UK Supreme Court rules business interruption insurance policies must pay out after Covid-19 losses

The original proceedings by the FCA were appealed from the High Court of England and Wales after being brought under the Financial Markets Test Case Scheme. The FCA appeal was heard alongside appeals by Hiscox Action Group, Royal & Sun Alliance Insurance Plc, and others. 21 sample insurance policy wordings were offered for consideration.

The appeals were heard jointly by the President of the Supreme Court, Lord Reed, sitting with Deputy President Lord Hodge, Lord Briggs, Lord Hamblen, and Lord Leggatt.

Quantified by expected performance

The FCA proceedings were brought on behalf of policyholders under various insurance schemes, including many small and medium enterprises (SMEs) forced to close or partially close as a result of the pandemic who were particularly vulnerable to losses. A Framework Agreement between the parties determined that the aim of the proceedings was to achieve the maximum possible clarity for policyholders and their insurers, with the possibility of affecting some 700 types of policy across over 60 different insurers.

Four types of clauses primarily came in for consideration: disease clauses, prevention of access clauses, hybrid clauses combining elements of these two clause types, and “trends” clauses allowing business interruption loss to be quantified by reference to the expected performance of the business in the absence of the insured peril.

In relation to disease clauses in particular, the insurers argued that policyholders would have suffered the same or similar business interruption losses even if the insured risk or peril had not occurred in the radius of any given premises. Therefore, the claims must fail because it could not be said that the loss was caused by the insured peril.

Wherever the disease occurs

In a joint main judgment with which Lord Reed agreed, Lord Hamblen and Lord Leggatt said of disease clauses: “On a fair reading of the judgment we think it clear that [the Commercial Court] regarded the insured peril as the disease itself - that is to say in this case Covid-19 - and not a particular outbreak of the disease.”

They continued: “This does not treat the insured peril as limited to any occurrence or outbreak of Covid-19. It treats the insured peril simply as Covid-19, wherever and whenever the disease occurs without any geographical or temporal limits except for requirements (a) that there is an occurrence within the relevant 25-mile radius of the insured premises and (b) that the cover runs from the date of that local occurrence.”

On this issue, they concluded: “The disease clause in [the model disease clause] is properly interpreted as providing cover for business interruption caused by any cases of illness resulting from Covid-19 that occur within a radius of 25 miles of the premises from which the business is carried on. The clause does not cover interruption caused by cases of illness resulting from Covid-19 that occur outside that area.”

Addressing causation, they later added in respect of one clause: “If there had been no other effects of the emergency, or of Government actions and advice, turnover would still have been lost as a result of the premises being forced to close. To this extent, there were concurrent causes of loss, each sufficient to cause loss without the other. Furthermore, these concurrent causes arose out of the same underlying or originating cause, namely the Covid-19 pandemic.”

Possibility of partial interruption

Moving to the prevention of access and hybrid clauses, which covered loss resulting from government or local authority actions preventing access to the premises, Lord Hamblen and Lord Leggatt said: “It can be seen that each of these clauses contains a series of elements which must all be satisfied to trigger the insurer’s obligation to indemnify the policyholder against loss.”

They continued: “We consider that an instruction given by a public authority may amount to a ‘restriction imposed’ if, from the terms and context of the instruction, compliance with it is required, and would reasonably be understood to be required, without the need for recourse to legal powers. This is likely to arise only in situations of emergency, as in the present case.”

On whether this included partial cessation of business activities, such as for restaurants limited to takeaway services only, they concluded: “The ordinary meaning of ‘interruption’ is quite capable of encompassing interference or disruption which does not bring about a complete cessation of business or activities, and which may even be slight. Furthermore, the possibility that interruption may be partial is inherent in the policy provisions which deal with the calculation of loss and which envisage that the business may continue operating during a period of interruption but with reduced income or increased costs of working.”

But for the peril

Addressing the effect of trends clauses, Lord Hamblen and Lord Leggatt said: “The simplest and most straightforward way in which the trends clauses can and should be so construed is, absent clear wording to the contrary, by recognising that the aim of such clauses is to arrive at the results that would have been achieved but for the insured peril and circumstances arising out of the same underlying or originating cause.”

They concluded on this matter: “We consider that the trends clauses in issue on these appeals should be construed so that the standard turnover or gross profit derived from previous trading is adjusted only to reflect circumstances which are unconnected with the insured peril and not circumstances which are inextricably linked with the insured peril in the sense that they have the same underlying or originating cause.”

For these reasons and others, the FCA’s appeal was substantially upheld and the insurers’ appeals were dismissed. A separate concurring judgment was given by Lord Briggs, with whom Lord Hodge agreed.