Following a "leapfrog" appeal, the Supreme Court handed down a landmark judgment on 15 January 2021 on how non-damage business interruption insurance (BI) policies should respond to claims arising out of the COVID-19 pandemic. The judgment represents a significant victory for insureds: BI cover is available under most of the policies considered. It is important to flag, however, that most SMEs holding traditional BI policies which respond to claims arising out of physical loss or physical damage will not benefit from this judgment. We consider the implications of the judgment and what happens next.
Background to the case
The FCA test case examined the operation of several non-damage BI clauses in the context of the pandemic. While traditional BI policies only respond to claims arising out of physical loss or physical damage, non-damage based cover is provided by some policies such as by reason of a notifiable disease, prevention of access to premises or a hybrid of these two categories. The Supreme Court addressed the issues arising on coverage provided by these three types of clauses as well as issues on causation and loss. For more information on the background to the dispute, see our timeline.
Disease cover is usually triggered where a business is interrupted as a result of an insured peril such as the outbreak of an infectious or notifiable disease within a certain radius of the business. The question at issue was whether the conditions necessary to trigger cover had been satisfied. The majority of the Supreme Court held that these clauses should be interpreted as covering BI losses resulting from COVID-19 as long as there had been at least one COVID-19 case within the geographical radius specified in the policy.
Prevention of access cover usually applies whereby an insured is prevented by the police or other statutory authority from gaining access to their premises. Hybrid wordings are a blend of disease and prevention of access wordings. Again, the question at issue was whether the conditions necessary to trigger cover had been satisfied. The Supreme Court rejected the findings of the High Court and held that an instruction given by a public authority may amount to a "restriction imposed" if it carries the imminent threat of legal compulsion or is in mandatory and clear terms and indicates that compliance is required. This means that cover may be available for mandatory closure orders that were not legally binding. In addition, where a policy requires an insured to be unable to use the insured premises before policy response is triggered, the Supreme Court held that this requirement may be satisfied where a policyholder is unable to use the premises for a discrete business activity or is unable to use a discrete part of the premises for its business activities rather than "hindrance". The conclusion that partial prevention of access/inability to use satisfies the policy condition widens the availability of cover quite significantly so that insureds who were partially able to mitigate their losses are now covered.
Causation and loss
Even if the policy responds to the claim, there must be a causal link between the insured peril (eg prevention of access) and the loss claimed.
The Supreme Court said that the "but for" causation test is not always determinative of issues of causation. In relation to policies with disease cover, the Supreme Court held that all 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). This means that it will be enough for a policyholder to show that at the time of any relevant government measure there was at least one COVID-19 case within the geographical area as defined by the policy. The FCA is currently consulting on draft guidance as to how the presence of COVID-19 in a particular area may be proved.
In relation to the prevention of access and hybrid clauses, 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 causal sequence. However, the fact that such losses were also caused by other (uninsured) effects of the COVID-19 pandemic does not exclude them from cover.
Losses in BI policies are normally assessed on the basis of settlement formulas based on loss of profits/additional expenses which allow for the adjustment of losses for trends. This may require a comparison between actual revenue and that which would have been generated had the insured peril not occurred.
The Supreme Court held that trends clauses should not be construed so as to deny cover provided by the insuring clauses. This means that where a clause requires adjustments to be made, these should not include circumstances arising out of the same underlying cause as the insured peril; thus, insurers will be unable to rely on the wider effects of the pandemic to reduce the indemnity. Linked to this, adjustments should only be made to losses to reflect circumstances affecting the business which are unconnected with the pandemic so that losses will not be reduced by COVID-19 related pre-trigger downturns in revenue (eg such as those resulting from people staying at home before the official government guidance/regulations).
The Supreme Court overruled the case of Orient-Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm). In that case, the Orient-Express hotel in New Orleans was damaged by Hurricane Katrina and losses were assessed by reference to an undamaged hotel in a flooded city as opposed to its standard occupancy rates. The Supreme Court's decision means that insureds can seek compensation based on what they would have earned if there was no pandemic. This aspect of the judgment will have implications for all BI claims and not just those arising from COVID-19.
What are the implications of the judgment for insurers and insureds?
The Supreme Court judgment will not have any impact on the majority of SMEs with traditional BI policies which only respond to claims arising out of physical loss or physical damage.
The Supreme Court judgment will also not have any impact on the aspects of the original High Court ruling which were not appealed by the FCA: the High Court ruling will still apply. This means that claims on Ecclesiastical's and Zurich's BI policies and certain policies issued by Hiscox, MS Amlin and RSA are not payable (see FCA Summary Table).
The Supreme Court judgment has been welcomed by those policyholders with non-damage based BI cover based on disease, prevention of access or a hybrid of these clauses affected by the judgment. In addition to those policies found to provide cover by the High Court, two additional QBE policies were held to provide cover. The sample wordings considered in the test case are considered representative of some 700 different policy types from some 60 different insurers affecting some 370,000 policyholders with potential claims worth up to £1.2 billion.
The judgment will not, of course, decide any individual insured's claim and all claims will have to be adjusted in the normal way. Applying the decision to individual claims may not always be straightforward and there may be difficult issues around quantifying and proving loss. Losses will need to be adjusted in light of the Supreme Court's findings and there may be complex considerations around causation, partial prevention of access and pre-trigger and trends clauses. As well as losses, cover limits, aggregation, occurrence and other policy clauses will need to be carefully reviewed.
The judgment is legally binding on the eight insurers that were parties to the test case. For those insurers who are not parties, the judgment will provide authoritative guidance for the interpretation of similar policy wordings and claims. The FCA published a list of policies with claims that may be affected by the test case in July 2020.
What happens next?
All insurers must now promptly reassess BI claims affected by the test case in light of the Supreme Court judgment, including those previously rejected or not fully paid. The FCA issued a Dear CEO letter on 21 January 2021 setting out its expectation that insurers reassess and settle claims quickly in light of the Supreme Court judgment, including making interim payments on policies where the claim has been accepted in full or in part. More insureds may have larger claims as a result of the Supreme Court decision and reserves may need to be reviewed. Insurers must also consider the FCA's August 2020 statement on considerations that insurers should take into account when applying deductions for government support received by insureds.
Where insurers accept liability, claims must be dealt with promptly and fairly in line with Principle 6 in the FCA handbook.
There may still be uncertainty about how the general principles in the Supreme Court decision should be applied to specific facts and wordings and further disputes remain a possibility particularly in larger, more complex claims. The FCA has said in its 21 January 2021 Dear CEO letter that in that scenario, insurers should seek to narrow the issues in dispute; agree to pay the reasonable costs of the policyholders and not seek costs against the policyholders in those circumstances.
Some insureds are reported to be considering claiming damages under the Enterprise Act 2016 for late payment of insurance claims. This is particularly an issue for those businesses which have gone into administration or insolvency during the pandemic. In order to succeed, claimants must prove that insurers did not pay a valid claim within a reasonable time causing them additional losses. Such claims are likely to be resisted by insurers on the basis that they acted reasonably particularly in the context of guidance from the FCA. That said, this argument would not be so persuasive for delays from the date of the Supreme Court judgment onwards.
Wholesale exclusions for epidemics and pandemics have already been inserted into many BI wordings on renewal. Given the implications of the judgment for other BI claims, insurers and intermediaries must also now review BI wordings arising from property damage and/or include cover for the underlying cause of the property damage at a higher premium. The existing approach to all BI claims must also be reassessed in light of the over-ruling of the Orient-Express decision. In the longer term, insurers, brokers and cover holders may want to review the design of policies and the way in which they are marketed and sold.
Reinsurers may face increased claims from insurers facing higher than expected BI losses. We anticipate scrutiny of reinsurance contracts and it is possible that there may be some disputes between cedants and reinsurers regarding the recoverability of these claims.