Business interruption insurance test case: Supreme Court rules in policyholders' favour
The Supreme Court has dismissed the insurers' appeals and allowed the FCA's appeals.
The UK Supreme Court (SC) has handed down its judgment on the appeal of the FCA’s business interruption (BI) insurance test case. The FCA had been largely successful at first instance. The Court dismissed the main appeals by the insurers and allowed the FCA’s appeals, broadly finding in favour of arguments put forward by the FCA on behalf of policyholders. This was the first ever Financial List test case. It was a leapfrog appeal from the High Court directly to the Supreme Court - such appeals are uncommon.
Here is a summary of the ruling and its immediate implications for the market.
The ruling at a glance
In issue in the appeal was the proper interpretation of four types of clauses:
- Disease clauses
- Prevention of access clauses
- Hybrid clauses
- Trends clauses
The appeal also raised issues of causation.
In broad terms, compared to the first instance decision the SC took a narrower view of disease clauses although confirmed cover due to causation, and a wider view of prevention of access clauses. The SC also made findings on trends clauses which will be of benefit of policyholders.
| Clauses | Specified in the judgment as | Summary of the SC’s decision |
| Disease clauses | Clauses which, in general, provide cover for business interruption losses resulting from the occurrence of a notifiable disease, such as COVID-19, at or within a specified distance of the business premises. | The SC disagreed with the first instance decision in respect of some of the clauses, taking a narrower view and finding that the correct interpretation of all the clauses was that they only cover relevant effects of cases of Covid-19 that occur at or within a specified radius of the insured premises. Having said that, the SC’s conclusion on causation nonetheless meant that cover will in most cases be confirmed, since the SC effectively treated all UK cases of COVID as having been concurrent causes of the responsive measures that were introduced by the government and which led to the relevant interruption. |
| Prevention of access (and similar perils) clauses | Clauses which, in general, provide cover for business interruption losses resulting from public authority intervention preventing or hindering access to, or use of, the business premises. | On the interpretation favoured by the SC, these clauses were triggered more easily than was found at first instance. The broader interpretation included that: government pronouncements, even prior to legislative steps, could suffice to trigger the clauses; and “inability to use” premises does not require complete inability, so long as a discrete part of business activities or of the premises are affected. |
| Hybrid clauses | Clauses which combine the main elements of the disease and prevention of access clauses. | In respect of the “disease” and “prevention of access” aspects of such clauses, the SC broadly followed the same considerations and approach noted above. |
| Trends clauses | Clauses which, in general, provide for business interruption loss to be quantified by reference to what the performance of the business would have been had the insured peril not occurred. | The SC found that the trends clauses in issue should be construed so that the standard turnover/gross profit from earlier trading is adjusted only to reflect circumstances which are unconnected with the insured peril and not circumstances which are inextricably linked with the insured peril. This approach ensures that the trends clause is construed consistently with the insuring clause and does not take away cover prima facie provided by the insuring clause. This is significant for policyholders. |
In the course of concluding that all UK cases of COVID were effectively concurrent causes of the responsive measures that were introduced by the government and which led to the relevant interruption, the SC overruled the Orient Express case and held that the “but for” test is not always determinative for these purposes. This finding is clearly of potential wider relevance to the insurance industry more generally.
What happens next?
The FCA and the insurers are working with the Court to refine the judgment into a set of declarations, which will be issued shortly.
The FCA intends to issue a set of Q&As for policyholders and will also publish a list of BI policy types that potentially respond to the pandemic.
The FCA has also published draft guidance for policyholders on proving the presence of coronavirus (a condition in certain types of policy). The consultation has been extended to 22 January 2021, but only for supplemental comments based on the SC judgment (it is otherwise closing on 18 January). Finalised guidance will be issued soon.
What does this mean for the insurance market?
The judgment and forthcoming declarations should provide some certainty and guidance in the assessment and resolution of claims arising from the pandemic. They will be of interest to:
- BI insurers, including those who did not participate in the test case, when assessing claims and considering fair treatment of customers. Insurers can expect heightened FCA supervisory scrutiny in the short term, and should be alert to the longer-term risk of enforcement and civil litigation where their approach is not aligned with the SC judgment.
- Courts when considering separate claims in relation to similar policy wording.
- The Financial Ombudsman Service (FOS) i.e. in settling complaints.
BI insurance and the background to the test case – a quick recap
The Covid-19 outbreak, and the public health measures introduced in response, have put businesses under sustained financial pressure. SMEs were particularly affected, and many have subsequently claimed for unforeseen losses under their BI policy (and, more specifically, under certain “non-damage” policy extensions).
The FCA – despite initially suggesting in a Dear CEO letter that insurers are, in most cases, not obliged to pay out for pandemic-related losses – announced in May 2020 that it was bringing a test case (under the Financial Markets Test Case Scheme) to resolve key contractual uncertainties.
The High Court heard the test case in July 2020, with its first instance judgment being published in September 2020. Our summary of that judgment can be found here.
