Our Dispute Resolution team look into the Supreme Court verdict in the business interruption test case. You can refer here and here to our previous publications in relation to this Business Interruption insurance test case.
The disruption caused by Covid-19 is ongoing and has continued to cause substantial losses to businesses, with many under significant financial strain. The judgment from the Supreme Court handed down on 15 January 2021, brings comfort to those businesses, with the Court substantially allowing the appeals of the FCA and other campaign groups, dismissing the Insurers’ appeals. Owing to this decision, thousands of policyholders will now be able to have their claims paid.
The judgment means that there is now clarity for businesses and insurers as to how wording of individual policies should be interpreted and is binding on the Insurers involved. The test case deals with six insurers, 14 different policies and does not cover all insurance policy wording, but provides legal certainty and assistance in determining claims brought against insurers due to business interruption as a result of Covid-19.
Summary of Judgment
In short, despite the fact that the Supreme Court accepted some of the arguments put forward by the Insurers, it dismissed the appeals of the Insurers and allowed the appeals of the FCA and its campaign groups. The full judgment, which contains a complete analysis of each of the issues on which the Supreme Court decided, can be accessed here.
The main findings of the Supreme Court in each category of issues can be summarised as follows:
Disease clauses
In general these provide insurance cover for business interruption losses caused by a “notifiable disease” at or within a specified distance of the policyholder’s business premises.
- The Court looked at what was meant by the wording “any…occurrence of a Notifiable Disease within a radius of 25 miles of the Premises”. The Supreme Court decided that the “correct interpretation of all the relevant clauses, they cover only relevant effects of cases of Covid-19 that occur at or within a specified radius of the insured premises. They do not cover effects of cases of Covid-19 that occur outside that geographical area.”
- So, if there has been a case of Covid-19 in the specified distance (defined by the policy) the business is insured for the losses caused by that case, together with the losses associated with the wider pandemic i.e. Government action.
Prevention of access clauses and hybrid clauses
These provide cover for business interruption losses resulting from public authority intervention preventing or hindering access to or use of the business premises. Hybrid clauses combine the main elements of disease and prevention of access clauses.
- The requirement of “restrictions imposed” can be satisfied by mandatory instructions or measures issued by a public authority without a requirement that those instructions had to be legally binding. Therefore, the guidance issued by the government, was sufficient to satisfy the requirement. A similar point was acknowledged by the Court when considering what was meant by the wording “enforced closure” of premises.
- “inability to use premises” – this requirement will be satisfied where the policyholder is able to demonstrate that it has suffered an inability to use the premises for the ordinary purposes of its business i.e. where part or all of the premises have had to be closed in response to restrictions imposed. There is cover for the part of that business for which the premises cannot be used. For example, if a pub could use its premises to continue a takeaway service but could not have customers eating in, it should be covered for the loss resulting from the aspects of its business that it was unable to open (the eating in part).
- “prevention of access” – this can include prevention of access to a discrete part of the premises or to the whole or part of the premises for the purpose of carrying on a discrete part of the business activity.
- “interruption” – the Court agreed that the ordinary meaning is capable of encompassing interference or disruption which does not bring about a complete cessation of business or activities. So even a slight disruption to the business would be sufficient for cover to be triggered.
Causation
The Insurers argued that policyholders would have suffered the same or similar business interruption losses even if the insured risk or peril had not occurred i.e. the policyholders claims should fail because it cannot be said that the loss was caused by the insured peril or because of how the trends clauses require the loss to be quantified.
- The Court found that all individual cases of Covid-19 which had occurred by the date of any of the Government’s measures were all “proximate” causes.
- The Court said that “there is nothing in principle or in the concept of causation which precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause – indeed as a proximate cause – of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself”
- So, this is an example of a situation where a series of events i.e. local cases of Covid-19, the pandemic, the advice of the Government all caused a result, but none of them individually were sufficient to cause the result by themselves.
- It was noted by the court that the “but for” test is sometimes inadequate.
Trends clauses
These provide for business interruption loss to be quantified by reference to what performance of the business would have been had the insured peril not occurred.
- The Court said that “the trends clauses should not be construed so as to take away cover for losses covered by the insuring clauses…”
- In addition, to avoid inconsistency with the insuring clauses, the trends clauses should be construed so as to “recognise that the aim of such clauses is to arrive at the results that would have been achieved but for the insured peril and circumstances arising out of the same underlying or originating cause”.
- So, the trends that are used to make adjustments are not to include circumstances arising from the effects of Covid-19.
Pre-trigger losses
- The High Court held that that if there had already been a measurable downturn in the turnover of the business due to Covid-19 before the insured peril was triggered, this should be taken into account, the effect of which could be that the policyholder’s indemnity would be reduced.
- The Supreme Court however said that adjustments should only be made to reflect circumstances affecting the business which are unconnected with Covid-19.
- Taking the example of a pub again, there may have been a decline in revenue due to the concerns of the public around the time Covid-19 was spreading in early March 2020, however there were no instructions from the Government to close at that time. The Supreme Court said that this decline in revenue is not to be used by Insurers to reduce pay out under the policy.
The Orient Express decision
The insurers relied on the decision in the Orient Express case. Briefly this was a claim in relation to damage to a hotel caused by hurricanes. The decision in this case at the time was that the hotel would have suffered business loss even if it was not damaged, as the city was forced to shut after the hurricane, leaving the hotel only recovering a limited amount under its insurance policy and not recovering business interruption loss.
- The Supreme Court said the decision on Orient Express was wrongly decided and should be overruled. This is a significant change in the Court’s decision.
- The Supreme Court basically said that the business interruption arose because of a) the loss from damage to the hotel and b) the damage to the city caused by evacuation. There were two causes of loss here, each of which were sufficient. So the loss caused by both a) and b) were covered because they both arose from the same underlying fortuity (the hurricanes).
The FCA has said that they “will work with insurers to rapidly conclude their claims processes on claims that the Supreme Court has said should be paid, providing interim payments wherever possible”. If policyholders have a claim it is advisable to check the wording of the policy to consider whether or not, on the Supreme Court’s findings, such a claim is valid and should be pursued.
We understand that the FCA will be publishing a document to provide further guidance for policyholders to understand the Judgment.
If you require advice on understanding the Judgment, please contact a member of our team here.