Business interruption insurance – Supreme Court rules on FCA test case

The Supreme Court has found in favour of the Financial Conduct Authority in a test case judgment which will benefit small businesses claiming under their business interruption insurance policies for losses resulting from the COVID-19 pandemic.

The Supreme Court sought to clarify the position in a case which was commenced by the Financial Conduct Authority (FCA) under the Financial Markets Test Case Scheme. Neil Parkes and Jenny Deacon's article on the High Court's previous decision in this case can be read here.

Overview of Supreme Court decision

Interpretation of "disease clauses"

Many insurance policies cover business interruption losses resulting from the occurrence of a notifiable disease within a certain distance of the premises.

The issue here was whether the loss had to be as a result of a localised occurrence of the notifiable disease (being the insurers' position) rather than the widespread occurrence and the Government response to the pandemic. 

The Supreme Court held that such clauses cover losses resulting from any case of the disease occurring within the defined radius, and further that each case of illness sustained by an individual as a result of COVID-19 is a separate "occurrence".   

Prevention of access and hybrid clauses

Prevention of access and hybrid clauses typically provide cover for loss resulting from public authorities preventing access to or use of the business premises following an occurrence of the notifiable disease. 

The Supreme Court rejected the High Court's interpretation that the requirement was only satisfied by measures which were mandatory.  The Supreme Court held that an instruction given by a public authority may amount to an imposed restriction if it carried with it the imminent threat of legal pressure or was mandatory in its nature, making it clear that compliance would be required without legal remedy. 

The Supreme Court agreed with the previous ruling that if policies cover business interruption caused by the policyholder's "inability to use" the insured premises, that cover would only be triggered if that business is unable to use the premises (or a discrete part of the premises) for its business activities, rather than merely being hindered in its use.

Causation

The key issue before the Supreme Court was whether the losses resulting from public health measures made in response to COVID-19 were caused by COVID-19 cases which occurred within the specified radius of the insured premises.  The insurers argued that the loss caused to policyholders would have occurred in any event due to the widespread nature of the pandemic – failing the "but for" test.  Further the insurers argued that the cases of disease occurring within and outside the specified radius should be considered in aggregate, resulting in the dominant cause of any Government measure occurring outside the specified radius. 

The Supreme Court rejected the insurers' position and held that the relevant measures taken in response to COVID-19 were taken as a whole and all individual cases of COVID-19 which had occurred by the date of Government measures would be considered as equally effective "proximate" causes to the measures.  This means policyholders need only show that at the relevant time there was at least one case of COVID-19 within the specific geographical radius of the insured premises.

The Supreme Court held that the "but for" test was not determinative in considering whether causation had been satisfied because it had to be considered by reference to a series of events, none of which had the only causal effect. 

As a result, the prevention of access and hybrid clauses could respond to losses caused by a local occurrence of COVID-19 in the wider context of the pandemic.  A policyholder is not excluded from cover if the localised occurrence on its own was not enough to cause the loss. 

Trends clauses

Trends clauses, which provide part of the quantification measure of a policy, allow for adjustments to be made as a result of other circumstances affecting a business to estimate the result that might have been achieved had the insured peril (the pandemic) not have occurred. 

The Supreme Court held that trends clauses should not be read so as to remove cover and that adjustments should not be made to include trends or circumstances which arise out of the same underlying or originating cause.  The trends for which adjustments should be made should generally be construed as those trends and circumstances which are unrelated in any way to the insured peril.

Pre-trigger losses

Following its interpretation of trends clauses, the Supreme Court disagreed with the High Court and held that adjustments should only be made where pre-trigger circumstances are entirely unconnected to the insured peril – here, COVID-19. 

What this means for businesses

The decision will be welcome for many businesses for whom COVID-19 has had a dramatic impact on their ability to open and trade.

In light of the Supreme Court's decision businesses who have suffered a closure and consequential hit on revenue as a result of COVID-19 should consider the following: 

1. Is there any insurance policy in place?
2. Is your cover through an insurer who was party to the test case? Or is it similar to a policy that was considered in the test case?
3. What has your insurer said about any claim under the policy?

Business owners who wish to consider their position and/or have been rebuffed by their insurers/brokers in the past, may wish to seek legal advice as to the merit of any claim or complaints they may have.

Unsurprisingly, the insurance industry has been gearing up for today's decision and it is possible that many policyholders who make a claim under their policy will now have greater success in their claims.

Subject to the quantum of losses claimed, and the nature of individual policies, those wishing to claim under their policy will have to consider with their legal advisors whether a standalone claim is made or whether they wish to join one of the various group actions that are being promoted.

For those businesses who do not have relevant cover under their policies (or a policy at all) there will undoubtably be a question as to why. This may lead to questions and potential claims against brokers as to the adequacy of the coverage.

The FCA has prepared a press release here which provides a useful commentary on what this case means to policy holders and reiterates that insurers must now work to conclude the backlog of claims. The Supreme Court judgment and press summary can be found here.

Should you wish to discuss the impact of this decision on your business please contact one of our specialist advisors who will be more than happy to help.