UK Supreme Court Provides Policyholders an Antidote to Business Interruption Losses

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This LawFlash provides a summary of the UK Supreme Court’s final decision in the FCA Business Interruption test case. The judgment is more policyholder friendly than the High Court judgment, particularly in relation to causation and quantification, and will have a far-reaching and long-lasting impact on policy interpretation.

In a very policyholder friendly decision on 15 January 2021, the UK Supreme Court handed down its judgment in the FCA Business Interruption test case. The test case was brought by the Financial Conduct Authority (FCA), for the benefit of policyholders. It is likely that over 370,000 policyholders stand to benefit from the clarity provided by the Supreme Court’s decision.

APPEAL

The case was originally heard by Flaux LJ and Butcher J in the High Court. We have previously provided a review of this judgment in a prior LawFlash.

The appeal to the Supreme Court, “leapfrogging” the Court of Appeal due to the exceptional circumstances of the test case, involved the interpretation of four types of clauses, namely (i) disease clauses, (ii) prevention of access clauses, (iii) hybrid clauses, and (iv) trend clauses. It also raised issues of causation (in particular issues of the applicability of the “but-for” test), pre-trigger loses and whether the decision of the Commercial Court in Orient-Express Hotels Ltd v Assicurazioni Generali SpA (trading as Generali Global Risk)[1] (the Orient-Express) was correct. We provide a summary of the findings below.

DISEASE CLAUSES

These clauses provide cover for business interruption losses resulting from the occurrence of a notifiable disease (i.e., COVID-19) at or within a specified radius of the insured’s business premises. The High Court had previously found that the “insured peril” is the effect of COVID-19 both inside and outside of the particular radius.

The Supreme Court, rejecting the High Court’s findings, found that (i) each case of COVID-19 is to be considered a separate “occurrence” of a notifiable disease, and (ii) the policy only responds to business interruption losses that have resulted from cases within the specified radius (i.e., any case/cases outside the specified radius does/do not form part of the “insured peril”). The latter finding is primarily based on the limit of judicial interpretation, and the Supreme Court was reluctant to rewrite the wording of the policy. As such, the insuring clauses, as a matter of plain language, only cover COVID-19 within the specified radius.

It is worth noting however that the overall scope of cover has not changed. Indeed, due to the wider interpretation of causation (outlined below), the “interpretation of the policies arrives at a broadly similar result to that reached by the court below, but by a different route.

PREVENTION OF ACCESS AND HYBRID CLAUSES

Prevention of access clauses provide cover for business interruption losses resulting from intervention from a public authority which prevents or hinders access to, or the use of, the business premises.

Hybrid clauses are a combination of the two – for example, business interruption losses resulting from the prevention of access as a result of action taken by a public authority in response to a notifiable disease.

Nature of Public Authority Intervention

The High Court had interpreted that any “restriction imposed” required the threat of legal compulsion, i.e., that any restriction imposed by the government must have legal force (in other words, a recommendation by the government to stay at home would not trigger the insuring clause). An example of a restriction carrying legal force would be the Health Protection (Coronavirus, Business Closure) (England) Regulations 2020 (SI 2020/327) (the 21 March Regulations), which, among other things, provided for the closure of business such as cinemas, theatres, and nightclubs. Contravention of the 21 March Regulations was made a criminal offence.

The Supreme Court widened the scope of cover under such insuring clauses to include instructions that are made in mandatory and clear terms which indicate that compliance is required without recourse to legal powers (or, importantly, that legally binding measures will follow if compliance is not obtained). For example, the statement of the prime minister on 20 March 2020 instructed businesses to close “tonight.” This is a clear, mandatory instruction which would be understood by the public as to require compliance without recourse to a legal basis. This analysis also applies to Regulation 6 of the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (SI 2020/350), which prohibited people from leaving their homes without reasonable excuse.

The Supreme Court did not directly address each government announcement or regulation. Rather, it decided that this should be left over to further argument. It did, however, state the argument in relation to some instructions (such as government instructions for certain businesses to close given on 20 March 2020) is stronger than to other more general instructions (such as general “stay at home instructions” first conveyed in announcements by the prime minister dated 16 March and 18 March 2020).

Extent of Hinderance of Access Required

The Supreme Court also allowed the FCA appeals relating to the interpretation of the following:

  • “Inability to use”: The Supreme Court found that there is coverage where the policyholder is unable to use either the whole or discrete part of its premises for either the whole or discrete part of its business activities. In this case, there would only be cover for that part of the business for which there is a complete inability to use (i.e., not in relation to those parts of the business that continue to operate). An example of this would be a restaurant being unable to use its “walk-in” facilities, and as such would have coverage for the loss of walk-in business.
  • “Prevention of access”: The Supreme Court found that there is coverage where there is prevention of access to a discrete part of the premises or to the whole or part of the premises for the purpose of carrying on a discrete part of the policyholder’s business activities.

CAUSATION: WHEN IS IT ESTABLISHED?

Disease Clauses

The Supreme Court found, agreeing with an alternative interpretation provided by the High Court, that all individual cases of COVID-19 that had occurred by the date of public measures were equally effective proximate causes of the government measures, and by extension, the business interruption losses. Therefore, it is sufficient to show that at the time of the government measure, there had been at least one case of COVID-19 in the geographical area covered by the clause (such as a 1- or 25-mile radius of the premises). This conclusion does not depend on the particular terminology used in the clause to describe the required causal connection.

Crucially, the Supreme Court rejected insurers’ appeals connected with the “but-for” test and “aggregation.”

The Supreme Court expresses the main weakness of the “but-for” test rather aptly by using a popular medical expression, namely that the “but-for” test produces too many false positives and false negatives to be a reliable method to determine causation in this case. An example of two hunters simultaneously shooting and killing a hiker is instructive. Where it can be said that either bullet would have killed the hiker, even if the other bullet had not been fired, the “but-for” test would produce a false negative (i.e., that neither bullet caused the death of the hiker). This simply does not accord with common sense principles.

The Supreme Court also found it was unlikely that, due to the nature of COVID-19 as a rapidly spreading disease, the parties intended cases outside the radius to displace the causal impact of COVID-19 within the specified radius. Further, the application of the “but-for” test would materially provide for an exclusion of the effect of COVID-19 outside the radius, an eventuality that the insurers were at liberty to include in the policy wording, if so desired.

The aggregation argument, whereby cases occurring outside the radius should be viewed as the dominant cause rather than those cases occurring in the radius, was rejected as unworkable and unreasonable.

Prevention of Access and Hybrid Clauses

The Supreme Court held that business interruption losses are only covered if they result from all the elements of the risk (the composite insured peril) covered by the clauses operating in the standard causal sequence. For example, the composite insured peril might require the causal sequences of (A) prevention of access to the premises, which is caused by (B) the actions or advice of a government or local authority, which is in turn caused by (C) an emergency which is likely to endanger life (or property) (i.e., COVID-19). It follows that each would have to occur in the sequence A à B à C for there to be cover.

Note however, the fact that such losses may have also been caused by other non-COVID-19 effects, does not exclude (or limit) such losses from cover (unless otherwise excluded by the policy).

TREND CLAUSES AND PRE-TRIGGER LOSSES

Trends clauses relate to the quantification of the business interruption loss. They provide scope for the adjustment of the losses, factoring in trends or circumstances that may have affected the financial results of the business, in order to approximate the actual business results that would have been achieved, notwithstanding the occurrence of the insured peril.

Finding against the insurers, the Supreme Court determined that the “trends” adjustment should be construed consistently with the insuring clauses and should not operate to take away the cover otherwise provided under the policy clauses. Put another way, trends clauses should not give insurers another route to avoiding liability under the policy (by reducing the indemnity to zero). Therefore, the trends and circumstances should not include those negative (financial) consequences of COVID-19 (the insured peril).

Following this logic through, the Supreme Court rejected the findings of the High Court in relation to “pre-trigger losses.” The lower court had previously ruled that, where there had been a considerable downturn in the turnover of a business due to COVID-19 before an insuring clause was triggered, then this downturn could be factored into the trend calculation, which would undoubtably reduce the size of the indemnity. The Supreme Court found that this was wrong and that only circumstances wholly unconnected with COVID-19 can be considered when adjusting the likely turnover of a business.

THE ORIENT-EXPRESS

The Supreme Court also overruled the Orient Express which will have wide-ranging ramifications to the insurance industry generally. We will be producing a separate, more detailed, LawFlash on this.

The case involved business interruption losses caused to a hotel as a result of the consequences of Hurricane Katrina. The loss was the result of two concurrent causes, namely damage to the hotel itself (an insured peril), and damage to the surrounding areas (an uninsured peril), both individually sufficient to cause the business interruption loss. The policy contained a trends clause on similar terms to those described above.

The Supreme Court found that the correct approach would have been for the trends clause to operate as to exclude circumstances which had the same underlying or originating cause as the damage, in the Orient-Express, the hurricanes, and in the present case, COVID-19.

 

Trainee Nicholas Woolf contributed to this LawFlash.

[1] [2010] EWHC 1186 (Comm); [2010] Lloyd’s Rep IR 531

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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