Business interruption insurance cover: Supreme Court FCA test case decision

The Supreme Court has handed down its much anticipated decision relating to the coverage of business interruption insurance claims made following the COVID-19 pandemic.

A key question was whether the Supreme Court ruling would finally provide the clarity that the expedited test case sought to achieve for both policyholders and insurers. The good news for all is that the Supreme Court has indeed provided much more clarity in relation to most issues. And the outcome is much to the benefit of policyholders.

Interestingly, the Supreme Court differed from the court below in its approach to several issues (and agreed with insurers on certain arguments where the court below did not - see below) but its ruling on causation ultimately leads to a favourable outcome for policyholders. While a detailed consideration of the Supreme Court’s analysis and findings will be of interest to insurers, policyholders will focus on the result and how the ruling affects their claims for BI losses.

By way of background, last year the Financial Conduct Authority (FCA) brought a test case (FCA v Arch Insurance ( UK ) Ltd and Others) in order to clarify the interpretation of a number of common business interruption insurance policy wordings which were giving rise to disputes as to whether claims made following the outbreak of COVID-19 in the UK were covered. The High Court decision was handed down last September, but both the FCA and most (six of eight) of the insurers involved then appealed straight to the Supreme Court.

The Supreme Court has dismissed the insurers’ appeals, and substantially allowed the FCA’s appeal.

Particular issues covered by the judgment include:

1. Interpretation of disease clauses

These clauses typically cover business interruption losses caused by occurrence of a notifiable disease at or within a specified distance of the insured premises. The High Court had found that disease cover was not confined to the effects only of the local occurrence of a notifiable disease. That court had analysed the disease clauses in all of the wordings in a similar way, save for QBE 2 and 3 in which the clause required an “event” to trigger cover and in relation to which the court found there to be no cover because occurrences of the disease at different times and places would not constitute the same event and the clause limits cover to the consequences of specific events. The Supreme Court considered that the court below had correctly analysed the QBE disease clauses and was in fact wrong not to interpret the other disease clauses in a similar way. The Supreme Court judgment agreed with insurers that, in respect of disease clauses, cover should only be provided for business interruption caused by any cases of illness resulting from COVID-19 that occur within the specified radius.

2. Causation

The above does, of course, beg the question of what ‘caused by’ means in this context. The Supreme Court judgment concludes (agreeing with the analysis of the court below) that each individual case of illness resulting from COVID-19 which had occurred by the date of any Government action was a separate and equally effective cause of that action; in order to show that business interruption loss was proximately caused by one or more occurrences of illness resulting from COVID-19, it is sufficient to show that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause.

3. Interpretation of prevention of access and hybrid clauses

Policies may respond where restrictions are imposed by a public authority following an occurrence of a notifiable disease. But this does not mean, says the Supreme Court, that an instruction has to have the force of law; it may amount to a ‘restriction imposed’ if it carries the imminent threat of legal compulsion or is in mandatory and clear terms and indicates that compliance is required without recourse to legal powers. The policy might provide cover where business interruption loss is caused by the policyholder’s ‘inability to use’ the insured premises; the judgment makes clear that this requirement may be met where a policyholder is unable to use the premises for a discrete business activity, or is unable to use a discrete part of the premises for its business activities (and the same reasoning is applied to a requirement for ‘prevention of access’ to premises). Note that the High Court had previously ruled that there was no cover under certain prevention of access clauses and these clauses were construed more narrowly to relate to specific localised events rather than a UK wide response. This was not appealed by the FCA but some policyholders may now revisit claims under such clauses in light of the Supreme Court’s reasoning more generally.

4. Effect of trends clauses

Trends clauses are provisions which, in effect, seek to exclude from the quantification of claims losses which would have arisen regardless of the operation of the insured perils. The Supreme Court’s conclusion is that the circumstances for which adjustments need to be made must only be circumstances which are unconnected with the insured peril.

5. Pre-Trigger Losses

Another favourable ruling for policyholders, the Supreme Court ruled that pre-trigger trends (reduction in business because of Covid-19 prior to the government action and restrictions) should not reduce insured losses.

6. Orient Express

Significantly, the Supreme Court made it clear that the Orient Express decision was wrongly decided and should be overruled. The policy in that case contained a trends clause and the case concerned BI losses arising out of hurricane damage to a hotel in New Orleans in which Insurers had successfully argued that cover did not extend to BI losses which would have been sustained anyway as a result of damage to the city even if the hotel itself had not been damaged.

Overall, the impact of the Supreme Court ruling is clearly significant (and helpful) for policyholders, including many small and medium sized businesses, and the likelihood is that many thousands of previously rejected, or at least paused, claims will now be revisited. While their prospects of success are now much improved, each case will turn on its particular facts and the relevant wording.  In addition, issues may yet arise in relation to prevalence and proof (on which the conclusions of the High Court stand) and quantum.  And while it seems very likely that insurers will be keen to resolve claims as efficiently as possible, there may be some substantial disputes yet over the number of claims (given the various lockdowns) and applicable limits where there is “any one event” or “per premises”/ “per insured” language in the policy.

For insurers, the focus will likely turn to reinsurance recovery and the inevitable issues such as aggregation that will be at play in that respect and may lead to some substantial disputes in court or arbitration.