The current pandemic emanating from the spread of COVID-19 has caused worldwide economic devastation. Where businesses with either reduced or no capacity to adapt to the current political climate have sought to rely on business interruption insurance, there have been seemingly endless complications.
This article explores the enforceability of relevant clauses contained in such insurance policies following the judgment handed down by the UK Supreme Court in January 2021.
High Court Case
In June 2020, the Financial Conduct Authority (“FCA”) brought a test case against a group of insurers to the High Court on behalf of small and medium enterprises (“SMEs”). This case was intended to probe the interpretation of standard clauses used within business interruption insurance policies against the backdrop of losses claimed to arise from the COVID-19 pandemic.
In short, following the judgment in September 2020, the High Court found in favour of policyholders on many key issues, particularly in relation to disease, hybrid disease/denial of access clauses as well as in relation to causation issues.
Supreme Court Judgment
Both parties appealed the decision and, due to the urgency and importance of the matter, the appeal “leapfrogged” the Court of Appeal and it arrived in the Supreme Court. The Supreme Court generally upheld the appeals in the FCA’s favour. The key headings considered in the Supreme Court case are the following:
- Disease Clauses:
These clauses provide non-damage business interruption cover triggered by an occurrence of a “Notifiable Disease” within the vicinity of the insured premises. The Supreme Court focused on an example providing cover for any “occurrence of a Notifiable Disease within a radius of 25 miles of the Premises”. Here, the Supreme Court sided with the insurers to the extent that the insurance policies cover only relevant effects of cases of COVID-19 occurring within the specified radius of the premises. This, however, has been described as a “pyrrhic victory” for insurers.
Under common law, “Occurrence” is something that happens at a particular time and place and in a particular way. The spread of COVID-19 is neither something that occurs at a particular time and place, nor in a particular way. In fact, it may occur at multiple different times and places and may occur in different ways through differing symptoms of greater or lesser severity. The Supreme Court concluded that each individual case of COVID-19 would constitute a separate occurrence. On plain reading of the words, these clauses do not cover business interruption caused by cases of COVID-19 outside of the specified area.
In relation to causation, the Supreme Court held that a policyholder would be able to show that business interruption loss was caused by one or more occurrences of disease if, at the time of any relevant government measure, there was at least one case of COVID-19 within the specified vicinity. It also agreed with the FCA that applying a “but for” test in a scenario where cases of COVID-19 inside and outside of the specified vicinity are concurrent causes of business interruption loss would give the insurer protection akin to if loss caused by any occurrence of a Notifiable Disease outside the specified vicinity had been expressly excluded from cover.
- Prevention of Access & Hybrid Extensions:
These clauses provide cover for a prevention or denial of access to or use of insured premises as a result of action taken by public authorities. The “hybrid” clauses seek to combine elements of both disease clauses and prevention of access clauses. The issues at hand here are the following:
- Whether these clauses are triggered by public authority actions that do not have the force of law?
The Supreme Court held that a restriction does not necessarily refer to the exercise of legal powers. They did, however, refer to the relevant test of how they would be understood by a reasonable person. In doing so, the court concluded that the Prime Minister’s instructions of 20 March 2020 that businesses close that same night would have been interpreted as a mandatory instruction and should be treated as such (irrespective of whether such instructions were actually mandatory).
- Whether these clauses require total closure of a business, or if a change in operations is enough to trigger cover?
The Supreme Court held that stopping something from happening is distinct from a mere hindrance. In other words, an impairment in use is insufficient to trigger cover. However, this requirement would be satisfied where part of the premises is unavailable for use e.g. eat-in services in a sandwich shop. With regard to any policy requiring “interruption” of the business, the Supreme Court held that a complete cessation was not necessary but instead an interference or disruption was sufficient.
- Whether Regulation 6 of 26 March 2020, prohibiting people from leaving their homes without reasonable excuse, is a relevant restriction imposed with regard to the businesses permitted to remain open?
Insurers argued that the restrictions ought to be directed at the policyholder. The Supreme Court agreed with the High Court’s analysis when it made the comparative example of a police cordon around a crime scene outside a shop. Whilst the restriction is not directed at the shop itself, the result is a total inability to access the shop.
With regard to causation, the Supreme Court held that business interruption losses are covered only if they result from all the elements of the risk covered by the clause operating in the required sequence. The Supreme Court rejected the insurers’ argument that the “but for” test be applied to these clauses. As it could not be proved whether travel restrictions or inability to use the premises, for example, caused the business interruption loss, it was not possible to demonstrate the requisite causation. The Supreme Court also referred to the general principle that the insurer is liable for losses proximately caused by the insured peril both in statute and common law.
In the light of the court holding that disease clauses only extend to the specified vicinity, the insurers argued that policyholders would have suffered the same or similar business interruption losses even if the insured risk had not occurred in the vicinity due to the nationwide effects outside of the specified vicinity. In essence, the insurers’ argument was that the policyholders could not prove that the business interruption resulting from the relevant public authority’s health measures would not have occurred but for the insured peril.
The Supreme Court disagreed with this argument and found that the relevant measures were taken in response to information about all cases of COVID-19 in the country as a whole. Consequently, all individual cases of COVID-19 that had occurred by the date of any government measure contributed equally to any governmental intervention.
- Trends Clauses:
These clauses provide for adjustments to be made to the business interruption losses to reflect circumstances not related to the insured peril that could have affected the business and, subsequently, the level of indemnity due to the policy holder. The Supreme Court held that trends clauses should be construed “by recognising that the aim of such clauses is to arrive at the results that would have been achieved but for the insured peril”. As such, adjustments are only to be made as to reflect circumstances affecting the business which are unconnected with COVID-19.
- Orient-Express Hotels case:
The above case focuses on the aftermath of hurricane damage in New Orleans. The insurers successfully argued that the policyholder could only recover loss that it would not have suffered but for the physical damage to the hotel. In other words, the policyholder could not recover loss of business which the hotel would have suffered even if the hotel had not been damaged at all due to the broader effects of the hurricanes on the city.
The insurers relied heavily on this decision on the basis that, even if there were no governmental restrictions on businesses, due to the general economic downturn the businesses would have suffered losses in any event.
Despite the fact that this case was heard by Justice Hamblen and included George Leggatt QC, both of whom are now Supreme Court Justices, this controversial judgment was overruled in the 2021 Supreme Court case. It was held that business interruption loss which arose because both the hotel was damaged and also that the surrounding area was damaged by the hurricanes had two concurrent causes, each of which was by itself sufficient to cause the relevant business interruption but neither of which satisfied the “but for” test because of the existence of the other. In such a case where an insured and uninsured peril operate concurrently and have arisen from the same interruption, provided that damage proximately caused by the uninsured peril is not excluded, loss resulting from both causes operating concurrently is covered.
View From The Market (by John McLaren-Stewart, CEO of Venture Risks and insurance broker)
Although the Supreme Court’s Decision has been heralded as a win for policyholders with the media trumpeting that all businesses would now get paid out for business interruption claims, the reality is unfortunately very different.
First, there are only a few insurers with specific policy wordings covering the risk exposure and a few with wordings vague enough to suggest a claim could be made.
Second, most insurers are taking a very severe approach to claims value calculations including reductions for businesses that did not “pivot” their business operations to carry out “other trading” and thereby mitigate their business interruption losses. In addition, insurers appear to be seeking again to reduce any pay out by taking into account furlough payments received, government loans received, and rate rebates given.
Third, most commercial policies specifically listed the infectious diseases covered and, since none had anticipated COVID-19, it was not included in the wording. These insurers have walked away from this pandemic all but unscathed.
It is notable that following the Supreme Court case, potential claims pay-outs dropped from 600,000 policies to 130,000, and with further analysis the market expects the “valid” claims as defined by the Supreme Court to reduce significantly further.
It should also be noted that that virtually all commercial insurance policies issued recently now specifically exclude coronavirus cover.
This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Dominic Holden or write to us using the contact form below.