The much anticipated decision of the UK Supreme Court in a test case addressing insurance coverage issues arising in connection COVID-19 business interruption ("BI") claims was handed down on January 15, 2021 in FCA v. Arch Insurance (UK) Ltd., [2021] UKSC 1.  The ruling favoured insureds, with the Supreme Court unanimously dismissing appeals brought by insurers and allowing all four of the appeals (two on a qualified basis) brought on behalf of insureds.

Proceedings were brought by the Financial Conduct Authority ("FCA") last year under the Financial Markets Test Case Scheme to clarify whether various policy wordings cover BI losses resulting from the COVID-19 pandemic.  Appeals from the initial High Court judgment were allowed to "leapfrog" directly to the Supreme Court (bypassing the Court of Appeal) and an expedited hearing, given the urgency of the underlying questions to the numerous businesses impacted by the pandemic. 

Eight insurers were involved in the test case, which considered a representative sample of standard form BI policies on the basis of agreed and assumed facts. The test case focussed on BI coverage under coverage extensions which differ from basic BI coverage available under most commercial property policies in Canada, which require physical loss or property damage in order to be triggered. 

At issue on the appeal were four types of clauses found in the sample BI extensions, including (i) disease clauses; (ii) prevention of access clauses, (iii) hybrid clauses and (iv) trends clauses.  The appeal also addressed the issue of causation, and whether insureds should be entitled to coverage in circumstances in which the BI loss would have occurred even if the insured risk or peril had not occurred.

Disease Clauses

The "disease clauses" at issue on the appeal provided coverage for BI loss caused by the occurrence of disease at or within a specified distance of the insured's business premises. The question was whether coverage under such disease clauses was limited to BI loss which could be shown to have arisen as a result of the individual occurrence of disease within that specified distance, or also covered BI losses arising from the wider pandemic and responses to it.  The Supreme Court ruled that the disease clause provides coverage for BI loss caused by an actual case of illness sustained by an individual within the specified distance of the business premises.  However, the Supreme Court went on to find that the disease clauses did not confine coverage to BI losses resulting only from the individual case of disease within the specified distance. 

Prevention of Access and Hybrid Clauses

The "prevention of access clauses" at issue on the appeal provided coverage for BI losses resulting from a public authority intervention preventing access to, or use of, the insured premises. The "hybrid clauses" combined the elements of the "disease clauses" and "prevention of access clauses".

The analysis concerning the "prevention of access clauses" focussed on whether the intervention of a public authority was required to have the force of law (as opposed to taking the form of a non–legally binding instruction or guidance from a public authority), and whether an "inability to use" a business premises required a complete inability to use the premises.  

The Supreme Court found that an instruction given by a public authority may amount to a "restriction imposed" if compliance with it would reasonably be understood to be required, without the need for recourse to legal powers.   The Supreme Court also found that an "inability to use" an insured premises was satisfied either if the insured was unable to use the insured premises for a discrete part of its business activities, or if it was unable to use a discrete part of its insured premises for its business activities (recognising, however, that there would only be cover for that part of the business for which the premises cannot be used).

Causation

The Supreme Court looked in detail at the issue of causation, and in particular the use of the "but for" test in determining causation under insurance policies.  The Supreme Court noted potential limitations of the "but for" test, in part based on an example from the Supreme Court of Canada case of Cook v. Lewis [1951] SCR 830, demonstrating that in a case involving concurrent tort-feasors, application of the "but for" test could give rise to the illogical result in neither tort-feasor being found to have caused the underlying harm.   In the test case, the Supreme Court found the "but for" test to be inapplicable to the causation analysis relating to disease and hybrid clauses. It found those clauses could respond to cover losses resulting from an individual occurrence of disease within specified distance in combination with the wider pandemic, even if the individual occurrence of the disease would not have been sufficient on its own to cause the BI loss.   The Supreme Court acknowledged, however, that the "but for" test remains a relevant test, and in most cases will be the appropriate test for causation.  It will not be appropriate where its application results in a narrowing, or negation of coverage in circumstances where, based on the interpretation of the policy as a whole, such narrowing or negation of coverage is found not to have been the intention of the parties.

Trends Clauses

"Trends clauses" are provisions within BI policies dealing with the quantification of BI loss.  Typically, trends clauses are intended to ensure that indemnity provided to an insured properly reflects the coverage granted under the policy, and is not reduced or inflated by factors unrelated to that coverage.  The Supreme Court held that trends clauses should be restricted to quantifying loss, and ought not to be used to delineate the scope of the indemnity (which is the function of the insuring clauses of the policy).  The trends clauses should, to the extent possible, be construed consistently with the insuring clauses in the policy.  As a result, trends clauses should be interpreted so as not to eliminate coverage provided by the insuring clauses.  In the case of BI losses arising in connection with the pandemic, the Supreme Court found that trends clauses should be applied such that losses are adjusted to take into account only circumstances unrelated to the insured peril  (the pandemic), and not circumstances which are related to the insured peril.

Conclusion

The Supreme Court's decision in the test case will result in coverage for a number of COVID-19 BI claims which otherwise had been in dispute in the UK.   While the Supreme Court applied a narrow interpretation to disease clauses, its accompanying causation analysis will likely lead to a greater number of claims being covered under BI extensions.  The decision also widens the scope of prevention of access clauses, and limits the application of the "but for" test in the interpretation of certain insurance clauses.    However, it must be borne in mind that while largely favourable to insureds, the test case will not apply to most COVID-19 related BI claims in Canada.  In the absence of coverage extensions such as those under consideration in the test case, many COVID-19 BI claims may still fail due to the absence of physical loss or damage to property.  What is more, even where coverage does exist, insureds will still be put to the task of quantifying the portion of their BI loss related the pandemic.  Insurers and insureds seeking clarity on their particular situation should seek the assistance of an insurance professional in assessing their policy and whether coverage is available for a BI loss.