Business interruption insurance and rent cesser – Much ado about nothing?

Our team: Armel Elaudais

While the various restrictions preventing landlords from taking actions against tenants to recover rent arrears during the Covid-19 pandemic have provided much needed breathing space for tenants, none of these measures extinguish tenants’ liabilities. Tenants have therefore been looking at other avenues to defend claims for rent arrears. Could insurance and rent suspension be the solution?

Last month the High Court gave its decision in the test case brought by the Financial Conduct Authority to determine whether business interruption insurance would cover losses arising out of Covid-19 – The Financial Conduct Authority v Arch and others [2020] EWCH 2448 (Comm). The Court considered sample policy wording falling into three categories:

  1. Disease – These were policies providing cover for losses resulting from business interruption arising from the occurrence of a notifiable disease within the vicinity of the premises. The Court found that these were triggered when there were cases of Covid-19 in the relevant policy area and that “vicinity” (if defined as an area surrounding the insured location in which events could have an impact on the insured’s business) could be widely construed to encompass England and Wales.
  2. Prevention of Access – This referred to policies covering loss arising from the prevention or hindrance of access to the premises due to actions/restrictions imposed by government. These were constructed more narrowly and whether cover is available will depend on whether the business was mandated to close and the impact of restrictions on the insured’s business. Although physical prevention was not required, “prevention of access” implied a complete closure, whereas the Court accepted that “interruption” can extend to disruption of the business operation and does not necessarily require completed cessation of the business.
  3. Hybrid cases – These were a combination of the two above categories.

The Court also considered the issue of causation. Insurers sought to argue that there would be no or reduced cover if, regardless of any local outbreak of Covid-19, the insured would have suffered losses in any event because of the wider effects of the pandemic. The Court however dismissed those arguments.

While this decision provides some much needed clarity on the interpretation of sample policy wordings, whether a particular policy will pay out will depend (a) on the particular wording of the policy, and (b) the circumstances of each business, in particular whether closure was mandatory or if it could continue to operate in some reduced capacity.

Engaging the insurance policy is, however, only the first hurdle for tenants seeking to rely on rent suspension provisions. The rent cesser clause will normally provide that if the premises are rendered inaccessible or unusable as a result of an insured risk, the tenant’s obligation to pay rent is suspended until the premises can be occupied again.

The first thing to consider is therefore whether business interruption due to Covid-19 falls within the definition of insured risk. Again this will depend on the specific wording of each lease. Insured risks typically refer to physical damage such as fire, flood or storm and may not include notifiable disease or prevention of access by government action. But if the definition includes a general sweep up (which allows the landlord to recharge insurance premium for other policy cover it may take), notifiable diseases or prevention of access may well fall within the “other risks” definition.

The next issue is whether the premises are inaccessible. Rent suspension clauses will usually refer to physical damage or destruction of the premises by an insured risk. So the question here is whether this can be triggered when there is no physical damage to the premises and access is prevented by reason of the government’s restrictions. This will be a matter of interpretation of the lease. In the FCA decision, the Court seemed willing to fudge the distinction between physical and non-physical damage when referring to incidents triggering the insurance cover. Whether it would be willing to apply a similarly broad interpretation in the context of a lease remains to be seen.

Tenants would be well-advised to ask their landlords to provide details of their insurance policy to see if business interruption caused by Covid-19 is covered under the policy and then review the rent cesser in their lease to see if there is scope for arguing that they are entitled to a rent holiday. There is, however, no guarantee that insurance and rent suspension will be the solution and to get there tenants may face a battle against both insurer and landlord.

It is also worth noting that the insurance companies in the FCA test case have appealed the High Court’s decision and have received permission to leapfrog the appeal directly to the Supreme Court, so things may well change.

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