Supreme Court paves the way for Covid-19 loss claims under business interruption policies

A final ruling by the UK Supreme Court in the urgent test case brought by the Financial Conduct Authority on behalf of policyholders has upheld the original finding that claims related to Covid-19 could (subject to the facts and the wording of individual insurance policies in each case) be covered under business interruption insurance (BII) policies issued by various insurers.

The case was fast-tracked to the highest court in the country after the English High Court issued its judgment on 15 September 2020, which was hailed as a first-round victory for policyholders.

The UK regulator as claimant effectively represented the interests of policyholders and brought the case, The Financial Conduct Authority v Arch and Others, before the High Court in July 2020. The litigation was triggered by many insurers issuing blanket denials of cover in response to claims from businesses under their BII policies.

What were the crucial points of the Supreme Court decision?

'No disease within 25 miles'

BII is often an extension in a property insurance policy. It may require physical damage to the property or, as is the case in some policies, or may be triggered by non-physical damage like, for example, "Notifiable Disease" (which Covid-19 is). Many BII policies limited cover to business interruption "following or arising from" the occurrence of a Notifiable Disease "within a radius of 25 miles" of the insured premises. Insurers sought to argue that this wording is intended to cover only local outbreaks, verified by an actual diagnosis of Covid-19 within the defined radius. The Supreme Court agreed that the clause only covered losses resulting from cases of disease within the radius and that each case of illness sustained by someone within the radius was a separate occurrence. However, this finding on its own is not helpful to insurers wanting to deny claims – because, as discussed next, the issue of "causation" did not go in favour of insurers.

Causation

The Supreme Court had to decide how to apply the "but for" test for causation to BII claims relating to Covid-19. Broadly, this has the effect that if loss would have arisen anyway, irrespective of the occurrence of the insured peril, then the insured peril cannot be said to have caused the loss.

Although the lockdown measures ordered by the government resulted from all the cases in the country (both inside and outside the radius), the Supreme Court decided there was cover if the policyholder could show that, at the time of a particular measure, there was at least one case within the radius. In essence, the insurers had sought to argue that the government would have imposed restrictions even if there had been no cases within the radius and hence any case within the radius did not "cause" the business interruption.

The Supreme Court agreed that, although the "but for" test will work in the "vast majority of cases", the test did not always work. Here, each individual case of coronavirus was a cause of the restrictions even if a single occurrence was not the cause in its own right. It is therefore sufficient, in order to prove causation, for a policyholder to prove that there was at least one case of Covid-19 within 25 miles of the insured premises.

In terms of the law, an important takeaway and legal precedent from the case is the Supreme Court's view that the "but for" test established in the Orient-Express v Assicurzionai Generali [2010] decision can be inadequate and that decision was wrongly decided.

Public authorities' clause

A further issue finally decided by the Supreme Court was the meaning of clauses that cover business interruption "due to restrictions imposed by a public authority following…an occurrence of a notifiable human disease within one mile of the business premises".

The main issue here had been the difference between law and guidance issued by the UK government to impose coronavirus restrictions. The Supreme Court found, in order to trigger cover under this clause, that it is not necessary to show mandatory measures which have the force of law. Instead, the clause can be satisfied by "instructions" in mandatory terms: for example, when the prime minister made a public statement on 20 March 2020 instructing businesses to close "tonight". However, the policyholder must demonstrate "inability to use" the insured premises and that means a complete inability rather than hindrance of use.

Osborne Clarke comment

Not all BII policies have the same wording as we highlighted following the High Court judgment and, as the test case was based on the specific wording of only a selection of policies in the market, the detail will not be relevant to all BII policies. Nevertheless, this decision will be important for a range of businesses that bought policies using similar wording to those contained in the test case policies.

It is necessary therefore to obtain specific legal advice based on your specific insurance policy and factual circumstances. We can advise further you on your rights under your BII, please contact us if you require assistance with possible claims on your insurance.