Covid-19 Business Interruption: Insurers to Pay Out
In a test case under the Financial Markets Test Case Scheme[1] the Supreme Court today substantially allowed a leapfrog appeal by the Financial Conduct Authority (FCA). The insurers’ appeals were dismissed.
The proceedings had been initiated by the FCA under the Scheme as a result of an agreement made with eight insurance companies to resolve issues on which guidance was needed.
Two groups of policyholders had also intervened in the proceedings.
The decision paves the way for many small businesses to be paid out under business interruption policies for losses incurred under the first COVID-19 national lockdown.
Issues arising were as follows:
Disease clauses
The court considered as an exemplar the wording in an RSA policy. This clause covered business interruption losses resulting from any occurrence of a notifiable disease within a specified geographical radius (typically 25 miles) of the insured premises.
It interpreted the clause as covering business interruption losses resulting from COVID-19 (which was made a notifiable disease on 5 March 2020) provided there had been an occurrence of the disease within the geographical radius.
“An occurrence” meant at least one case.
Lord Briggs and Lord Hodge would have upheld the lower Court’s interpretation of the clause but otherwise agreed with the main judgment.
Lord Hamblen and Lord Leggatt accepted the Insurers’ arguments that (i) each case of illness sustained by a person as a result of COVID-19 was a separate “occurrence” and (ii) the clause covered only business interruption losses resulting from cases of the disease that occurred within the radius.
Other disease clauses should be interpreted in a similar way.
Prevention of access and hybrid clauses
These clauses specified a series of requirements which must be met before the insurer was liable to pay.
Some clauses applied only where there were restrictions imposed by a public authority following an occurrence of a notifiable disease.
The Supreme Court rejected the lower court’s interpretation as too narrow and held that an instruction given by a public authority may amount to a “restriction imposed” if it carried the imminent threat of legal compulsion or was in mandatory and clear terms and indicated that compliance was required without recourse to legal powers.
It did not rule on whether individual measures satisfied this test. The argument was stronger in relation to some general measures such as instructions in mandatory terms from the Prime Minister.
The Hiscox wording provided cover only where business interruption loss was caused by the policyholder’s inability to use the insured premises.
That meant complete and not partial inability to use the premises.
The requirement may be satisfied where a policyholder was unable to use the premises for a discrete business activity or was unable to use a discrete part of the premises for its business activities.
Causation
The relevant measures were taken in response to information about all cases of COVID-19 in the country as a whole.
All individual cases of COVID-19 which had occurred at the date of the government measures were equally effective proximate causes of that measure.
It was therefore sufficient for a policyholder to show that at the time of any relevant Government measure there was at least one COVID-19 case within the geographical area covered by the clause.
The “but for” test was sometimes inadequate and there could be situations (of which the present case was one) where a series of events all caused a result although none was individually either necessary or sufficient to cause the result by itself.
Rejecting the “weighing” test as unreasonable and unworkable, the Supreme Court held that the fact that such losses were also caused by other (uninsured) effects of the COVID-19 pandemic did not exclude them from cover.
Trends clauses
Such clauses should not be construed so as to take away cover provided by the insuring clauses. The trends and circumstances for which the clauses required adjustments to be made did not include circumstances arising out of the same underlying or originating cause as the insured peril (i.e. in the present case effects of the COVID-19 pandemic)
Pre-Trigger losses
Permitting adjustments to be made under trends clauses to reflect a measurable downturn in the turnover of a business because of COVID-19 before the insurance was triggered, was rejected on appeal.
Such adjustments could only be made to reflect circumstances affecting the business which were unconnected with COVID-19.
Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm); [2010] Lloyd’s Rep IR 531
Although the insurers relied on this case to support their arguments on causation of loss and the effect of trends clauses, the Supreme Court ruled that it was wrongly decided and, accordingly, the case was overruled.
[1] The Financial Conduct Authority (Appellant) v Arch Insurance (UK) Ltd and others (Respondents) Hiscox Action Group (Appellant) v Arch Insurance (UK) Ltd and others (Respondents) Argenta Syndicate Management Ltd (Appellant) v The Financial Conduct Authority and others (Respondents) Royal & Sun Alliance Insurance Plc (Appellant) v The Financial Conduct Authority and others (Respondents) MS Amlin Underwriting Ltd (Appellant) v The Financial Conduct Authority and others (Respondents) Hiscox Insurance Company Ltd (Appellant) v The Financial Conduct Authority and others (Respondents) QBE UK Ltd (Appellant) v The Financial Conduct Authority and others (Respondents) Arch Insurance (UK) Ltd (Appellant) v The Financial Conduct Authority and others (Respondents) [2021] UKSC 1: Lord Reed (President), Lord Hodge (Deputy President), Lord Briggs, Lord Hamblen and Lord Leggatt