UK Supreme Court unanimously finds in favour of policyholders in landmark COVID-19 business interruption insurance test case

Background

Many businesses have suffered significant financial losses as a result of the coronavirus pandemic. For example, restrictions implemented by the UK government have resulted in a large number of businesses being forced to close down all or part of their normal business operations. Some have sought to recover their losses by claiming under their business interruption (“BI”) insurance policies.

It was observed by the FCA that whilst some insurers accepted liability for BI losses occurring as a result of COVID-19, others considered that the pandemic fell outside the scope of their policy wording. Consequently, proceedings were brought under the FCA’s Financial Markets Test Case Scheme in order to provide clarity on the contractual interpretation of a number of BI policies commonly used in the market.

The FCA acted on behalf of the policyholders, bringing the test case pursuant to an agreement with eight insurers, in which the wordings of 21 sample policies, thought to be representative of a much larger pool of policies, were considered. For further detail on the background of the case, see our earlier article here.

High Court decision and appeal

In the first instance decision, issued in September 2020, the High Court found in favour of policyholders on the majority of key issues, meaning that many of the representative BI policies considered were held to provide insurance cover in principle. Despite the FCA’s broad success in the first instance, it appealed on four grounds. Six of the eight insurers in the High Court proceedings also chose to appeal the first instance decision. Given the need to provide clarity to policyholders and insurers as soon as possible, the appellant parties were granted permission for a “leapfrog appeal”, heard by the Supreme Court (“Court”) (bypassing the Court of Appeal).

Supreme Court Decision

In a decision handed down on 15 January 2021, the Court unanimously dismissed the insurers’ appeals and found in favour of the FCA on all of its points of appeal, and accordingly, further widened the scope of policies which will now be engaged by the COVID-19 pandemic. Some of the key issues considered on appeal included the correct contractual interpretation of four types of BI policy provisions, being disease clauses, prevention of access clauses, hybrid clauses and trends clauses, and the requirements to satisfy the test for causation.

Disease Clauses:

Disease clauses provide cover for BI losses following the occurrence of a notifiable disease (i.e. a disease notified under public health regulations) within a specified distance or proximity of the insured business premises.

In summary, the High Court considered that under certain types of BI policy disease clauses provided coverage for BI losses resulting from COVID-19 where there had been at least one case of the virus within the relevant geographical radius. This broad interpretation meant that coverage under the policy wording wasn’t confined to the impact of local COVID-19 cases alone.

The majority of the Court disagreed with the High Court’s assessment, finding that each case of illness sustained by an individual was a separate ‘occurrence’ and the relevant clauses could therefore cover losses resulting from cases of the disease within the relevant vicinity of the premises. As a result, the disease clauses did not in theory cover losses resulting from outbreaks of the disease outside the relevant area.

Whilst this finding on construction substantially narrowed the scope of the disease clauses from the first instance decision, the Court ultimately came to the same conclusion as the High Court in light of its assessment on causation. The High Court had correctly found that the wording of the disease clause didn’t confine the BI coverage to only cases of a notifiable disease in the vicinity, and it was important to attach significance to the potential for a notifiable disease to affect a wide area, and therefore for the occurrence to form part of a wider outbreak.

In its analysis on causation, the Court held that all cases were equally effective proximate causes of the measures taken by the UK Government to restrict business activities. For a policyholder to evidence BI loss under the disease clauses it would be sufficient to prove that – at the time of government measures being implemented in response to cases of the virus – there was at least one case of COVID-19 within the relevant vicinity.

Prevention of access and hybrid clauses

The Court considered sample prevention of access clauses, which provide cover for BI losses caused by restrictions put in place by government or local authorities preventing businesses from using, or accessing, their business premises. Hybrid clauses were also considered, these being a combination of disease and prevention of access wordings.

The decision confirmed the correct interpretation of several policy wordings. The key findings were as follows:

• “Restrictions imposed” by a public authority: The Court confirmed that this wording meant mandatory instructions, but removed the requirement set out by the High Court that such restrictions must have the “force of law” (i.e. measures taken by authorities under identifiable legal or statutory powers). In some cases, it would be sufficient for an instruction to be in mandatory terms and clear as to what compliance would require. Similar analysis would apply to wordings such as “enforced closure of an insured location”, and “closure or restrictions placed on the premises”.
  
  
•  The Court disagreed with the High Court’s finding that “inability to use” a business premises required a complete inability to use the premises, unless the use is de minimis. Instead the requirement would be satisfied where a policyholder was unable to use the business premises for a discrete part of its business activities or if it was unable to use a discrete part of the premises for its business activities. The wording “prevention of access” was interpreted in a similar manner.
  
  
•  “Interruption” was correctly considered by the High Court to mean interruption to the business generally and was not limited to meaning a complete cessation of the policyholder’s business or activities.

In its consideration of causation, the Court noted that prevention of access/hybrid clauses indemnify the policyholder against the risk of all elements of the insured risk operating in causal combination to cause the BI loss. The fact that such losses were also caused by other uninsured and unexcluded effects of the COVID-19 pandemic did not preclude them from cover.

This new interpretation by the Court has widened the scope of coverage which may now be available under certain prevention of access and hybrid clauses. For example, restaurants who were limited to providing takeaway services may now be able to obtain insurance payments for losses resulting from an inability to carry out dine-in services.

Causation

The Court noted that in some circumstances, including the current case, the traditional “but for” causation test was not appropriate. None of the individual cases of COVID-19 could be said to have individually caused the Government restrictions which led to BI, and instead all cases equally caused the introduction of national measures. Whether a causal connection was sufficient to trigger the insurer’s obligation to indemnify the policyholder depended on what had been agreed between the parties.

Trends clauses and pre-trigger losses

The Court also considered the application of “trends clauses”, which provide for adjustments to a business’s standard turnover when calculating the indemnity payable to a policyholder. The adjustment takes into account any business trends and special circumstances which may impact profits or revenue. In doing so, the provisions ensure any amount due to a policyholder more closely reflects the true profits/revenue that would have been achieved by the business.

The Court held that, in the absence of any clear wording to the contrary, the trends for which adjustments are to be made should mean trends or circumstances unrelated to the insured peril. This meant that the trends clauses did not require losses to be adjusted on the basis that, if the insured peril had not occurred, the business would have still been affected by other consequences of the COVID-19 pandemic.

In the first instance decision, the High Court had found that if there was a quantifiable downturn in business turnover as a result of COVID-19 before the insured peril was triggered, then in principle the continuation of that downturn should be taken into account as a trend (known as “pre-trigger losses”). The Court disagreed with this conclusion and held that the losses should be calculated by reference to earnings as if there had been no COVID-19 pandemic or associated restrictions at all.

What does this decision mean?

This landmark decision brings proceedings in the test case to an end and provides important certainty for policyholders and insurers alike.

The Court’s wide interpretation of prevention of access and hybrid clauses, in addition to its findings in relation to the application of trends clauses, will be welcome news for many policyholders who may now find that their policies are engaged by the COVID-19 pandemic and eligible for insurance coverage. It is estimated that the outcome of this case could affect up to 370,000 insurance holders.

The FCA commented that “the test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and 'causation' issues to provide clarity for policyholders and insurers. Today's judgment does not determine how much is payable under individual policies but provides much of the basis for doing so.”

Whilst a positive outcome for policyholders in general, the judgment is highly detailed and, accordingly, practical application of the decision will be subject to the wording of individual BI policies. We recommend that policyholders seek independent legal advice when considering the impact of this decision on their own BI insurance.

There are also various issues which the Court was not required to consider and which are likely to lead to further discussion and disputes between policyholders and insurers in the context of submitted claims. For example, the FCA test case focused on the first national UK lockdown from March 2020, which was then lifted by the beginning of Summer 2020. However, after that: (i) there were a number of local lockdowns that occurred; (ii) a tiered system of restrictions was introduced (which, under the higher tiers, meant that certain businesses had to close or partially close); and (iii) in late 2020, further national lockdowns were imposed. Depending on the precise wording of the relevant BI policy, certain of these different events could give rise to multiple triggering ‘occurrences’ and claims for payment.

A policy checker and set of FAQs has now been published by the FCA. The FCA is also preparing further guidance to assist stakeholders with their understanding of the decision which will be published shortly – a draft version can be accessed here. For further information, please see the FCA’s dedicated webpage.

BI insurance and COVID-19 Tracker

Our BI tracker lets you see at a glance how the regulators and courts in a variety of jurisdictions view these policies and the coverage claims that have been made.

https://www.twobirds.com/en/in-focus/coronavirus-covid-19/business-interruption-insurance-and-covid19-tracker

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