Much to the relief of businesses who had the foresight to acquire Business Interruption Insurance (BII), the Supreme Court has yesterday (15 Janurary 2021) ruled in a test case brought by the Financial Conduct Authority (FCA).
Many businesses had sought to make claims under their BII policies for losses suffered as a result of the impact of Covid-19, particularly from the nationwide lockdown. Insurers, however, rejected the claims, interpreting the relevant clauses in the various insurance policies much too narrowly.
In an effort to provide clarity and certainty on the issue of how to interpret BII policies, the FCA (by agreement with the insurers concerned) brought the fast-tracked test case in the High Court against 8 different insurers. The case addressed 21 different policies that were believed to be a representative sample of policy wordings. It is expected that the ruling on the test case should assist in the interpretation of other policies as well, not just those directly addressed in the test case.
The High Court had found in favour of policyholders on the majority of key issues and the case was referred to the Supreme Court following appeals by both the FCA and the insurers.
The Supreme Court has now found entirely in favour of the policy holders, both by upholding the previous findings and on the issues that the FCA had appealed on for the benefit of small business owners.
Today’s decision may well result in insurers reviewing their policy wordings to deal with the scenario of a pandemic and adjust premiums accordingly in the future. For the time being, however, the insurance cover upheld by the ruling will undoubtedly be a lifeline for a number of small and medium businesses in particular.
Following yesterday's ruling in the Supreme Court, business owners should review their insurance provisions for any potential business interruption cover and seek advice to establish whether clauses in their policies fall within those that will now benefit from the Court’s precedent findings.
More detailed analysis of issues dealt with in the test case and ruling of the Supreme Court
Broadly speaking, the 21 policies fell into three categories:
- Disease clauses: “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”
- Prevention of access clauses: “provide cover for business interruption losses resulting from public authority intervention preventing or hindering access to, or use of, the business premises”
- Hybrid clauses: “combine the main elements of the disease and prevention of access clauses”
Insurers had denied cover under disease clauses on the basis that the clauses referred to a specific locality (normally a certain radius from the insured premises) and that the lockdown was a result of a nationwide disease outbreak rather than a localised one. Essentially, they argued that it was not possible to show that the business’ trading was interrupted only because of a particular local disease outbreak that caused the lockdown.
The Supreme Court applied a common-sense approach on the issue and took the relevant wordings quite literally. It found that it was true that the disease clauses required a case of illness from Covid-19 in the particular radius of the business premises (as defined in each particular policy). The clauses did not, however, go as far as to specify that the particular local case had to be the cause of the authorities’ decision which interrupted the operation of the business. Therefore, policy holders have to be able to show that there was a case of Covid-19 in the local area, but the insurers have no justification for trying to avoid policy cover by implying any additional requirements. Contrary to the insurers’ contention, the local Covid-19 case does not have to be proven to have caused the government’s lockdown decision.
Prevention of access clauses
Prevention of access clauses differed more substantially from insurer to insurer than disease clauses. Generally, however, they cover cases where access to the business premises was hindered or prevented as a result of public authority action take due to an emergency likely to endanger life.
The Court did interpret these clauses more narrowly than the disease clauses, which, given how much more specific the prevention of access clauses are, shouldn’t come as a surprise. Consequently, on this issue, the High Court’s interpretations mostly upheld the insurers’ positions. The Supreme Court has now, however, found more widely in favour of policyholders. It held that restrictions imposed by mandatory closure orders were sufficient, the orders did not have to be legally binding. It further found that a business did not have to be wholly prevented from trading. Losses from partial closures as a result of the lockdown (e.g. business not fully closing but being limited to takeaway sales) could be covered as well.
Prevention of access clauses still require careful consideration to establish on a case by case basis to consider whether the policyholder benefits from the Supreme Court’s findings.
Please do not hesitate to contact our team if you would like advice on the likely interpretation of any such clauses your business may have as part of its insurance cover.
As the name suggests, hybrid clauses are those that combine disease and prevention of access clauses. The Supreme Court’s findings, accordingly, are in line with those detailed above.
Value of cover (trends clauses)
Trends clauses serve as a definition of the extent to which any losses will be covered by the insurer and normally excludes cover for losses the policyholder would have suffered, had the event that triggered cover not occurred.
The insurers again sought to apply this clause very narrowly which had the potential to make the value of any insurance claims negligible.
After the High Court found for businesses, this issue in particular was one that the insurers sought to challenge on appeal. The Supreme Court, however, rightly and crucially (in terms of potential recoveries by policyholders) also held in favour of the policyholders. The Court further provided guidance which will generally help policyholders overcome the limitations the insurers sought to apply to the value of claims.
For any advice or further questions about the above article and how this might affect you, please contact our Litigation & Dispute Resolution Team by emailing firstname.lastname@example.org or by callng 01603 610911.