Business Interruption Insurance following the Supreme Court’s decision in Financial Conduct Authority v Arch Insurance (UK) Ltd and others

The Supreme Court decision is welcomed as it brings a degree of clarity on the issue of what businesses can claim under their business interruption insurance policies in relation to Covid-19.

This note is only relevant to England and Wales.

What is business Interruption Insurance?

This is generally insurance to cover a policyholder’s loss of profits and other expenses that the policyholder has suffered as a result of damage to property after an event such as say a flood. However, a number of policies cover non-damage interruption such as a pandemic and it is this second element of cover that was the subject of the case.

Background to the case

As we are now all unfortunately aware, this matter started in early March 2020 when Covid-19 became a not so distant matter but a very serious and all-consuming issue.

Some of the key events were:

• On 5 March the Government stated that Covid-19 had become a notifiable disease.
• The World Health Organisation declared Covid-19 a pandemic on 11 March 2020.
• On 21 March the Government made regulations that legally required various types of businesses to close and on 23 March lock-down was brought in which included the closure of other various types of business and created wider restrictions on movement.
• A number of further regulations have been made since, both by the UK Government and in Wales.
• In June 2020 the Financial Conduct Authority (FCA) brought a test claim against a number of insurers in relation to determining the issue of principle on what is covered by Business Interruption Policies.
• Eight insurance companies took part in the case and the case looked at 21 sample policies from those eight insurance companies.Those companies were (with the number of each insurance company’s policies in brackets):
• Arch Insurance (UK) Ltd (1), Argenta Syndicate Management Ltd (1), Ecclesiastical Insurance Office Plc (2), Hiscox Insurance Company Ltd (4), MS Amlin Underwriting Ltd (3), QBE UK Ltd (3), Royal & Sun Alliance Insurance Plc (5) and Zurich Insurance Plc (2).
• Following the High Court hearing in July 2020 the High Court gave its judgment in September 2020 and decided most issues in favour of the FCA and policyholders.However, an appeal was made by most of the Insurers as well as by the FCA on parts of the judgment that they were not successful on.
• This appeal was sent direct to the Supreme Court due to the need for a final decision. The Supreme Court made their decision on 15 January 2021

The Supreme Court decision

The Court made a decision based on the sample of common insurance policy clauses. Whilst there were many points argued, they can be summarised into 6 issues.The Supreme Court set these 6 issues out as follows:

1. “Disease clauses” (clauses which, in general, provide cover for business interruption losses resulting from the occurrence of a notifiable disease, such as COVID-19, at or within a specified distance of the business premises);
2. “Prevention of access clauses” (clauses which, in general, provide cover for business interruption losses resulting from public authority intervention preventing or hindering access to, or use of, the business premises)and “Hybrid clauses” (clauses which combine the main elements of the disease and prevention of access clauses);
3. The issue of Causation. In particular, the insurers argued that policyholders would have suffered the same or similar business interruption losses even if the insured risk or peril had not occurred, so that the claims fail because it cannot be said that the loss was caused by the insured peril and/or because of how the trends clauses require the loss to be quantified;
4. “Trends clauses” are clauses which, in general, provide for business interruption loss to be quantified by reference to what the performance of the business would have been had the insured peril not occurred;
5. Pre-trigger losses- Many insurance policies look at any other causes of loss prior to the event for which the business is insured. For example, if a hotel had failed a health inspection and lost much of its business prior to Covid-19, the calculation for the loss of business related to Covid-19 would take into account the pre-trigger loss relating to the failed health inspection;
6. The High Court case in 2010 of Orient Express Hotels v Assicurazioni Generali SpA. The case concerned a hotel hit by Hurricane Katrina that was only be able to claim under English law for losses relating to the physical damage to the hotel and not for its losses related to the wider destruction of the city and the subsequent loss of trade. The hotel had tried claiming that as the whole city was in recovery, their business inevitably suffered and they should be able to claim for this loss. This argument was unsuccessful and the Insurer succeeded in not allowing the wider loss.

Dealing with each of these 6 issues in turn, the court decided the following:

1. Correct interpretation of disease clauses

The Court decided by a majority that the High Court decision from September 2020 was wrong in its interpretation of the policy wording and the Judges made it perfectly clear; businesses are only covered for the results of Covid-19 within the radius specified by their policy. This was a narrower interpretation of the clauses considered than by the High Court. However, because of the Judges analysis of causation (see point 3 below) this was not a decisive blow to policyholders. In the end it just means that insured businesses just have to establish that there were cases of Covid-19 within the radius specified by their policy.

2. The correct interpretation of prevention of access and hybrid clauses

The insurance companies attempted to narrow their liability by arguing that businesses should only be covered for prevention of access in relation to restrictions put in place.

which actually had ‘the force of law’. Throughout the pandemic restrictions and government directives have been announced before legislation has been passed to actually give them legal force. The Supreme Court held that the insurance companies should still be liable regardless of whether the restriction at the given time was actually legally binding.

In terms of ‘inability to use’ clauses, it was held that it would be dependent on the individual case. Generally speaking however, they decided that it would not be right to deny a business insurance cover just because they can still use some of their business premises. For example, a restaurant which continues to do takeaways will not be prevented from claiming for its inability to use its restaurant. The court reached a very similar conclusion on ‘prevention of access’. Businesses will not be prevented from claiming simply because access could still be achieved to part of their business premises.

3. Causation - The question of what link must be shown between the disease and the business loss

The insurance companies tried to restrict their liability by arguing that the Court should apply the ‘but-for’ causation test. This is the test which is normally deployed and is somewhat of a starting point when establishing that one event caused another. The insurance companies were in effect asking the court to hold that insured businesses should need to prove that ‘but-for’ the disease in the radius specified by their insurance policy, the government would not have imposed the restrictions on businesses.

So, if a hotel’s insurance policy covered them for business interruption caused by a notifiable disease within a 25 mile radius, the hotel would have to establish that ‘but for’ the cases in that radius the government would not have imposed restrictions on businesses. This would be very difficult for businesses to establish and would almost certainly prevent them from claiming for loss of business caused by government restrictions and lockdowns.

The Supreme Court decided that in this case they should not apply the ‘but-for’ test. They held that this is an example of where a strict application would be too exclusive. Instead they stated that in order to prove the loss was caused by the disease, the insured only need prove that there was at least one case in the radius of their insurance policy.

4. Trend clauses. The Court has ruled on how the losses should be calculated. Generally speaking, the amount which businesses can claim under their insurance will relate to the business revenue for the previous calendar year.

The Supreme Court held that the period of comparison used to calculate the loss suffered by a business should be a period completely free of any Covid-19 effects. For example, businesses in the hospitality and travel industry began to suffer in February and March of 2020, before Covid-19 graduated fully to become a global pandemic. The figures used to calculate a business’ loss will now not be skewed by any effects of Covid-19.

5. The effect of other pre-trigger losses

On this issue the Supreme Court has ruled that any pre-trigger loss which was related to Covid-19 cannot be taken into account. Therefore, as with the Court’s ruling on trend clauses, losses of profits caused by the early effects of Covid-19 will be excluded from the calculation of the insurance claim.

6. The Orient-Express case

Applying their position on causation, the Supreme Court effectively overruled the decision in the Orient-Express Hotels Ltd v Assicurazioni Generali SpA case. The Supreme Court decided that this case was wrongly decided and that the hotel should have been able to claim for losses resulting from the wider damage to the city. This wider interpretation will undoubtedly increase the potential for future claims by businesses.

So where are we now? Especially if your policy is not one of those the court considered

The case only involved 8 Insurers and the Supreme Court acknowledged that there may be over 700 different policies by over 60 insurers in the market.

The test case has removed the need for policyholders to resolve a number of the key issues individually with their insurers. However, the judgment was based on the wording from a sample of common insurance policies. If your policy was one of those considered, then matters may be easier to resolve.

The judgment was not exhaustive and each policy has the potential to be unique. For an accurate assessment of your prospects of a successful claim under your policy get in touch with a member of our Commercial Litigation team.

CONTACT US

To discuss any of the issues raised in this article, you can contact either Nick Armitage, Partner and Head of our Commercial Litigation team or Stephen Newman, Partner and Head of our Company and Commercial team by email at info@ramsdens.co.uk or by calling us on 01484 821 500.