The Supreme Court issued its judgment in the FCA Business Interruption (BI) test case on 15 January 2021, dismissing insurers' appeals and bringing positive news for thousands of policyholders who have spent months in limbo, waiting for their BI insurers to respond to their claims for losses related to the COVID-19 pandemic.
With the relevant issues having been decided, and with no prospect of appeal against the Supreme Court's conclusions, the Judgment is binding on the insurers who were a party to the test case – Arch, Argenta, Ecclesiastical, Hiscox, MS Amlin, QBE, RSA and Zurich – and provides guidance to other insurers with wordings similar to those considered by the Court. The Judgment therefore provides much-needed clarity for individual policyholders who may otherwise have had to bring proceedings against their insurers for payment of their losses on a case-by-case basis.
Practical impact – in short
The Supreme Court dismissed all of the insurers' appeals and so there are no policyholders which should now be worse-off from the decision.
The Supreme Court has largely upheld the findings of the High Court and in some material respects has broadened the coverage available. This means that most policyholders will be in the same position and certain policyholders will now be in a better position – particularly those with 'prevention of access' and hybrid clauses which the High Court found would respond as a matter of principle.
For these policyholders, the focus will now be on quantum and claims settlement. The Supreme Court provides welcome clarity on how quantum should be calculated and in particular the application of trends clauses in favour of policyholders. There is now no scope for insurers to cut down the quantum claim when the loss comes to be assessed by taking into account factors connected to COVID-19 when benchmarking performance.
However, the path to recovery will not be as straightforward for everyone:
- Some policyholders (i.e. those with 'prevention of access' clauses intended to respond to specific localised events) will not be affected by the Supreme Court decision because the FCA did not appeal all aspects of the High Court's findings.
- There will be those policyholders whose insurers consider that their wordings can be sufficiently distinguished from the Supreme Court's findings. These sort of arguments will need to be looked at very carefully, because the Supreme Court has given a wide-ranging judgment on the state of the law more generally and each policy wording will therefore need to be considered on its individual terms.
- Certain issues fall outside of the test case altogether. For example, questions of aggregation around how many "events" have taken place. This will be particularly relevant to businesses impacted by local versus national lockdowns with multiple sites / operations in different parts of the country.
The consequences of this Judgment will also extend beyond claims for COVID-19-related losses, due to the overruling of the earlier case of Orient-Express. As a result, policyholders can expect more extensive cover for consequences of events such as natural disasters than would previously have been available.
A summary of the main conclusions of the Supreme Court is set out below.
Due to the COVID-19 pandemic, a large number of businesses have been forced to close in compliance with official Government guidance to reduce the spread of the disease. Many have claimed under their non-damage business interruption insurance for the resulting financial losses, but whilst some insurers have paid such claims, others have disputed cover leading to great uncertainty and delay.
In order to clarify the position in respect of the most commonly disputed issues and to establish some general guidelines, the FCA brought a test case in the High Court, selecting 21 sample policy wordings issued by eight different insurers to be considered, which were thought to be representative of those existing in the market.
The High Court's resulting Judgment in September 2020 was seen as broadly positive for policyholders, generally concluding that the 'disease' and 'prevention of access' clauses provided cover for the pandemic, and that this (and the Government's response) had caused the business interruption losses.
Multiple appeals were made by insurers (and in certain instances the FCA) on those conclusions directly to the Supreme Court by way of the 'leapfrog' procedure (allowing them to bypass the Court of Appeal). The Supreme Court issued its judgment on 15 January 2021, categorising the appeals under a series of headings. We consider each of these in turn below.
'Disease' clauses provide cover for business interruption losses caused by the "occurrence" of a "notifiable disease" at or within a specified radius of the insured premises (e.g. 25 miles). The High Court concluded that the relevant "occurrence" was the COVID-19 pandemic itself, and accordingly such clauses covered all resulting business interruption losses, provided there was at least one case of the disease within the specified radius.
On appeal by insurers, the Supreme Court stated that it could not agree with the High Court's findings. A reasonable reader of the insurance policy would not understand the clause to include cases falling outside the specified radius, and it was not consistent with the meaning of the word "occurrence" to class this as a pandemic comprised of cases suffered by numerous different individuals at different times. Instead, each individual case of COVID-19 was the relevant "occurrence", and cover was only available for business interruption losses arising from the cases within the specified radius.
Whilst at first glance this departure from the High Court's ruling appears to be a much less helpful position for policyholders, the practical impact of this for coverage is limited because of the Supreme Court's findings on causation (see below).
'Prevention of access' / hybrid clauses
Such clauses are intended to offer cover for BI losses suffered due to an inability by the policyholder to access or use their business premises. They are comprised of several elements acting in combination, and often include a radius requirement similar to 'disease' clauses above (so-called 'hybrid' clauses). The Supreme Court considered a number of appeals related to the language of these clauses, and confirmed that:
- The High Court had been correct to hold that clauses requiring "restrictions imposed" by a public authority would generally mean mandatory measures imposed as a result of an authority's statutory (or other) legal powers. However, it had been wrong to state that such restrictions also had to be legally binding. The wording of the clauses had not been limited in this way, and it was conceivable that mandatory instructions could be given in the anticipation that legally binding consequences would follow from a lack of compliance. A reasonable policyholder would not have understood the wording "imposed" to have required a legal basis for cover to result;
- "Restrictions imposed" did not have to be directed at policyholders only (although this was most likely); regulations prohibiting people from leaving their homes without a reasonable excuse would also qualify for the purposes of this clause;
- An "inability to use" the premises required more than a mere hindrance or impairment. However, it did not result from the language of the clause that this required the entire premises to be unavailable. That inability would be satisfied if only part of the premises were unusable or if the premises could only be used for a discrete part of the insured's business activities. In such cases though, cover would only be available for the part of the business or premises which could not be used. This conclusion applied equally to similar wordings, such as "prevention" or "denial" of access; and
- Wording requiring an "interruption" to business activities did not involve a more demanding test than mere interference or disruption; complete cessation was not required. Such an interpretation would run contrary to the ordinary meaning of the word "interruption" and was inconsistent with other provisions in the policies.
The Supreme Court therefore interpreted these clauses more widely than the High Court.
The crux of the insurers' argument was that policyholders had to show that the loss would not have been sustained 'but for' the insured peril. Unless the insured peril is the pandemic itself, this would present a coverage issue for policyholders. Nonetheless, the Supreme Court rejected the proposition that the 'but for' test was determinative.
It could not obviously be said that any individual case of COVID-19 on its own would have resulted in the Government restrictions. Such actions were taken in response to information about all of the cases in the country as a whole. A realistic analysis of 'disease' clauses was that all of the cases were therefore equally effective causes of the restrictions which led to the BI loss. In reaching this conclusion, the Supreme Court noted that parties to the insurance contract would have been aware that a rapidly spreading infectious disease would most likely result in cases both within and outside the specified radius of the insured premises. Any actions taken by the Government in response would therefore relate to the outbreak as a whole. It was contrary to the commercial intent of the clause for uninsured cases outside of the specified radius to deprive the policyholder of indemnity for loss also caused by insured cases of the same disease within the specified radius. The Supreme Court also relied on the fact that the clauses did not include wording limiting cover to loss arising only from cases of "notifiable disease" within the specified radius.
The Supreme Court also rejected an alternative aggregation argument advanced by QBE, that the relevant question to consider was whether individual cases within the specified radius, when taken together, would have had the same causal impact as the aggregate of all of the individual cases outside the specific radius. Whilst this aggregation approach was not generally impermissible, it did not make commercial sense in the context of the disease clauses as it was not possible to separate the effects of certain cases from others. The question of whether the loss resulted from an insured peril was an 'all or nothing' one. It would be unworkable to attempt to answer that question by weighing the relative potency of insured and uninsured cases of the disease.
The practical effect of the Supreme Court's findings on this issue is therefore closely aligned with that of the High Court, albeit for different reasons.
'Prevention of access' / hybrid clauses
The Supreme Court disagreed with the High Court that the 'but for' test should be applied by asking what the position would have been if none of the elements of the insuring clause had occurred. This involved treating the insured peril as being the risk of one (or more) of the conditions in the insuring clause occurring, rather than the risk of them all occurring together, as intended by the clause. It also rejected insurers' argument that the Government restrictions should be treated as the insured peril, as this neglected to take account of the fact that the wording only provided cover for restrictions resulting in an inability to use the premises (i.e. not the restrictions as a whole).
By applying the 'but for' test in this way, the scope of the indemnity was limited to losses caused only by the insured peril (and not those also caused by a concurrent proximate cause). The correct interpretation was to treat the clause as insuring the policyholder against only the risk of all of the elements of the 'prevention of access' clause acting in causal combination to cause the loss – regardless of whether it was also concurrently caused by an uninsured consequence of the COVID-19 pandemic, being the underlying cause of the insured peril. If those uninsured consequences were expressly excluded, or if the pandemic was found to be the proximate cause instead of the combination of elements of the insured peril however, there would be no cover.
Trends clauses provide a mechanism for quantifying the policyholder's loss, generally by comparing turnover during an earlier unaffected period of trading with that during the indemnity period, and providing an adjustment if the business's turnover would have been impacted in any event without occurrence of the insured peril.
The Supreme Court found that the most appropriate way to treat such clauses was for the quantum adjustment to reflect trends unconnected with COVID-19 only. The aim of trends clauses was to arrive at the result which would have been achieved but for the insured peril and circumstances arising out of the same underlying clause, which was consistent with this application.
The High Court had indicated that it may be appropriate for a trends clause adjustment to be made if there had already been a downturn in an insured's business revenue as a result of COVID-19, before the insuring clause had been triggered (although only to the extent that this downward trend would have continued without the insured peril being triggered at all).
The Supreme Court allowed the FCA's appeal on this issue, agreeing that such a downturn in turnover was not a trend or circumstance for which an adjustment was permitted (let alone required by the relevant policy wording). This would be contrary to its finding that the only appropriate adjustment was for circumstances unconnected with the pandemic.
Orient-Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm)
The Supreme Court also considered Orient-Express, an arbitration award which was upheld in the Commercial Court. The case concerned a hotel which had been damaged by Hurricane Katrina, whose recovery of its business interruption losses was limited as a consequence of the wider damage to New Orleans which it was said would have impacted its revenue irrespective of the physical damage to the hotel itself.
The Supreme Court concluded that this case had been wrongly decided and that it should be overruled. Applying its earlier causation analysis, business interruption losses resulting from two concurrent causes (which would not satisfy the 'but for' test because of the existence of each other) arising from the same underlying issue should both be covered. The exception was where the damage proximately caused by the uninsured peril was excluded by the policy wording. Insurers should therefore have been liable for any circumstances which had the same underlying cause as the damage to the hotel (i.e. the hurricane), including the drop in visitor numbers to the city.