The FCA Test Case
Business Interruption (“BI”) insurance covers businesses for financial losses, which occur when a business is impeded by an unexpected prescribed event. In June 2020, the FCA, on behalf of thousands of policyholders, brought a test case before the High Court, asking the Court to provide an urgent, declaratory judgment addressing the "significant uncertainty" arising from the scope of the application of BI policies and COVID-19 related losses.
The Court considered 21 sample policy wordings from eight different BI insurers. In particular, focusing on the four categories of clauses, which policyholders might seek to invoke in relation to the COVID-19 pandemic. Those four categories of clauses are as follows:
- "Disease" clauses - which cover business losses arising from a ‘notifiable’ disease occurring within a specified radius of the insured premises. The Court was asked to consider whether the disease occurrence must be within a specified radius, or, whether the nationwide occurrence of COVID-19 would suffice;
- "Prevention of access" clauses -which cover business losses arising from for the restriction of access to, or use of, insured premises as a result of Government actions or restrictions. The Court was asked to consider the scope of the restrictions;
- Hybrid clauses - which cover business losses as a result of either a notifiable disease or prevention of access as set out above; and
- "Trends" clauses- which generally operate to prevent insureds from claiming losses which would have occurred even if the insured peril had not. The Court was asked to consider causal requirements, in particular whether insurers, relying on the case of Orient- Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm), could argue that business losses would have occurred “but for” a localised outbreak or local application of restriction, given the substantial impact COVID-19 had on the UK economy.
The High Court’s findings
The High Court, finding largely in favour of the FCA, determined as follows, with respect to:
- "Disease" clauses - policy coverage would be triggered as soon as there was a positive confirmation of a COVID-19 case within the ‘notifiable area’. The Court determined that COVID-19 was an indivisible “composite peril”, meaning that there was no requirement for the disease to occur only within the notifiable area, dismissing the insurers' position that a national lockdown falls outside the scope of a ‘notifiable area’;
- "Prevention of access" clauses - the Court construed these clauses to be narrower in scope than disease clauses, determining that coverage would be triggered by complete occlusion. The prohibition of access to members of the public to premises, but not to members of the insured’s staff, did not suffice. Policy coverage would only be triggered where the business was wholly closed. Importantly, however, prevention of access clauses could provide cover to businesses, which had fundamentally changed their business in order to mitigate their potential losses;
- Hybrid clauses - the Court determined that cover pursuant to these clauses would be fact specific. In relation to the prevention of access, the Court determined that coverage would depend on whether the specific clause covered the ‘prevention’, ‘hindrance’ or ‘limitation of access’. As with the ‘disease clause’ element of a hybrid clause, the Court determined, as above, that cover applied to losses flowing from more than just a local outbreak of COVID-19; and
- "Trends" clauses - distinguishing the facts of the Orient-Express Hotels case, the Court determined that an incident of COVID-19 would likely (depending on the precise wording of the policy) trigger cover for all losses flowing from the nationwide lockdown and Government restrictions, such that insurers could not rely on the ‘trend clauses’ in order to prevent the engagement of policies.
The FCA and six of the eight Defendants applied to the High Court for a ‘leapfrog’ certificate entitling them to seek permission to appeal directly from the Supreme Court. The High Court granted such permission to appeal to all parties.
The insurers’ appeals
Amongst other items, the insurers sought to appeal;
- the High Court’s decision that COVID-19 is an indivisible / “‘composite peril’;
- the High Court’s treatment of the Orient-Express Hotels case; and
- the operation of the trends clauses.
The FCA appeal
The FCA sought clarification from the Supreme Court on a number of the High Court’s decisions, including:
- whether government recommendations, which do not carry the force of law / legislation, can trigger a “prevention of access” clause; and
- whether ‘complete closure’ is required in order to trigger a “prevention of access” clause.
The Supreme Court's decision
The Supreme Court today handed down a series of judgments, finding in favour of policyholders, substantially allowing the FCA’s appeal and dismissing the insurers’ appeals.
With Lords Hamblen and Leggatt providing the main judgment, the Supreme Court categorised the issues arising on the appeals into six main issues:
The Supreme Court accepted the arguments advanced by insurers, finding that each case of COVID-19 is a separate “occurrence” and that disease clauses only cover BI losses resulting from COVID-19 cases occurring within the specified radius. However, following the Supreme Court’s analysis of “the causal link” (see below), the practicalities of the Supreme Court’s decision do not differ from that of the High Court’s decision; it is sufficient for a policyholder to show that at the time of any relevant Government measure there was at least one case of COVID-19 within the specified radius.
“Prevention of access” clauses
Agreeing with the High Court, the Supreme Court found that ‘inability’ to access business premises, rather than a ‘hindrance of use’, must be established in order to cover BI losses under a prevention of access clause. The Supreme Court adds that the ‘inability’ requirement may be satisfied where a policyholder is unable to use the premises for a ‘discrete business activity’ or is unable to use a discrete part of the premises for its business activities.
The causal link between BI losses and the occurrence of a notifiable disease
Insurers argued that cases of the disease occurring inside and outside the specified radius should be viewed in aggregate, such that the overwhelmingly dominant cause of any Government measure will have been cases of COVID-19 occurring outside the specified radius. The Supreme Court rejected the insurers’ argument finding that there can be situations (as is the case in the COVID-19 pandemic) “where a series of events all cause a result, although no event was individually necessary or sufficient to cause the result by itself” and so an aggregate analysis of COVID-19 cases is not appropriate in the circumstances.
Again, agreeing with the High Court, the Supreme Court held that these clauses should not be construed so as to reduce cover provided. Further, the Supreme Court added that the trends and circumstances on which these clauses require adjustments to be made cannot rely on the same underlying or originating cause as the insured peril. Any adjustments made by insurers must be unrelated to the COVID-19 pandemic.
Quantifying BI losses which occurred before coverage was triggered
The High Court permitted adjustments, which reflected a measurable downturn in the turnover of a business, as a result of COVID-19 before the insured peril was triggered. The Supreme Court rejected this approach, and in favour of insureds, reaffirmed the position that any adjustments made by insurers must be unrelated to the COVID-19 pandemic.
The status of the Orient-Express Hotels decision
The Supreme Court concluded that the Orient-Express Hotels case was wrongly decided and should be overruled.
The Supreme Court’s decision provides clarification on the principles that will apply when determining coverage under certain commonly used terms in different insurers’ policies.
This will hopefully lead to insurers recognising and paying the majority of claims. However, the wording examined by the Supreme Court will still need to be applied to the facts of each specific claim. Further, in many instances the wording of individual policies may differ from the precise wording examined by the Supreme Court. Insurers are facing huge and potentially ruinous liabilities - therefore they can be expected to continue to contest coverage issues where there is scope for doubt as to the applicability of the Supreme Court’s principles either to the facts of individual claims or where policy wording differs from that examined by the Supreme Court.