Article | Supreme Court Judgement - Business Interruption Test Case

18th January 2021

UK Supreme Court Judgment - Business Interruption Test Case:

 

Impact on Consumer Sector

 

Background

The UK’s Financial Conduct Authority (“FCA”) brought a test case on behalf of policyholders against certain insurers in relation to COVID-19 related business interruption losses.

The FCA, as the conduct regulator of insurers in the UK, took a representative sample of insurance policy wordings and put forward policyholders’ arguments with the objective of obtaining clarity for all parties involved as to whether COVID-19 losses were covered under so called “non-damage” extensions to business interruption policies, where cover is triggered by the occurrence of an infectious disease within the vicinity of insured premises or by the inability to use premises due to government action.

The High Court handed down judgement in September 2020, confirming cover to large numbers of policyholders. Both the FCA and insurers appealed aspects of the judgment via an expedited “leapfrog” appeal procedure, with the Supreme Court (the “Court”) delivering its judgment on 15 January 2021.

Summary of Supreme Court decision

Whilst the Court did not agree with the High Court’s precise interpretation of every legal issue, the Court overwhelmingly found in favour of the policyholders and the judgment broadens the circumstances in which they may recover their losses compared with those allowed by the High Court, particularly those bringing claims under prevention of access and hybrid clauses.

Although the test case related to business interruption insurance policies carried by SMEs, very similar concepts and policy language can be found in the business interruption policies of large corporate insureds, as well as loss of rent policies, meaning that the findings of the Court will assist many insureds in the consumer sector.

For parties with policies that contain relevant non-damage extensions, the decision offers greater prospects of recovery of losses from insurers.

Disease clauses

The Court considered the correct interpretation of disease clauses, which require the occurrence of a notifiable disease within a specified vicinity of insured premises, typically 25 miles .

The Court’s decision on causation in relation to disease clauses is highly significant for future insurance claims, clarifying that a court can does not have to apply the “but for” test where it is deemed inappropriate. The court confirmed that where a series of events which together cause a result, but none of which  on its own was sufficient to cause that result, the claim could still succeed. Accordingly, the Court confirmed that cover would be effective under disease clauses on the basis that all individual COVID-19 cases as at the date of lockdown measures being imposed were equally effective proximate causes of those measures and of the public response to it. A policyholder need only show that there was at least one case of COVID-19 within the area defined in the relevant policy.

The evidence required for a policyholder to establish the presence of COVID-19 was addressed by the FCA in draft guidance dated 11 December 2020, and includes NHS death data, well-established media reports and, potentially, a case within an individual’s personal knowledge, even if that person was without symptoms.

Prevention of access clauses

Prevention of access” clauses typically provide cover where there is prevention or hindrance of access to or use of insured premises as a consequence of public authority instructions. The FCA successfully appealed the High Court’s narrow interpretation of public authority instructions, confirming that an instruction from a relevant authority need not have the force of law, but can amount to a “restriction imposed” if it carries the “imminent threat” of legal compulsion or where it is “in mandatory and clear terms and indicates that compliance is required without recourse to legal powers”.

This means that some policyholders who would not have been able to claim until regulations came into force in late March 2020, may now be able to claim from an earlier date if their business was affected by instructions issued by the government.

The Court considered that the term “inability to use” premises did not mean a complete inability to use them, but could also cover an inability to use part of them or an inability to use for a discrete purpose. For example, a restaurant that was closed but continued to offer takeaway services may now be able to claim, whereas this would not have been possible based on the High Court findings.

Causation and Trends Clauses

Causation is without doubt one of the most significant areas of the judgment. The Court over turned the Commercial Court’s decision in the case of Orient Express v Generali. Following hurricane damage in New Orleans, the Commercial Court had found that a “trends clause” prevented a hotel from recovering business interruption losses consequent on damage, because the damage caused to New Orleans itself and its closure meant the hotel would still have suffered business interruption losses even if it had not been damaged.

Insurers unsuccessfully tried to rely on the Orient Express decision arguing that, even without the occurrence of a notifiable disease within 25 miles of insured premises, the insured would still have suffered a loss because of the effect of the national lockdown measures.

Impact on Consumer Sector Insureds

Insureds who have made claims on policies with disease clauses or prevention of access clauses may have found that insurers have refused to pay these claims pending resolution of the test case. The Supreme Court decision should pave the way for many of these claims to be assessed and paid.

There are a number of issues unresolved by the test case:

1.    For the purposes of interpretation of policy sub-limits and excesses, how many “losses”, “events” or “occurrences” has an insured suffered? A policy excess, for example, may apply on a “per occurrence basis” so for landlords with multiple premises, does that mean that multiple excesses are payable? Did the extension of the lockdown arrangements create a separate occurrence giving rise to further claims where cover was on a time limited basis?

2.    For insured parties with cover which relates to the occurrence of disease at the premises (as opposed to within the vicinity of the premises), is it possible to identify relevant evidence likely to trigger cover?

3.    In relation to loss of rent claims, where a tenant remains contractually liable to pay rent under the lease, but has not paid it, what are the precise circumstances in which an insured is entitled to an indemnity? Some loss of rent policies will cover “loss of rent receivable” (i.e. payable) which might cover this type of situation. However, can the insurer subrogate against any tenants who are not insured?

4.    Of greater difficulty will be situations where landlords have waived rights under leases and have agreed reductions, perhaps in an attempt to minimise losses. Whether this would ever be insured is likely to turn on the policy mechanics and arguments as to the landlord’s need to mitigate losses.

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