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Business Interruption Claims & Covid-19 - What Next?

Following months of uncertainty for policy holders, on 15 January 2021, the Supreme Court handed down its judgment in FCA v Arch Insurance (UK) Ltd and others [2021] UKSC 1, an appeal from the High Court judgment in FCA v Arch Insurance (UK) Ltd and others [2020] EWHC 2448 (Comm).

The High Court's Decision

Following the outbreak of the COVID-19 pandemic, the Government provided guidance which required a number of businesses to close. These businesses were effectively required to halt their operations and as a result, suffered a loss of revenue.

Due to growing concerns surrounding the lack of a positive response from insurance companies the FCA were prompted to commence proceedings against a number of insurance companies in order to resolve the uncertainty surrounding Business Interruption ("BI") insurance cover and to ensure the fair treatment of policyholders.

In these proceedings, the FCA sought clarity in relation to common extensions to BI cover, namely:

1. Infectious diseases clauses which provide cover for business interruption in circumstances where a notifiable disease has occurred at or within a given radius of the business's premises;
2. Prevention of access clauses which provides cover for business interruption in some circumstances where access to the business is hindered as a result of steps taken by a public authority in light of an emergency; and
3. Hybrid clauses which provide cover for business interruption where restrictions have been imposed on a business due to a notifiable disease.

After hearing arguments from the defendant insurance companies concerning coverage of the policies and causation, the High Court agreed with the FCA's interpretation of these clauses and held that most infectious disease clauses would provide cover to policyholders as a consequence of COVID-19. Further the High Court also held that certain prevention of access and hybrid clauses may provide cover for policyholders depending on the wording of such policies and how the business was affected by the Government's response to the pandemic.

Grounds for Appeal

Following the conclusion of the High Court's case, the FCA and several of the insurance companies involved applied for permission to appeal directly to the Supreme Court. The High Court granted these applications on 2 October 2020.

The Appeal concerned the wordings of certain policies which were the subject of the High Court's Decision. In particular, the FCA and several of the insurance companies required the Supreme Court to determine the following:

1. Certain matters of construction of the disease clauses, prevention of access and hybrid clauses;
2. Whether the High Court was correct in:

• Applying counterfactual scenarios in relation to the operation in relevant policies which provided for loss adjustments; and
• In its analysis of Orient-Express Hotels Ltd v Assicurazioni Generali S.p.A. [2010] EWHC 1186 (Comm) which concerns the construction of BI policies in relation to losses suffered as a result of devastation to the surrounding area.

The Appeal took place over 4 days commencing on 16 November 2020, the decision of which was handed down on 15 January 2021.

The Supreme Court Appeal

The Supreme Court unanimously dismissed the appeals of the insurance companies and allowed the appeals of the FCA and the Hiscox Action Group. In allowing the FCA's appeal, the Supreme Court considered issues surrounding:

1. The disease clauses;
2. The prevention of access and hybrid clauses;
3. Causation;
4. The trends clauses;
5. Pre-trigger losses; and
6. The decision in Orient-Express.

In short, the effect of the Supreme Court judgment is that all of the disease clauses, prevention of access and hybrid clauses in principle provide for BI losses caused by the COVID-19 pandemic.

Disease Clauses

In interpreting the disease clauses, the Supreme Court disagreed with the FCA that the clause should be read as covering the BI consequences of a notifiable disease whenever the disease occurs provided there is at least one case of illness caused by the disease within the specified 25-mile radius.

The Supreme Court instead preferred a narrower construction of disease clauses, however due to its findings on causation which are highlighted below, it reached the conclusion that disease clauses would provide cover in principle.

Prevention of Access and Hybrid Clauses

In determining prevention of access and hybrid clauses, the Supreme Court had to consider whether the restrictions imposed by the Government had to have the force of the law for those clauses to provide cover and the nature of the prevention or hindrance required for the clauses to be triggered.

The Supreme Court disagreed with the High Court's decision on this ground and agreed with the FCA's contention that the requirement of restrictions could be satisfied by mandatory instructions or measures issued by a public authority without requiring the guidance to be legally binding. Further, the Supreme Court held that either an inability to the premises for a discrete business activity, or an inability to use a discrete part of the premises for its business activities had to be established for cover to be available.

Causation

The insurers argued that claims under BI policies failed because it could not be determined whether the losses were caused by the insured peril (i.e. the occurrence of COVID-19 in the vicinity of the insured premises). In other words, policyholders could not prove that the insured business interruption resulting from the Government guidance would not have occurred but for the insured peril.

The Supreme Court disagreed with the arguments of the insurance companies, instead finding that all the individual cases of COVID-19 that had occurred by the date of the Government guidance were equally effective proximate causes of that measure, therefore all the cases were equal causes of the imposition of national measures and so there was nothing which precluded an insured peril from being regarded as a proximate cause of the loss.

Trends Clauses

Almost all of the insurance policy wordings considered by the Supreme Court included clauses which provided for adjustments to be made to the BI losses to reflect circumstances that could affect the business and, therefore, the level of indemnity afforded to a policyholder under the BI policy ("the Trends Clauses").

As a result of the Trends Clauses, insurers argued that they are not liable to indemnify policyholders for losses which would have occurred regardless of the occurrence of any insured perils by reason of the wider consequences of the COVID-19 pandemic.

The Supreme Court again disagreed with the insurance companies' interpretation of the Trends Clauses and held that the effects of COVID-19 had to be disregarded when making any adjustments to the level of indemnity afforded to policyholders. Instead, adjustments ought only to be made to reflect circumstances affecting the business which are unconnected with the COVID-19 pandemic.

Pre-Trigger Losses

A further issue arose in relation to the Trends Clauses and whether any business interruption experienced prior to the occurrence of any cases of COVID-19 in the vicinity of the insured premises amounted as a trend in calculating the amount payable to policyholders.

The Supreme Court decided that a downturn in turnover is not a circumstance for which adjustment is permitted and that the indemnity is calculated by reference to what would have been earned if the COVID-19 pandemic had not occurred.

The Decision in Orient-Express

The decision in the Orient-Express case concerned a claim for BI loss arising from damage to a hotel in New Orleans resulting from Hurricanes Katrina and Rita in 2005. In this case, insurance companies successfully argued that the policyholder could only recover loss that it would not have suffered but for the physical damage to the hotel. In other words, policyholders could not recover loss of business which the hotel would have suffered even if it had not been damaged at all.

The Supreme Court held that the Orient-Express case had been wrongly decided and that the court in that case had been wrong to hold that the BI loss was not covered by the insurance policies.

What Next?

The Supreme Court judgment means that BI cover is available to thousands of policyholders as a result of COVID-19 and the Government guidance in relation to the pandemic. However, in spite of this success, the Appeal does not determine the amount payable under each individual policy, but only provides the legal basis for doing so.

As such, insurance companies will have to consider both the High Court decision and the Appeal to establish how the judgment affects their BI policies.

Policyholders with potential claims should expect to hear from their insurance company soon in relation to their claims and those considering settling their claims should contact their insurer before accepting any offers of settlement, in case the Supreme Court decision has led to additional options and/or a wider scope for indemnity.

It is important for policyholders to notify their insurers of any potential claims within the time frames set out in their policies and to also consider contacting the Financial Ombudsman if they have not received a response. Legal support is also advisable to assist in policy interpretation and bringing a claim where indemnity is refused.

For more information contact Stephen McArdle in our Commercial Litigation department via email or phone on 0333 207 1142. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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Mandatory Grounds for Possession

Mandatory Grounds for Possession