Supreme Court Dismisses Insurers’ Appeals in the FCA’s Business Interruption Insurance Test Case – a Landmark Win for Policyholders
The Supreme Court has today handed down its decision on the appeals made by a number of insurers and the Financial Conduct Authority (“FCA”) against the High Court’s decision in the FCA’s business interruption insurance test case.
The test case, which was brought by the FCA on behalf of policyholders, concerned the construction of certain provisions in the insurers’ policy wordings, specifically whether such provisions provided business interruption cover in response to the Covid-19 pandemic.
The High Court’s decision, which was handed down on 15 September 2020, was a resounding win for the FCA. However, the High Court found that some provisions excluded or limited cover in some instances.
The Supreme Court substantially allowed the appeals of the FCA and dismissed those appeals made by the insurers. This news will be welcomed by the thousands of policyholders whose businesses have been affected by the Covid-19 pandemic, and who should now receive the long-awaited settlement payments from their insurers. The reasons for the judgment can be summarised as follows: -
These are clauses which generally cover business interruption losses resulting from any occurrence of a notifiable disease (which, from 5 March 2020, includes Covid-19) within a specified geographical radius of an insured’s premises (generally, 25 miles). The Supreme Court interpreted these clauses as covering business interruption losses resulting from the impact of the Covid-19 pandemic provided that there was at least one occurrence of Covid-19 within the specified radius.
Prevention of access and hybrid clauses
These clauses specify a series of requirements which must all be met before the insurer is liable to pay. Some clauses apply only where there are “restrictions imposed” by a public authority following an occurrence of a notifiable disease. The Supreme Court decided that restrictions need not be mandatory by law but can be deemed “imposed” by an authority if it is in mandatory and clear terms and indicates that compliance is required without legal enforcement. This means that instructions given by the Prime Minister or guidance published by the Government could satisfy these clauses.
Other policy wordings allow cover only where there is an inability to use the insured premises. The Supreme Court held that an inability to use rather than a hindrance of use must be satisfied but a policyholder may satisfy this requirement where it is unable to use the premises for a discreet business activity (for instance, a restaurant that, under the Government restrictions, is not allowed to serve alcoholic drinks to non-dining patrons), or where a policyholder is unable to use a discrete part of the premises for its business activities. This reopens the door to a large number of policyholders whose business interruption claims were thwarted by the High Court’s decision.
One of the key issues was whether business interruption losses consequent on public health measures taken in response to Covid-19 were, in law, caused by cases of Covid-19 which occurred within the specified radius of the insured premises. The Supreme Court held that all the individual cases of Covid-19 which had occurred by the date of any Government measure were equally effective “proximate” causes of that measure (and of the public response to it). It is therefore 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 geographical area covered by the clause.
These clauses provide for business interruption losses to be calculated by adjusting the results of the business in the previous year to take account of trends or other circumstances affecting the business in order to estimate more accurately what results would have been achieved if the insured peril had not occurred. The Supreme Court held that these clauses should not be construed so as to take away cover provided by the insuring clauses, and that the trends and circumstances for which the clauses require adjustments to be made do not include circumstances arising out of the same underlying or originating cause as the insured peril (i.e. in this case, the effects of the Covid-19 pandemic).
The Supreme Court rejected the High Court’s approach which, subject to qualifications, permitted adjustments to be made under trends clauses to reflect a measurable downturn in the turnover of a business due to Covid-19 before the insured peril was triggered. The Supreme Court ruled that adjustments should be made only to reflect circumstances affecting the business which are unconnected with Covid-19.
This decision will bring comfort to thousands of businesses now in their third national lockdown. In light of the Supreme Court’s decision, it should now prove far easier for policyholders to satisfy the requirements of their business interruption insurance policies and receive settlement payments from their insurers where their businesses has been affected by the Covid-19 pandemic.