Supreme Court judgment: FCA business interruption test case
On 15 January 2021, the Supreme Court handed down its Judgment in the COVID-19 Business Interruption (BI) insurance test case brought by the Financial Conduct Authority (FCA) on behalf of small to medium-sized enterprises (SMEs) BI policyholders who suffered financial losses as a result of the COVID-19 pandemic. The Supreme Court found in favour of the FCA, and SMEs policyholders, whilst unanimously rejecting the Insurers’ appeals.
Standard BI cover usually depends on there being physical or material damage to an insured premises. However, some BI policies contain non-damage “extensions” and many businesses have sought to rely on these to recover losses resulting from the COVID-19 Pandemic.
The FCA brought a test case in the High Court to seek clarity on 21 BI policy wordings and this raised issues of causation by insurers, taking into account that policyholders would need to prove that COVID-19 has resulted in a loss that has triggered cover.
The FCA, the Hiscox Action Group and six of the eight insurer defendants appealed several of the issues in the High Court Judgment handed down judgment on 15 September 2020. The appeals were heard by the Supreme Court over four days between in November 2020 and on 15 January 2021, the Supreme Court handed down its judgment.
A link to our summary of the High Court judgment, the background to the proceedings and the issues in dispute, can be found here.
Summary of Supreme Court decision
The appeal focused on three categories of insuring clauses which are common across most BI insurance policies and relevant to COVID-19:
- “disease” clauses, which provide cover for business interruption following the occurrence of a notifiable disease within a defined area;
- “prevention of access” clauses, which provide cover for business interruption where there is restricted access to the Insured's business premises; and
- “hybrid” clauses, that seek to link cover to a combination of disease and prevention of access
The Court also analysed causation related issues and “trends clauses”, a mechanism for quantifying loss by establishing the link between COVID-19 and the policyholders’ losses arising from the pandemic.
Whilst the Judgment is highly detailed and should be carefully reviewed for a detailed analysis on each issue, we set out below a summary of the Supreme Court’s conclusions on the appealed clauses:
The wording of many of the clauses reviewed required an “occurrence of a Notifiable Disease” within a specified radius of the insured premises. Subject to any specific policy definition and/or factual issues that need to be considered for each claim, and whether the disease wording is only triggered if the relevant disease appears in a list set out in the policy, the High Court held that only the effects of a disease (i.e. COVID-19) as a whole were needed to cause a loss, and the occurrence of a notifiable disease within the radius was simply something which needed to have happened as a condition for coverage. Thus cover under these clauses will not necessarily be limited to losses resulting from a local occurrence of a Notifiable Disease.
The Supreme Court rejected this approach and held that disease clauses only provide cover for BI caused by any cases of illness resulting from COVID-19 that occur within the stipulated area (in the example considered, a 25 mile radius from the insured premises) , and not BI losses caused by COVID-19 cases outside that area. However, the Supreme Court made clear that, whilst the occurrence of the disease was required in the specified radius, the correct interpretation was not to limit cover only to local outbreaks of disease and the occurrence of the disease across a wider area would not prevent the application of the clause.
Prevention of access and hybrid clauses
Many prevention of access clauses deal with damage or destruction to business, however, some provide cover for losses resulting from government or local authority action or restriction. “Hybrid” clauses deal with both restrictions imposed on the premises and the occurrence of a notifiable disease.
The Court's analysis of Disease clauses also underpins its interpretation of Hybrid clauses that have a disease element.
In relation to Prevention of Access clauses, there must be “restrictions imposed” and an “inability to use the premises” or a “prevention of access” as a result. Accordingly, the appeal focused on two issues (1) whether restrictions imposed is required have the force of law and (2) clarity as to nature of the prevention or the hindrance of access, namely the interpretation of the principles of an “inability to use”, “prevention of access” and “interruption”.
"With regards to the first issue, the Supreme Court arrived at a wider interpretation than the High Court and found that restrictions do not always require the force of law and may cover a broad range of rules and instructions."
These include those given by a public authority in anticipation that legally binding measures would follow. As for the second issue, the Court held that the nature of the prevention requires more than mere impairment or hindrance to use the premises. However, the phrases “inability to use”, “prevention of access” and “interruption” are not limited to cases where there is an inability to use the whole premises for the whole of a policyholder’s business activity. It can be satisfied where there is an inability to use a discrete part of the premises for a discrete part of its business activity, so for example, a restaurant business which could still access the premises to provide a takeaway service may be able to claim for the inability to access the premises for its dining in service.
As a general rule, for cover to apply, an insured event must be the proximate cause of the loss claimed. In most cases this is relatively straightforward, for example, an insured event such as a flood or fire causes BI loss. However, in the case of COVID-19, the Government’s restrictions which, led to BI and BI losses, were not imposed because of a single case of COVID-19. Government measures were taken in response to the cumulative impact of COVID-19, in which “all the cases were equal causes of the imposition of national measures”.
- Disease Clauses In assessing causation in relation to disease clauses, the Supreme Court concluded that it was sufficient to prove that the BI was as a result of Government action taken in response to cases of the disease, which included at least one case of COVID-19 within the radius covered by the clause.
- Prevention of Access and Hybrid Clauses In respect of prevention of access clauses, the Supreme Court considered wording that required (A) an occurrence of a notifiable disease, which causes (B) imposed restrictions, which cause (C) an inability to use the insured premises, which causes (D) an interruption to at least a discrete part of a policyholder’s business activities. It held that such clauses indemnified the policyholder regardless of whether the loss was concurrently caused by other (uninsured but non-excluded) consequences of the Covid-19 pandemic, which was the underlying or originating cause of the insured peril (e.g. a result of action by the Government taken in response to COVID-19). The Court reached the same conclusion in respect of other wording considered.
Trends clauses provide an adjustment mechanism and are intended to ensure that the value of an insurance claim is not significantly greater or less than that covered by the policy.
In the absence of policy wording to the contrary, the circumstances for which adjustments need to be made must only be circumstances which are unconnected with the insured event. Insurers cannot therefore make adjustments on the basis that the losses were equally caused by the Covid-19 pandemic generally and the measures resulting from it.
The judgment is legally binding on the eight insurers that agreed to be parties to the test case, namely:
- Arch Insurance (UK) Ltd;
- Argenta Syndicate Management Ltd;
- Ecclesiastical Insurance Office Plc;
- MS Amlin Underwriting Ltd;
- Hiscox Insurance Company Ltd;
- QBE UK Ltd;
- Royal & Sun Alliance Insurance Plc; and
- Zurich Insurance Plc.
The judgment also provides authoritative guidance for the interpretation of similar policy wordings and claims. Last year, the FCA estimated that, in addition to the particular wordings considered, it was likely that the final decision would affect 700 types of policies across 60 different insurers and that 370,000 policyholders could potentially be affected by the test case.
The intention is that the judgment will be distilled into a set of declarations which can be applied when interpreting policies. The FCA and eight defendant insurers are working with the Supreme Court to enable the Court to issue its declarations quickly. Further, the FCA is preparing a set of questions and answers for policyholders to assist them and their advisers in understanding the test case, as well as a list of BI policy types that potentially respond to the Covid-19 pandemic.
The Supreme Court Judgment provides policyholders with further clarity in relation to their business interruption insurance coverage. The findings on causation mean that it will be very challenging for insurers to deny, or reduce, cover from losses whose underlying cause is the COVID-19 pandemic. Whilst the FCA's Dear CEO letter of 22 January 2020 makes it clear that it now expects insurers to proceed with making payments, it must be stressed that the Supreme Court Judgment does not address all possible policy coverage disputes and it does not determine how much is payable under individual policies.
Given the complexities relating to heads of cover and the application of the Judgment in order to determine the quantum of recoverable loss, policyholders should review their BI cover policy wording carefully.
Get in touch
For more information on this update, please contact Olivia Morton.
This article was prepared by Salvatore Anania.