Canadian Underwriter

How business interruption verdict impacts trends clauses

September 30, 2020   by Greg Meckbach

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If your clients are looking for business interruption coverage arising from the pandemic, a key question is whether there is a “trends clause” in their policy.

“In policies with trends clauses, the calculation of loss of business income must take into account external factors that would potentially impact the future economic performance,” said Eric Charleston, a Toronto-based insurance coverage lawyer with Miller Thomson LLP.

He was commenting on a decision released Sept. 15 by the High Court of England and Wales in a test case brought by the U.K. Financial Conduct Authority.

The verdict in that case is binding only on the eight insurers who were named by the FCA and only with regard to the 21 policy wordings in dispute.

Both sides recently announced they are appealing.

Insurers with similar policy wordings should be prepared for Canadian courts to look to the British court ruling, Charleston told Canadian Underwriter in an interview after the initial verdict but before the appeals were announced.

An eight-day trial held this past July. None of the disputed wordings required physical damage to the premises. The FCA was seeking clarity on whether those wordings provide coverage for BI-related to government orders or advice to shut down a workplace.

In several instances, policies providing BI cover for an incident of a disease within a certain distance (25 miles for example) of the premises did in fact cover businesses who faced income loss in Britain arising from COVID-19.

One of the trends clauses the British Court considered reads as follows:

“Under Rate of Gross Profit, Annual Turnover, Standard Turnover, Annual Rent receivable, Standard Rent, Receivable Annual Gross Revenue and Standard Gross Revenue adjustments shall be made as may be necessary to provide for the trend of the Business and for variations in or other circumstances affecting the Business either before or after the Incident or which would have affected the Business had the Incident not occurred so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the Incident would have been obtained during the relative period after the Incident.”

Had the court sided with insurers on the issue of the tends clauses, that could have effectively negated the value of any insurance cover available to the insured, noted law firm Herbert Smith Freehills, which represents the FCA.

“What the court was reckoning with was the pervasive impact on economy of the COVID-19 pandemic and whether that could be considered as part of the trends clause, in quantifying the loss of an insured, if there was coverage,” Miller Thomson’s Charleston said in an interview. “Essentially the court said no. What the court broadly ruled was that the pandemic itself was the insured peril, and the insured peril itself cannot be used as a negative trend to downwardly adjust a business interruption total.”

Another trends clause reads as follows:

“Business trends: Provided that you advise us of your estimated annual income, or estimated annual gross profit if applicable, at the beginning of each period of insurance, the amount insured will automatically be increased to reflect any special circumstances or trends affecting your activities, either before or after the loss. The amount that we will pay will reflect as near as possible the result that would have been achieved if the insured damage had not occurred.”

The test case was not intended to encompass all possible disputes, the FCA says. The judgment does not determine how much is payable under individual policies, but will provide much of the basis for doing so.

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