On 15 January 2021, the Supreme Court handed down judgment in the Covid-19 Business Interruption Insurance (“BII”) test case of The Financial Conduct Authority v Arch and Others.
The Supreme Court unanimously dismissed the insurers’ appeals to a previous High Court ruling and substantially allowed all four of the FCA’s appeals, potentially allowing BII policy holders that have suffered losses because of the Covid-19 pandemic to recoup some of those losses. The affected businesses include art market participants.
This landmark decision is welcome news for policy holders, because it makes it more difficult for insurers to deny cover or reduce indemnity for policy holders. In addition, the judgment provides further clarity on the so-called “infectious disease clauses” and “prevention of access/hybrid clauses”.
BII policy holders need to carefully consider the wording of their particular policy. Our specialist art law practice remains at the disposal of any readers who may require assistance in assessing their BII policy in light of the latest Supreme Court decision.
We summarise below the main issues considered by the Supreme Court.
Infectious disease clauses
These clauses generally provide cover for business interruption loss caused by the occurrence of a notifiable disease at or within a specified distance of the policyholder’s business premises.
The insurers’ position was that such clauses should be interpreted only to cover losses that could be demonstrated by policyholders to have resulted directly from the localised occurrence of COVID, rather than as a consequence of the UK-wide lockdown and the global pandemic. The FCA’s position was that such clauses should be construed to cover the business interruption consequences of COVID, as long as it was clear that it had occurred within the specified distance of the business premises in question. The High Court agreed with the FCA’s position.
While the Supreme Court construed the infectious disease clauses somewhat more narrowly than the High Court, it nonetheless affirmed the position that the model wordings were not intended to apply only to the consequences of localised occurrences of the illness within the relevant radius. For more on the Supreme Court’s findings on causation, please see below.
Prevention of access & hybrid clauses
A prevention of access clause generally provides insurance cover for business interruption losses as a result of public authority intervention preventing access to, or use of, business premises. A “hybrid” clause combines the main elements of infectious disease and prevention of access clauses. For the purposes of hybrid clauses, the Supreme Court treated the infectious disease portion of the relevant model wordings as described above.
Overall, the Supreme Court construed the prevention of access & hybrid wordings more widely than the High Court (further details below). Policyholders should therefore revisit their wordings in light of the judgment to consider whether the Supreme Court’s findings on these particular wordings mean that they now have a valid claim when previously a successful claim seemed a more remote possibility.
1. The nature of the public authority intervention required to trigger the clause
The High Court had decided that only “restrictions imposed” by statutory instrument were capable of triggering benefit, e.g., the 21 and 26 March Regulations. Instructions given by the UK Government which did not have the force of law would not satisfy the term.
The FCA sought to establish that cover was triggered by any Government intervention, not just the 21 and 26 March Regulations (such as the Prime Minister’s instructions in his early national broadcasts to ‘stay at home’ and that certain businesses should close).
The Supreme Court widened the meaning of “restrictions imposed” to include earlier government instructions of 20 March 2020.
2. The nature of the prevention or the hindrance of access / use required to trigger the clause
The meanings of the following phrases were considered: “inability to use”, “prevention of access” and “interruption”.
The High Court had held “inability to use” required a complete inability to use the premises, and that anything short of complete closure would not constitute “prevention of access”. It found that “interruption” meant business interruption generally rather than a stop or break.
The Supreme Court agreed with the FCA that the requirement for “inability to use” is satisfied even if the policyholder is unable to use part of premises for a discreet part of its business.
On “prevention of access”, the Supreme Court held that prevention means stopping something from happening or making an intended act impossible but also held, consistent with its analysis of “inability to use”, that the wording may cover prevention of access to a discrete part of the premises.
The Supreme Court also held that “interruption” does not mean a complete cessation of business, and that the ordinary meaning of “interruption” is capable of encompassing interference and disruption.
Causation
The issue of causation received significant attention from the Supreme Court. For the purposes of this blog, it will not be possible to cover this point in great detail.
In short, the insurers argued that it is necessary to show a direct causal link between the occurrence of the insured peril and the loss sustained by the policyholder. They asserted that, because of the widespread nature of the pandemic, policyholders would have suffered the same or similar business interruption losses even if the insured risk or peril had not occurred within the specified distance of their respective premises. Therefore, the policies were not intended to cover for their losses. The Supreme Court rejected this argument.
The “trends clauses”
“Trends clauses” provide for business interruption losses to be quantified by reference to what the performance of the business would have been had the insured event not happened.
The insurers contended, much like in their causation argument, that these clauses should be interpreted to mean that they are not liable to indemnify policyholders for losses which would have arisen regardless of the occurrence of the insured peril, because of the wider consequences of the Covid-19 pandemic. Applying the same principles as in the causation argument, the Supreme Court rejected this argument. It held that, absent clear wording to the contrary, the aim of such clauses is to arrive at the outcome that would have occurred but for the insured peril.
Pre-trigger losses
The Supreme Court also addressed the question of whether any loss claimed should take into account a downturn in turnover due to Covid-19 before the trigger event.
The High Court judgment had the effect that if there was a downturn in the turnover of a business due to Covid-19 before the insured peril was triggered, the continuation of that measurable downturn ought to be taken into account as a trend in calculating the indemnity payable, thus significantly reducing the pay-out.
The Supreme Court gave an example of a pub that suffered a 30% downturn in turnover during the week ending 20 March, due to public concern about contracting Covid-19, but it was not ordered to close (and its policy not triggered) until the Government’s instruction of 20 March. On the High Court decision, the reduction in turnover during the indemnity period would have been calculated by reference to the reduced turnover figure immediately before trigger, leading to a much-reduced indemnity.
The Supreme Court disagreed with that reasoning and stipulated that indemnity should be calculated by reference to what would have been earned had there been no pandemic at all, thus disregarding demonstrable revenue drops prior to the policy being triggered that resulted from COVID or its effects.
By Andreas Killi and Till Vere Hodge