the claim.

The key difference between the two positions is the treatment of the UK Government measures. The insurers’ position is that you can separate the measures and any “authority closure” is distinct from all the other COVID-19 related measures (e.g. social distancing, restriction on travel). The policyholder position is that these are all part of a single set of measures and so should be removed in the but-for position.

Taking an example of a restaurant in Central London – I’m going to assume that it has a policy that is triggered by a closure by an authority due to the presence of a notifiable disease (no Relevant Policy Area).

Under this scenario, the Central London restaurant becomes a perfect, utopian “island” free of COVID-19. Not only that, the absence of any UK Government measures means people could flock from all around and I would suggest that a strong argument could be made that the restaurant would have been doing a roaring trade, potentially far in excess of “business as usual”.

However, I still think there could be examples where the but-for position could lead to a less than “business as usual” expected position. I previously used a pub in a train station as an example - the but-for case might open the pub, but wouldn’t bring the crowds back to the train station. Businesses that rely on other businesses being open may still find it harder to put forward an optimistic but-for case under the alternative case.

To reiterate my view set out in my first article, the corollary of the Orient Express verdict is that it must also allow the possibility of windfall profits i.e. that the business would have achieved higher revenue than the business as usual case. I would caution that it will be circumstance specific – there would be winners and losers on these assumptions – but the policyholders’ alternative case would likely give rise to some policyholders being able to claim windfall profits.

Relevant Policy Area

The terminology “Relevant Policy Area” is referencing the policy extensions that require a notifiable disease or danger within a certain vicinity – this might be 1 mile or it might be 25 miles. Under the policyholders’ alternative case, this entire area becomes an “‘island’ of normal disease free trade in a ‘sea’ of disease/public action” i.e. all businesses in this area are operating and the area is free of COVID-19 and UK Government measures.

Normally, it might be expected that the larger the area the more cover is provided to the policyholder. However, in this instance, so long as COVID-19 is present somewhere within the Relevant Policy Area and the policy is triggered, the size of the area may have a differing impact on the quantum of the loss.

Taking the Central London example, a small one mile vicinity would restrict the number of other similar businesses that are assumed to open that might compete with the policyholder. The businesses within that one-mile area might still argue that they would benefit from customers being drawn to the area to arrive at an assumed level of trade that is in excess of “business as usual”. However, as that area is widened, this competitive advantage reduces and at a 25-mile radius – which from a Central London location would encompass pretty much everything within the M25 – that competitive advantage is practically nil and the assumed case would revert back to “business as usual”.

However, taking a more rural example where there might be less opportunity to draw in additional customers and so the business is focused on recovering its “business as usual” case - if the business relies upon customers from a far wider catchment area, the larger the Relevant Policy Area the easier it might be to put forward that “business as usual” case.


The FCA is putting forward the case for the policyholder so it is not surprising that the assumptions put forward – and the examples above – appear favourable to policyholders. The strength of these assumptions will come under scrutiny once insurers have filed their reply which is due on 23 June. What I find interesting is that the primary policyholder case would broadly put all policyholders back in the position they would have been in but-for COVID-19, whereas the alternative case would potentially result in some big winners, but also some big losers.

What is clear is that both the implied insurers’ case and the policyholders’ alternative case would likely lead to huge complexities in determining the basis on which to calculate the quantum of the claims.

Richard Cameron-Williams 
Partner - Forensic Accounting and Valuation Services

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