Last year, as the effects of COVID-19 were beginning to be felt by businesses, we wrote about steps that could be taken under the terms of any existing contracts where performance might be affected by the pandemic. Many clients found themselves revisiting the law on force majeure and frustration and carefully checking the terms of their contracts.

For others, in particular small and medium sized businesses, they were checking their insurance policies: did the “business interruption” insurance policy they had in place cover any of their losses suffered as a result of COVID-19 and the subsequent restrictions imposed by government? It was a billion-pound question, with an estimated 370,000 policy-holders holding their breath to hear the answer, after insurers initially refused to pay out.

The answer came last Friday in the form of a judgment of the Supreme court in the first case of its type brought by the FCA under the Financial Markets Test Case scheme. The case, which leapfrogged its way from the High court due to is importance, examined the wording of various sample clauses of business interruption policies and asked whether they applied in the context of COVID-19.

For the policy holders, the judgment was a welcome one; for insurers, an expensive one: the Supreme Court, agreeing with the High Court, dismissed all appeals from the Insurers, allowed all four of the FCA’s appeals, and held that all of the clauses considered in the case (and likely many like them, given they were provided as representative samples) would provide cover for business interruption caused by the COVID-19 pandemic.

The judgment

The judgment itself runs to some 112 pages, and considers a variety of sample clauses commonly found in business interruption policies. For obvious reasons, the focus was particularly on Disease Clauses which cover business interruption losses caused by the occurrence of a ‘Notifiable Disease’ within a defined radius, and so called Prevention of Access clauses which cover circumstances in which a policy holder cannot gain access to their premises, as well as hybrid clauses of the two.

While the Supreme Court disagreed with some of the analysis of the High Court on questions of construction and causation, ultimately the Supreme Court’s judgment not only confirmed coverage for those policy holders for whom the High Court found in favour, but expanded the class of potential claimants further.

The Disease Clauses

One of the questions for the Court was the meaning of the sample Disease Clause which read:

“We shall indemnify you in respect of interruption or interference with the Business during the Indemnity Period following…any occurrence of a Notifiable Disease within a radius of 25 miles of the Premises”

• The High Court had interpreted this clause quite widely: in its view, the clause covered the effects of COVID-19 generally, not merely the effects of a single case within the 25-mile radius. So, as long as a policy holder could point to a case of COVID-19 in the defined radius, their business interruption losses owing to the more general effects of COVID-19 would be covered.
• The Supreme Court disagreed with the above analysis. It had the effect, the Court said, of straining the plain meaning of the clause and resulting in coverage for perils that were not insured against: the so-called “insured peril” was the occurrence (i.e. a single case of COVID-19) within the 25-mile radius. Only losses resulting from that occurrence were covered.
• However, critically, this interpretation did not limit the scope of claims as policy holders might have feared. When the Court moved on to consider causation, it rejected the argument that a policy holder had to show that “but for” the single case it had identified within the defined radius, the loss would not have occurred. Instead, the Court said that there are circumstances where it is appropriate to depart from the “but-for” test for causation, and this was one.
• So, whilst a policy holder had to identify a case of COVID-19 within the covered radius to make a claim, it did not have to show that its business interruption losses was caused by this single case. Instead, it could point to the effects of other cases across the country despite themselves being uninsured perils:

“there is nothing in principle or in the concept of causation which precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause – indeed as a proximate cause – of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself.”

The Prevention from Access and Hybrid clauses

The Court examined a number of clauses that both covered circumstances in which simply  a business is prevented from gaining access to its premises, and so-called hybrid clauses where that access is prevented because of a disease. For example, one sample clause read:

“losses resulting solely and directly from an interruption to your activities caused by your inability to use the insured premises due to restrictions imposed by a public authority during the period of insurance following an occurrence of any human infectious or human contagious disease, an outbreak of which must be notified to the local authority” 

In these cases, the Supreme Court offered a wider construction than the High Court.

• the “restriction imposed” did not need to have the force of law, underpinned by statutory instrument. Instead, the Court recognised that there have been occasions during the past year where statements have been made by the Prime Minster which were understood to be instructions to various professions to cease operations immediately, even if there was some delay before they have the force of law.
• a policy holder could claim for those parts of its premises that it was unable to use, even if it could use others. The obvious example would be restaurants claiming for loss of in-person diners whilst the continued to offer take-away meals.
• the same conclusions about causation in the context of Disease Clauses were reached in the context of prevention of access clauses.

Trends clauses and pre-trigger downturn

Trends clauses provide the method by which business interruption losses are quantified, notably by adjusting the figures achieved by businesses in previous years to account for trends or other occurrences that might have affected the business in any event even if the insured peril did not occur. Again, the Supreme Court disagreed in some respects with the High Court’s approach to these clauses:

• The Supreme Court confirmed that, absent clear wording to the contrary, insurers cannot adjust a business’ interruption losses by taking into account other COVID-19 related losses that it might have suffered irrespective of the insured peril.
• So, it would not be open to an insurer to argue that the loss incurred by a business’ not being able to access the premises can be adjusted on the basis that footfall would be lower in any event because of COVID-19. COVID-19 and its various consequences are not trends or circumstances that can be prayed in aid of when quantifying what the business would otherwise have earned had the insured peril not taken place.
• For that reason (as well as the Court’s view on causation) the Orient Express case, a landmark case familiar to practitioners of insurance law involving Hurricane Katrina, was wrongly decided and overruled.
• Finally, disagreeing with the High Court, the Supreme Court held that insurers could not take into account any downturn in business related to COVID-19 that had occurred before the triggering of the policy. Again, in the words of the Court, the trends or circumstances for which adjustments may be made do not include trends or circumstances caused by the insured peril itself or its underlying or originating cause.

What does this mean?

The case rightly attracted a lot of attention from policy holders, insurers, and the press. Clearly, it is a cause for celebration for those businesses which held policies with the insurers involved in the test case, as well as for the FCA who will have been pleased to see the first use of the Financial Markets Test Case scheme result in such a significant judgment. Perhaps it makes the case for exploring the introduction of such schemes in other industries.

Those business-owners who hold similar policies with other insurers will be buoyed by the Supreme Court’s reasoning too, and it is likely that we will see an increase in claims being made for business interruption losses, at a potentially significant cost to insurers. Quite whether this is an opening of the floodgates for claims, though, is another matter: the facts of any particular case and the specific wording of the relevant clauses will still need to be closely examined.