Many more businesses will be able to recover under their business interruption ("BI") policies for losses caused by the COVID-19 pandemic, thanks to the Supreme Court judgment of The Financial Conduct Authority & Ors v Arch Insurance (UK) Ltd & Ors  UKSC 1.
The Supreme Court determined a number of legal principles relating to BI in this test case which had been brought by the Financial Conduct Authority ("FCA") to help resolve disputes between insurers and insureds regarding recovery of COVID-19-related losses (see further details of the background and context in which this appeal was heard in the commentary below).
Disease clauses provide cover for BI as a result of infectious or notifiable diseases at, or within a specified geographical area of the insured’s business premises. The Supreme Court has held this means that insureds must show that there was at least one case of COVID-19 within the geographical area covered by the clause.
Insurers had also argued that they were entitled to exclude any losses that were not directly caused by that insured risk, so that insureds could not recover losses caused by COVID-19 cases outside the geographical area. Insureds said that this would be almost impossible for them to prove and would severely impact their ability to recover their losses.
The Supreme Court decided that insurers could not exclude losses caused by the wider pandemic. This was because the policy wordings did not expressly apply only to COVID-19 cases within the geographical area, but also because of its findings on causation (explained below).
Prevention of access clauses
Prevention of access clauses provide cover for BI caused as a result of the intervention of a public authority which prevents access to, or use of, the insured premises.
What form does that intervention have to take? The High Court had said that there had to be a measure expressed in mandatory terms which had the force of law. This would have meant that losses incurred before the legislation regarding the lockdown measures were brought into force could not have been recovered, even though the Prime Minister had instructed people in national broadcasts to "stay at home" and for certain businesses to close before the legislation was passed. The Supreme Court however has taken a wider interpretation, holding that an instruction given by a public authority may qualify “if, from the terms and context of the instruction, compliance with it is required, and would reasonably be understood to be required, without the need for recourse to legal powers". This means more insureds will be able to recover under BI policies, but it does create more uncertainty about which instructions will qualify.
The Supreme Court also considered what constituted a prevention of access. Many clauses said it meant an “inability to use” and the High Court had said this meant a complete inability to use the premises. The Supreme Court however held that it meant an inability to use the premises for a discrete part of its business activities, or to use a discrete part of its premises for its business activities, so that if only part of an insured’s business was affected, such as a restaurant not being able to have diners eat in, but still being able to operate its takeaway business, then it could still recover for its eat-in business.
Insureds can only recover for losses that are caused by the insured risk. Insurers argued that this meant that insureds had to show that the loss would not have happened but for the occurrence of the insured risk, and they could not do that because the widespread nature of the pandemic meant that they would have suffered the same losses even if the insured risk had not occurred (e.g. COVID-19 had not occurred within the specified geographical area).
The Supreme Court said that this "but for" test was not determinative in deciding causation in this situation, as account also had to be taken of the nature of the cover provided. Here, a series of events (individual cases of COVID-19) combined to produce a particular result which meant that the BI clause was triggered, but the insured risk was not on its own sufficient to cause all the losses suffered. In such a case, the combination of the insured risk with many other similar uninsured events would be sufficient causation.
So in this case, a BI clause can respond to cover losses resulting from an occurrence of COVID-19 in the geographical area in combination with the wider pandemic, even if the COVID-19 occurrence in that area on its own would not have been sufficient to cause the policyholder’s losses.
A "trends clause" means that if there is cover, the insured is to be put in the same position as it would have been had the insured risk not occurred.
Insurers had argued that even if the insured risk had not occurred, the insured would still have suffered losses because of the wide-spread effect of the pandemic on the rest of the country. In support of this argument, insurers sought to rely on the case of Orient-Express Hotels Ltd v Assicurazioni General SA (UK Branch) (t/a Generali Global Risk)  EWHC 1186 (Comm), which had held that although a New Orleans hotel that had been damaged by Hurricane Katrina did have BI cover, it was not entitled to recover all its losses because the devastation to the area around the hotel caused by the hurricane had been so great that it would have suffered BI losses in any event even if the hotel itself had not been damaged by the hurricane.
The Supreme Court agreed with insureds that such an approach effectively takes away the cover provided by the insuring clauses, and said that the Orient-Express case had been wrongly decided. It held that any adjustments required by trends clauses should not include circumstances arising out of the same underlying or originating cause as the insured risk.
The Supreme Court’s judgment will be distilled into a set of declarations which will be considered by insurers and insureds when considering affected claims. Insurers will still have to consider how the decision applies to clauses which do not have precisely the same wording as those looked at in the test case.
The FCA has said it will work with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible. It has called for insurers to communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps. More information can be found on the FCA’s webpage.
The Supreme Court was the final stop for the FCA’s test case. The case had been brought in June 2019 by the FCA in order to bring some clarity to the legal issues arising from BI claims made in light of the COVID-19 pandemic and the first lockdown in March 2020.
The question of coverage for BI insurance arising from the pandemic was a difficult one for the insurance industry. With the Chancellor’s announcement on 17 March 2020 that government action was sufficient to allow BI policyholders to claim, expectations were set. However, many insureds found that insurers felt their policies did not respond. As an indication of the scale of the problem, The Association of British Insurers estimated that 75% of the £1.2 billion its members are anticipated to pay out for claims relating to COVID-19 will be for business interruption. The downside for insurers held liable is clearly significant and, as a result of the national lockdown, many of the declined insureds were SMEs facing an existential threat and needed to have their disputes resolved quickly.
Insureds had limited options to seek redress. Essentially, they could either issue legal proceedings or take the complaint to the Financial Ombudsman. Legal proceedings entail costs and adverse costs risk, as the loser bears the winner’s costs usually. Whilst third party funding and litigation insurance might be available, whether the insured sued itself or as part of a group, the costs would eat into any recovery. The ombudsman can investigate and make a decision that is binding on the insurer but which the insured is not bound to accept. Eligibility is determined by financial limits, so is only open for relatively small claims by smaller businesses. The ombudsman was also facing delays at the time of lockdown, so any claim was likely to take many months.
The FCA took decisive action and, on 1 May 2020, announced it would be seeking to obtain a judgment to resolve contractual uncertainty regarding the meaning and effect of BI insurance. The FCA selected representative wordings from policyholders to form part of the test case. Eight insurers joined the action, with the FCA arguing for coverage and insurers defending their position on various policy wordings. The case was brought in the Financial List of the Commercial Court. Designed to provide a speedy judgment, the case was heard by a Court of Appeal judge and a Commercial Court judge together. The action commenced on 8 June 2020, the hearing took place at the end of July 2020 and judgment was given on 15 September 2020. The statements of case and parties’ arguments were put on the FCA website and affected insureds could provide feedback. The hearing itself was streamed.
The test case brought by the FCA should be welcomed by insurers and policyholders alike. The regulator and insurers have moved swiftly to try and resolve differences affecting insureds and to bring some clarity on key legal issues for the benefit of insurers and insured alike. It has been done in a way that removes the cost risk an insured taking action might otherwise run in taking action itself and has been done in a transparent manner, so affected parties can be assured the issues have been fully explored in argument. The test case proceeded speedily, much faster than parties could have otherwise achieved. Being brought by the FCA, there was an equality of arms as between claimant and defendant. The result is clarity on the relevant law for all concerned which can now be applied to individual policies. The FCA and insurers are to be commended for the action taken in participating in this test case.