The UK Supreme Court has recently handed down its final ruling on the UK’s Financial Conduct Authority (FCA)’s test case regarding the operation of business interruption (BI) clauses, triggered by business disruptions caused by government lockdown measures in response to the COVID-19 pandemic. In this article, we provide a quick summary of the UK Supreme Court decision and discuss how this might shape Australia’s own position of similar issues.

The decision can be accessed here.

We previously examined this test case, along with an Australian Court of Appeal decision seeking proper interpretation of similar BI policies against losses sustained from the pandemic. Our previous article can be found here.

The UK Supreme Court dismissed the appeal, upholding the original verdicts in favour of policyholders. It will be interesting to see how this affects the Australian position as the Insurance Council of Australia (ICA) awaits a decision on its application to appeal its test case to the Australian High Court.

UK appeal: An update

On 15 January 2021, the UK Supreme Court dismissed an appeal from the UK High Court in respect of a test case by the FCA which was run to clarify whether cover was owed to policyholders for COVID-19 related losses under various standard insurance policy wordings.

The Court found that policyholders who experienced business disruptions due to the COVID-19 pandemic were entitled to compensation by the insurers. In issue on appeal was the proper interpretation of four types of clauses, commonly found in many of the relevant policy wordings:

  • disease clauses: providing cover for business interruption losses from the occurrence of a notifiable disease within a specified distance of the business premises;
  • prevention of access clauses: providing cover for BI losses due to public authority intervention which prevented (or hindered) access to (or use of) the business premises;
  • hybrid clauses: some combination of the main elements of the above two; and
  • trends clauses: quantifying BI loss by reference to how the business would have performed if not for the occurrence of the pandemic.

The appeal also raised issues of causation: Would the policyholders have suffered similar BI losses even if cases of COVID-19 occurred outside the policy prescribed 25-mile radius of an insured premises?

In short, the UK Supreme Court agreed with the UK High Court’s interpretation of the policy wordings. the Court acknowledged that local businesses remain highly suspectable to disruptions from distant outbreaks in the UK due to the highly contagious nature of the virus, but also as a consequence of an increasingly globalised world.

Where do we stand in Australia?

As discussed in our previous article, the case currently before the Court in Australia seeks proper interpretation of “disease clauses” in BI policies for losses sustained from the pandemic. In issue are exclusion clauses which incorrectly refer to the repealed Quarantine Act rather than the Biosecurity Act. The appellant insurers submit this is an obvious mistake, which ought be construed so as to extend to diseases listed under the current Biosecurity Act.

This was rejected by the Court of Appeal. The Court found the mistake, though apparent, was not so absurd as to permit correction by construing the language of the policies contrary to their natural meaning. The exclusion clauses explicitly refer to the Quarantine Act and, therefore, the policy should be read as such.

The ICA has sought leave to appeal to the High Court. At the time of writing, the High Court has yet to hear the application.

Fallout and costs

The recent UK decision does not bode well for Australian insurers. Should the appeal be denied, insurers face the immediate threat of managing payments to policyholders under these freshly interpreted policies. Insurers will also need to revisit their policies to ensure premiums accurately reflect coverage.