Last year, we reported on the High Court test case brought by the Financial Conduct Authority (FCA) seeking a declaration about the meaning and effect of selected business interruption (BI) insurance policy wording in the context of COVID-19 pandemic claims, as many hospitality and other businesses had been denied cover under their BI policies for losses suffered during the pandemic. In September 2020, the High Court ruled against insurers and, in the main, found for the FCA on the majority of the key issues. Unsurprisingly, a number of insurers appealed the decision, which ‘leapfrogged’ direct to the Supreme Court, which has today unanimously dismissed insurers’ appeals. There is no further route of appeal and today’s decision marks the completion of the legal process for impacted policies meaning that many thousands of policyholders will now have their claims for coronavirus-related business interruption losses paid. The judgment is a very welcome relief for the large number of policyholders, estimated at 370,000, seeking to rely on their BI policies.
High Court decision
In summary, the High Court found that the outbreak of coronavirus could amount to an ‘occurrence’ under BI policies and that BI policyholders did not need to show that localised cases of coronavirus were the only effective cause of their business interruption, but simply that there was a case of COVID-19 within the relevant geographical area.
Insurers were given the right to appeal the judgment directly to the Supreme Court and an appeal was heard in December 2020, with both the insurers and FCA appealing certain aspects of the High Court judgement.
Supreme Court decision - Financial Conduct Authority (Appellant) -v- Arch Insurance (UK) Ltd and others (Respondents)  EWHC Comm 2448
The Supreme Court has dismissed insurers’ appeals and upheld the FCA’s appeals.
Some of the key points from the Supreme Court judgment are as follows:
1. Disease Clauses
A Disease Clause generally provides insurance cover for BI losses caused by the occurrence of a notifiable disease within a specified distance of the BI policyholder’s premises. An example of such wording is:
‘any … occurrence of a Notifiable Disease within a radius of 25 miles of the Premises’. ‘Notifiable Disease’ was defined as ‘illness sustained by any person resulting from… any human infectious or human contagious disease… an outbreak of which the competent local authority has stipulated shall be notified to them.’
The Supreme Court has held that such a clause provides cover for BI caused by any cases of illness resulting from COVID-19 that occur within a radius of 25 miles of the business but that it does not cover interruption caused by cases of illness resulting from COVID-19 that occur outside that area.
2. Prevention of Access Clauses/hybrid wordings
A Prevention of Access clause generally provides insurance cover for BI losses resulting from public authority intervention preventing access to, or use of, the insured’s premises. A ‘hybrid’ clause combines the main elements of the Disease and Prevention of Access clauses.
The Supreme Court has held that the Prime Minister’s instruction in his statement, on 20 March 2020, to businesses to close was capable of being a restriction imposed regardless of whether it was legally capable of being enforced as it was a clear and mandatory instruction given on behalf of the UK government. Affected businesses would understand this had to be complied with and it should therefore be viewed as preventing access to businesses and premises.
The Supreme Court also considered the issue of causation. Insurers argued that it is necessary to show, at a minimum, that the loss would not have been sustained but for the occurrence of the insured event. The Supreme Court found that the ‘but for’ test was not determinative in ascertaining whether the test for causation has been satisfied. The causal connection required had to take account of the nature of the cover provided in the BI policies and it may be satisfied where the insured event, in combination with many other similar uninsured events, brings about a loss with a sufficient degree of inevitability, even if the occurrence of the insured event is neither necessary nor sufficient to bring about the loss by itself. In summary, it will be much more difficult for insurers to deny cover, or reduce an indemnity otherwise due to an insured, on the basis that losses that would otherwise be covered under the policy would have resulted in any event from uninsured events whose underlying cause is the COVID-19 pandemic
The FCA has issued a press release in connection with the judgment, which states: ‘We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible. Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.’
The test case was not intended to cover all possible disputes between policyholders and insurers, but to resolve some key contractual uncertainties and ‘causation’ issues, and to provide a degree of clarity for policyholders and insurers going forward. It remains the case that the judgment does not actually determine how much is payable under individual policies, but does now provide conclusive guidance on much of the basis for doing so. It is anticipated that BI policyholders will hear from insurers very shortly regarding their claims.
The FCA has confirmed the next steps to be:
(i) the Supreme Court’s decision will soon be distilled into a set of declarations; (ii) it will publish a set of Q&As for policyholders to assist them in understanding the test case; and (iii) it will also publish a list of BI policy types that potentially respond to the pandemic.
This article is a high-level summary of the decision and does not cover each of the Supreme Court’s findings. Over the coming weeks, the judgment will be the subject of detailed analysis. The key issues for policyholders are (i) whether any of the Supreme Court’s findings apply directly to their wording; and (ii) what additional issues/information is required to establish and support a valid claim. The 370,000-affected policyholders are likely to be very relieved with this decision.