15th January 2021

Landmark Supreme Court judgment delivered on FCA’s business interruption insurance test case

Supreme Court gives boost to businesses who can now demand payment for their business interruption claims

Supreme Court gives boost to businesses who can now demand payment for their business interruption claims

Solicitor, Joanna Barr writes: The Supreme Court has today handed down its judgment in the Financial Conduct Authority (FCA)’s business interruption (BI) insurance test case, bringing some much-needed positive news for businesses with BI insurance policies, many of whom have been significantly affected by business losses suffered as a result of the Covid-19 pandemic. Today’s judgment will result in thousands of policyholders having their claims for Covid-19 related losses paid when they had previously been refused or put on hold by insurers

Introduction

In 2020, the FCA brought a test case against insurers on behalf of policyholders suffering significant Covid-19 related losses to obtain clarity from the Court on whether those losses should be covered by their BI insurance policies. Most BI policies are focused on physical property damage and would not apply to business losses incurred as a result of the Covid-19 pandemic. However, where certain policy extensions have been purchased by to include BI cover in other circumstances – such as, for example, the occurrence of an infectious or notifiable disease within the vicinity of the business premises (namely 'disease clauses') or the prevention of access to a premises because of public authority closures or restrictions (namely 'prevention of access clauses'). Where those extensions have been purchased some insurers have accepted liability for Covid-19 losses under these types of policies whilst others disputed liability despite very similar policy wording leading to much concern about unfairness and a lack of certainty and clarity for policyholders. The FCA issued the test case to clarify key issues for policyholders and insurers alike, and to enable insurers to assess and pay out on claims swiftly.

In September 2020, the High Court issued its judgment which was seen as largely favourable to policyholders. Seeking further clarity on certain issues, the FCA and insurers issued appeals of the High Court decision and the case was leapfrogged to the Supreme Court for a concluding judgment on issue.

Supreme Court’s judgment

The Supreme Court judgment handed down today has allowed the majority of the FCA’s appeal made on behalf of policyholders and has unanimously dismissed the appeals brought by insurers. That said, the Supreme Court accepted some of the insurers’ appeal arguments, but these did not affect the outcome of the appeal.

A summary of the key points is as follows:

  • Interpretation of the disease clauses: These clauses provide cover for the occurrence of a notifiable disease within the vicinity of an insured’s premises.

Applying a narrower approach than the High Court, the Supreme Court found that disease clauses will provide cover for BI caused by any cases of illness resulting from Covid-19 that occur within the policy’s specified radius of the business premises. It does not cover interruption caused by cases of illness resulting from Covid-19 that occur outside that area. The Supreme Court agreed with the High Court that (i) the language of a disease clause does not confine cover to BI which results only from cases of a notifiable disease within the specified radius, as opposed to other cases elsewhere, and (ii) significance should be attached to the potential for a notifiable disease such as Covid-19 to affect a wide area when considering causation as a whole under the policy.

In terms of causation, the Court concluded that it is enough to prove that the interruption of the business was caused by one or more incidences of Covid-19 within the geographical area covered by the clause.

  • Interpretation of prevention of access and hybrid clauses: A prevention of access clause generally provides insurance cover for business interruption losses resulting from public authority intervention preventing access to, or use of, the insured premises. A “hybrid” clause combines the main elements of disease and prevention of access clauses.

The Supreme Court has applied a wider interpretation of these clauses than the High Court, as follows:

  • The judgment concluded that an instruction given by a public authority may amount to a “restriction imposed” if compliance with it is required but is not necessarily legally binding. For example, the Supreme Court agreed with the FCA that the Prime Minister’s instruction on 20 March 2020 to some businesses to close was capable of being a “restriction imposed”.
  • The Supreme Court agreed with the FCA about the meaning of “Inability to use” premises and “Prevention of access”. For these terms, cover may be available for partial closure of premises (as well as full closure) although there would only be cover for that part of the business for which the premises cannot be used. The Supreme Court held that “interruption” is capable of encompassing interference or disruption which does not bring about a complete stop to business or activities, and which may only be a small disruption. So, where a café business in ordinary times provided eat in and take away services but was no longer allowed to provide eat in services as a result of restrictions, losses related to the closure of the eat in part of the premises could be recoverable.
  • The Court decided that these clauses indemnify the policyholders and can act in combination with other events to cause BI loss.
  • In terms of what are known as trends clauses, the Supreme Court held that insurers cannot reduce the pay-out otherwise due to the insured on the basis that its business would have suffered losses caused by the Covid-19 pandemic even if the insured event hadn’t occurred. The indemnity payout should be calculated by reference to what would have been earned had there been no Covid-19, disregarding any significant revenue drop prior to the policy being triggered that resulted from Covid-19.

The effect of this judgment does not mean that insurers are automatically required to pay out claims, as each claim turns on its own facts and any pay-outs will remain within the strict limits specified in the policy. However, it lays down helpful, benchmark principles against which key issues in policies can be decided between insurers and policyholders and to provide uniformity and fairness across the industry for the benefit of businesses.

FCA’s actions following judgment

The FCA has said that it will “work with insurers so that they rapidly conclude their claims processes on claims that the Supreme Court has said should be paid, providing interim payments wherever possible.”   

In an effort to simplify the judgment, the FCA and the insurers are working together to produce a set of declarations which will be available shortly. The FCA will also publish a list of Q&As to assist policyholders and advisers in understanding the test case.

The FCA has already published draft guidance for policyholders on how to prove the presence of coronavirus, which is a condition in certain types of policy, and final guidance will be issued the FCA as soon as possible after the consultation has completed.

Implications for businesses

If your business had BI cover for property-related damage only, you will not be affected by today’s Supreme Court decision. However, businesses with ‘disease’ or ‘prevention of access’ clauses in their policies who have provisionally had cover refused by their insurers should now revisit their policy wordings to see whether the Supreme Court’s findings mean that they now have valid claims and should obtain interim payments where possible. The Supreme Court was specifically dealing with losses caused by the first lockdown in March 2020. However, the judgment will equally apply to the interpretation of policies in the context of subsequent lockdowns, provided policy terms have remained the same. Businesses should therefore submit separate claims to their insurers for these losses.

Policyholders with questions about interpretation of their policy should contact their broker or legal advisers for further assistance. If you understand your insurer to be incorrectly refusing to pay out under your policy, you ought to take immediate advice and escalate the issue to the Financial Ombudsman if necessary.

To find out more about anything covered in this article, or to discuss the potential impact of the coronavirus pandemic on your business, or if you require assistance with interpreting your BI policy, please contact Joanna Barr or Caroline Watson of Thrings’ Dispute Resolution team.

 


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