The Financial Conduct Authority (FCA) brought a test case in the High Court, selecting 21 sample policy wordings issued by eight different insurers, to determine principles of policy coverage for business interruption (BI) arising out of COVID-19
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 BI losses.
Multiple appeals were made by insurers (and in certain instances the FCA) on those conclusions directly to the Supreme Court, which issued its Judgment on 15 January 2021 having categorised the appeals under a series of headings. The insurers' appeals were dismissed. By way of brief summary on each:
1. 'Disease' clauses
'Disease' clauses provide cover for BI 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 considered that COVID-19 must have occurred within the radius in order to provide cover for losses resulting from COVID-19 more widely, whereas the Supreme Court considered that only an occurrence of the notifiable disease within the specified radius was an insured peril. However, the practical impact of this for coverage is limited because of the Supreme Court's findings on causation (see below).
2. 'Prevention of access' / hybrid clauses
Such clauses are intended to offer cover for BI losses due to an inability to access or use business premises. They are comprised of several elements, and are often combined with a radius requirement similar to 'disease' clauses above (so-called 'hybrid' clauses). The Supreme Court confirmed that:
- The High Court had been correct to hold that the wording "restrictions imposed" by a public authority would generally mean mandatory measures imposed as a result of statutory or legal powers. However it had been wrong to state that such restrictions also had to be legally binding;
- "Restrictions imposed" did not have to be directed at policyholders only (although this was most likely); regulations preventing people from leaving their homes would also qualify;
- An "inability to use" the premises required more than a mere hindrance or impairment. That inability would be satisfied if only part of the premises were unusable; and
- Wording requiring an "interruption" to business activities involved a more demanding test than mere interference or disruption.
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.
The Supreme Court rejected the proposition that the 'but for' test was determinative. In respect of disease clauses, each individual case of COVID-19 was an equally effective cause of the restrictions which led to the BI loss. For 'prevention of access' / hybrid wordings, the insured peril should be considered in combination with other similar uninsured events to assess whether the causal link is satisfied. In other words, it is sufficient if the insured peril (e.g. an occurrence of the disease within a 25-mile radius) acts in combination / concurrently with uninsured perils (the wider outbreak of the disease) to cause the loss. This means that policyholders will be covered for losses caused by the pandemic even though the insured peril is not sufficient to bring about the loss by itself.
4. Trends clauses
Trends clauses provide a mechanism for quantifying the policyholder's loss 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.
5. Pre-trigger Losses
The High Court indicated that it may be appropriate for a trends clause adjustment if there had already been a downturn in an insured's business due to COVID-19 (prior to the trigger of the insuring clause). The Supreme Court disagreed, as this would be contrary to its finding that the only appropriate adjustment was for circumstances unconnected with the pandemic.
The Supreme Court also considered the Orient-Express case in which it had been decided that due to a trends clause, a hotel in New Orleans could only recover BI losses resulting from physical damage sustained during a hurricane to the hotel, and not from the associated lack of tourism resulting from the wider area damage.
The Supreme Court concluded that this case had been wrongly decided and should be overruled.
No further appeals can be made against the Supreme Court's conclusions, bringing an end to the legal arguments in relation to the impacted policy wordings. The judgment is binding on those 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. By bringing the test case, the FCA has provided clarity for those individual policyholders who may otherwise have had to bring proceedings against their insurers for payment of their losses on a case-by-case basis.
In light of the positive conclusions for policyholders (which improved their position from the High Court judgment) it is now expected that insurers will move to adjust and pay those claims which the Supreme Court has directed should be covered. Further action may still be necessary for those policyholders whose insurers consider that their wordings can be distinguished from the Supreme Court's findings.
More generally, the impact of the Supreme Court's ruling on the Orient-Express case has great significance for wider BI cases, for example in respect of natural disasters such as flooding where similar issues may arise.
This article was first published by Thomson Reuters Regulatory Intelligence on 20 January 2021
Please click here for a more detailed analysis of the Supreme Court decision