Business Interruption insurance test case - big win for policyholders in Supreme Court

The Supreme Court today handed down its landmark judgment in the FCA Business Interruption (“BI”) insurance test case - dismissing the Insurers’ appeals and giving a boost to many policyholders who have suffered COVID-19 related business closures.

Background

A number of Insurers disputed that certain BI policies covered COVID-19 related losses and government imposed restrictions. The FCA raised a test case in June 2020 to seek clarity on behalf of affected policyholders.

The High Court largely found in favour of the FCA. For more detailed commentary on that, see our previous post. Unsurprisingly, this was appealed by Insurers to the Supreme Court, which takes us to today’s judgment.

Decision

The judgment extends to 114 pages and covers a number of areas which were in dispute. The headlines on the key battle grounds are as follows:

• Disease clauses - where a policy covers BI losses resulting from any occurrence of a “notifiable disease” within a specified geographical radius (typically 25 miles) of the insured premises,  that clause requires proof of there having been an occurrence (meaning at least one case) of COVID-19 within the radius. That is unlikely to be too onerous for all but the most remote of premises.
• Prevention of access – where a clause could only be triggered following “restrictions imposed” by a public authority, restrictions imposed by a local or national government need not have the force of law to invoke insurance cover. Where the policy requires “inability to use” the insured premises - inability rather than hindrance of use must be established but this requirement may be satisfied where the premises (or a discrete part of it) cannot be used for a discrete business activity.
• Causation – this is arguably the most significant aspect of the judgment:
  • each individual cause of COVID-19 could be considered as equally effective proximate causes of the relevant Government measure which resulted in a prevention of access.
  • it is therefore sufficient for policyholders to show that prior to the relevant government measure being introduced there was at least one case of COVID-19 in the geographical area covered. This is a departure from the normal “but for” test of causation.
  • If prevention of access or “hybrid clauses” are triggered, the losses are insured even if the losses are also caused by other, uninsured, effects of COVID-19.
• Trends clauses and Pre-Trigger Losses – most policies required BI losses to be calculated be adjusting the figures to reflect what would have happened if the insured risk had not occurred. These clauses should not be construed so as to reduce the value of the claim as a result of circumstances arising from the COVID-19 outbreak.
• The Orient-Express case – one for the insurance law purist. This relates to a previous case based on a BI claim following damage to a hotel in New Orleans caused by a hurricane, and was heavily relied on by Insurers. The Supreme Court held that case to have been wrongly decided and was overruled.

Where does all this leave policyholders?

Importantly, the test case only covers certain “non-damage” policies, which means it does not affect policies which require damage to a premises for the policy to be triggered. These policies are not expected to pay out in response to COVID-19.

On the whole, the Supreme Court’s judgment appears to be very good news  for policyholders. Arguably the most significant headline for businesses is that the judgment should make it easier to establish that the losses suffered were caused by the prevention of access or by the presence of COVD-19 in the geographical area.

Some hurdles to proving loss have been removed. It is however important to bear in mind that the judgment deals with sample wording and does not rule on whether cover is available in any specific set of factual circumstances. Insurers will still need to consider claims on a case by case basis.

It does however open up the range of claims on which policies are likely to pay out. If your BI cover may be affected, then now is the time to review your policy.

The FCA has published a press release (available here),  and have advised that they will be publishing a set of Q&As for policy holders to assist in applying the test case, as well as continuing to work with insurers.

We will be providing further detailed commentary on the judgment and implications.

If you are considering how the decision may affect you, then please get in contact with Ashley Mawby and Andrew Forsyth.