The Supreme Court has provided clarity on key contractual clauses in Business Interruption Insurance policies arising out of Covid-19, says Natalie Dindar.
When business were left facing the devastating losses caused by Covid-19, many had hoped that they would be saved by their business interruption insurance policies. Travel agents in particular, who were already dealing with unprecedented cancellations and refunds, suffered another blow when they were forced to close their high street stores due to lockdown measures. However, some insurers disputed liability even though policyholders believed they would be covered, which led to widespread confusion over the scope and wording of these policies.
Business interruption insurance covers the loss of income a business suffers following a disaster. Most SME policies provide basic cover for losses arising out of property damage, but some policies also provide cover for infectious or notifiable diseases.
The Supreme Court delivered its Judgment on 15th January 2021, unanimously rejecting the insurers’ appeals in this landmark case which is estimated to affect around 370,000 policies.
The Financial Conduct Authority (FCA) selected a sample of 21 policy wordings provided by eight of the largest commercial insurers, and brought a “test case” on behalf of SME policyholders to obtain clarity on key areas of contractual uncertainty in the business interruption policies.
Following the Judgment handed down by the High Court last September, 6 of the insurers appealed the decision, and the FCA appealed the issues on which they were unsuccessful. Due to the importance and urgency of the case, “leapfrog” appeals were made to the Supreme Court (bypassing the Court of Appeal).
Supreme Court decision
The Supreme Court was asked to determine the correct interpretation of common clauses which are found in business interruption policies, and whether cover would be triggered in the context of the Covid-19 pandemic (in particular the national lockdown measures imposed from March 2020). Summarised below are the key points of debate:
- ‘Disease clauses’ and causation
Disease clauses cover business interruption which results from the occurrence of a notifiable disease at or within a specified distance from the policyholder’s business premises. The Supreme Court looked at example wording from an RSA policy, which stated that the policyholder would be indemnified in respect of business interruption caused by an “occurrence of a notifiable disease” that was “within a radius of 25 miles of the premises”.
Whilst Covid-19 met the definition of a “notifiable disease”, one of the questions was on what date it became “notifiable” in order to trigger cover. It was agreed by the parties that Covid-19 became a notifiable disease across the whole of the UK by 6th March 2020, the day after the Health Protection (Notification) Regulations 2010 were amended.
The next hurdle was the interpretation of an “occurrence” of Covid-19 “within a 25 mile radius of the premises”. What the Supreme Court had to determine was whether the policy wording covered business interruption caused by:
- Consequences of Covid-19 which occurred only within the specified radius (the insurers’ argument), or;
- Consequences of Covid-19 occurring anywhere, as long as there was also at least one case within the specified radius (the FCA’s argument)
The Supreme Court found that the first interpretation was correct. In other words, the policy covered business interruption that followed an occurrence of Covid-19 only within the 25 mile area, and it did not cover any occurrences outside of that radius. Despite a narrow interpretation of the policy wording, the Supreme Court’s wider approach to causation was in the policyholders’ favour.
Insurers relied on the “but for” causation test to deny cover. Their argument was that the loss of business would have occurred in any event due to the widespread impact of the pandemic, and the policyholder was unable to show that the loss would not have occurred “but for” the insured peril (i.e. cases of Covid-19 occurring within the specified radius).
The Supreme Court rejected this argument and took a more common sense approach. Every case of Covid-19 was deemed an equally effective cause of the national measures. Therefore, it was sufficient for policyholders to prove the occurrence of one case of Covid-19 within the specified area, when national measures were imposed, to trigger cover.
- Prevention of access and hybrid clauses
Prevention of access clauses cover business interruption arising from public authority intervention which prevents access to or use of the policyholder’s premises. Hybrid clauses combine the key elements of disease clauses and prevention of access clauses. The central questions in relation to these clauses were:
- Whether the restrictions had to be imposed by law, and
- What the words “inability to use” meant
In respect of the first question, the Supreme Court found that it was not necessary for the restrictions to be imposed by law, as long as the restrictions were mandatory and clear in language. When the Prime Minister announced on 20th March 2020 that the nation should stay at home and that businesses should close, that was a sufficiently clear instruction. It was reasonable for businesses to act on this advice straight away, even though it did not become law until 26th March 2020 with the enactment of The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020. Therefore, it was decided that cover would be provided from 20th March 2020.
The Supreme Court found that prevention of access and inability to use clauses would be triggered even where there was a partial prevention. Insurers argued that cover should only be provided where there was an inability to use all of the premises, and if the policyholders’ business could still function in some other way, cover would not be provided. This argument was rejected, and the Supreme Court provided an example of a restaurant having to close its indoor dining but which continued to operate its takeaway service. In that example, cover would be provided because the business was unable to use a discrete part of its premises, and/or it was unable to use the premises for a discrete part of its business activities.
To give another example, let’s imagine a high street travel agency that had to close due to lockdown measures which meant that they were unable to take walk-in bookings, but their telephone sales were still operational. This could constitute an inability to use the premises for carrying on that discrete business activity, i.e. walk- in sales, which could trigger cover.
When turning to the issue of causation, the Supreme Court’s approach was similar to that in disease clauses (as mentioned above). Therefore, if there was an inability to use or partial inability to use the premises as a result of restrictions, cover would be triggered if the policyholder could show at least one case of Covid-19 within the specified radius.
- Trends clauses
Insurers calculate losses by reference to earlier periods of financial performance or “trends”, and ask the question: what would the financial position have been had the insured peril not occurred?
The insurers argued that the losses would have still occurred regardless of the insured peril (Covid-19 occurring within the specified radius) due to the widespread impact of Covid-19 on society as a whole. In other words, had the businesses remained opened, they would have still suffered a loss. If the clause was construed in this way, then effectively the losses would be calculated at zero.
The Supreme Court held that trends clauses should be construed in a way that is consistent with the insuring clauses, and should not be construed in a way which effectively excludes cover. In reaching this decision, the Supreme Court ruled that the decision in the Orient-Express case was wrong. In the Orient-Express case, a hotel which had been damaged by Hurricane Katrina was denied cover under their business interruption policy because it was found that the effect of the hurricane in New Orleans would have caused the same loss to the business in any event.
Whilst this decision is certainly welcome news for travel agents who were forced to close due to the pandemic, individual policies will need to be assessed alongside the Judgment and the wording will be key. As a starting point, businesses can check the list of policies that were selected to see if theirs is affected.
The complex Judgment will be distilled into a set of declarations, and the FCA and insurers are working with the Supreme Court to issue these declarations as quickly as possible. In the meantime, the FCA has issued guidance to assist policyholders in proving the presence of Covid-19 at or within a specified radius of their premises, which is a requirement in some policy types. They have also published a set of FAQs which is aimed at small businesses to establish whether their policy may cover them.
Where insurers have declined cover, policyholders should in the first instance contact their broker and see if their insurer will now provide cover in light of the Judgment. Businesses can also consider bringing a complaint to the Financial Ombudsman Service, where decisions are binding on insurers. Lastly, if cover is refused and there are strong merits in bringing a claim, litigation is always an option. However, this option is the most expensive, so may not be worth pursuing unless a group action is considered with other policyholders.