What is business interruption insurance and can it help my fashion & beauty business?

The COVID-19 pandemic had a significant effect on UK retail, with shops closing and manufacturing halting. Many retailers had little option but to respond to enforced lockdown closures by adopting a more flexible digital approach. While this strategy was easier to adopt for those retailers in the fashion and beauty sectors that already had an omnichannel presence, for others — particularly boutique stores and those relying heavily on in-person engagement, such as tailors and beauticians — lockdown was extremely detrimental to their business.

Despite these hurdles, it seems like UK retail is bouncing back. According to Statista, revenue in the beauty and personal care market is expected to grow by 3.80% globally between 2023 and 2027 (and by 2.17% in the UK).

One of the driving factors behind this is that many large retail businesses had prior provisions in place through business interruption insurance (BI). Here, Trainee Solicitor Carys Keeble explains what BI is and how, through recent cases brought before the courts, it has developed.

What is business interruption insurance?

Business interruption insurance covers the loss that a business suffers as a result of interruption or interference due to certain ‘triggering’ events. While such an event is typically a fire or flood (something that causes physical damage to premises and prevents the business from operating), many BI policies also include cover for ‘non-damage’ BI, such as disease, terrorism or cyberattack.

BI policies and COVID-19

As a result of the COVID-19 pandemic, there have been a surge in claims for ‘non-damage’ BI losses. Although BI has existed for a long time and businesses have been insured for years, COVID-19 placed many BI policies under scrutiny over whether the specific circumstances of COVID-19 — not just the disease itself, but the resulting national lockdowns and various restrictions — were covered under BI policies.

There was such confusion about what fell within these policies that the Financial Conduct Authority (FCA) took a test case to the Supreme Court on behalf of hundreds of thousands of affected policyholders. The Supreme Court handed down its judgment on 15 January 2021 in favour of the insured businesses, finding that most BI policies did provide cover for ‘non-damage’ triggering events, including interruption due to COVID-19. However, most businesses that held ‘traditional’ BI policies lost out. These smaller policies, generally held by SMEs, still required physical damage.

How are BI claims dealt with?

Although the test case clarified that COVID-19 did fall within the BI cover policy terms, three recent court cases have delved deeper into the details.

On 17 October 2022, judgment was handed down simultaneously in Stonegate v MS Amlin & Ors (‘Stonegate’), Greggs v Zurich (‘Greggs’) and Various Eateries v Allianz (‘Various Eateries’). Each of these turned on a number of common issues around the quantification of COVID-19 BI losses.

The ‘Various Eateries’ all had the same (or very similar) policy wording (known as the Marsh Resilience wording, as it was prepared by Marsh & McLennan group brokers). The policy wording provided:

“In the event of interruption or interference to the Insured’s Business as a result of:

 ... viii. Notifiable Diseases & Other Incidents:

a. discovered at an Insured Location;

b. attributable to food or beverages supplied at or from the Insured Locations;

c. which are reasonably likely to result from an organism discovered at an Insured Location; and/or

d. occurring within the Vicinity of an Insured Location,

“during the Period of Insurance ... within the Territorial Limits, the Insurer agrees to pay the Insured the resulting Business Interruption Loss.”

The Court was asked three key questions:

1. Aggregation — how were the wide-ranging losses suffered by each of the policyholders to be aggregated for the purpose of applying the policy limits and deductibles?

On this question, the Court found that what constituted an ‘event’ for the purpose of any relevant policy caps was the first lockdown (March to May 2020), followed by separate occurrences in each jurisdiction within the UK. However, the Court did not accept that a business could claim losses for every set of stores that were individually affected in the jurisdiction.

2. Causation — for how long after the policy period did losses continue to be proximately caused by covered events occurring during the policy period — and how long was the relevant indemnity period?

Here, the Judge did not find that loss continued to be caused by covered events (such as COVID-19) for any significant period after the end of the policy period. This was very fact-dependent. However, the Judge did leave this decision open to the fact-specific detail and allowed that, when establishing causation for the purposes of requesting an extended indemnity period in respect of some or all of the losses suffered, the timings will rely on the proof.

3. Government support — were insurers entitled to make deductions from the BI indemnity calculation in respect of financial support provided by the UK government’s CJRS (‘furlough’) and Business Rates Relief schemes?

With this question, the Court took a more pro-insurer approach and found that insurers were entitled to credit for sums received by the insured in government furlough schemes.

The findings in these cases mean that the amount businesses can claim against their insurers has been significantly reduced. However, this might not be the end of the story, as permission to appeal has been granted. We can expect the appeals to be heard either later in 2023 or in 2024.

What next?

These cases serve as a reminder to review your BI policies. If you don’t have one in place, reach out to a financial and legal adviser to talk through the risk management options available.

Careful consideration should be given to what ‘business interruption’ looks like to you and your business. For example, while a fashion retailer may find alternative routes to market (such as online sales) in the event of an enforced store closure, the availability of those routes may be harder for beauty retailers that rely more heavily on in-person purchases.

How we can help

We have considerable experience in reviewing and dealing with BI claims. While the FCA has reminded insurers to provide reasonable guidance to help policyholders make a claim, if you need any support to review your policies, lodge a claim with your insurer or secure payment from an insurer, get in touch with our Head of Litigation and Regulatory, Jeff Lewis.