Supreme Court Rejects Insurers' Claims in Landmark Business Interruption Insurance Case
The Supreme Court has ruled largely in favour of the FCA in a decision that should provide a lifeline for thousands of policyholders who have been battling insurers over business interruption (BI) claims for losses incurred as a result of the Covid-19 pandemic.
The long-awaited judgment in the Covid-19 BI insurance test case of The Financial Conduct Authority v Arch and Others, substantially allowed the FCA's appeal on behalf of policyholder, many of whom are small and medium enterprises (SMEs) and dismissed the appeals of the insurers: Arch Insurance (UK) Ltd, Argenta Syndicate Management Ltd, Hiscox Insurance Company Ltd, MS Amlin Underwriting Ltd, Royal & Sun Alliance Insurance Plc and QBE UK Ltd (the Insurers).
The FCA had already been successful on many of the issues at first instance in the High Court, but now the Supreme Court has allowed all four of the FCA's appeals (in two cases on a qualified basis) on the issues it chose to appeal. The result means that all of the insuring clauses which were in issue on the appeal should provide cover for BI caused by Covid-19. The ruling last Friday (15 January) is the end of the legal process for impacted policies and means that thousands of policyholders will now have their claims paid.
The test case involved complex legal issues and the FCA's aim was to obtain clarity on policy wording as quickly as possible following the refusal of a number of insurers to pay out claims.
A selection of policy wordings were tested and the ruling provides guidance for a wider pool of 700 policies, potentially affecting 370,000 small businesses.
The FCA says it will now work with the Insurers – who are leading providers of BI insurance - to ensure they move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible. They also expect the Insurers to be proactive and communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.
Many policyholders whose businesses were affected by the Coronavirus pandemic suffered significant losses, resulting in large numbers of claims under BI policies.
Most SME policies are focused on property damage and only have basic cover for BI as a consequence of property damage. But some policies also cover BI from other causes, in particular infectious or notifiable diseases and prevention of access and public authority closures or restrictions. While some insurers have accepted liability under these policies, in many cases insurers have disputed liability causing lack of clarity and uncertainty.
The FCA’s aim in bringing the test case was urgently to clarify key issues of contractual uncertainty for as many policyholders and insurers as possible. This was achieved by both sides (FCA and the Insurers) agreeing to a representative sample of 21 types of policy issued by eight insurers being considered by the Court. A total of 370,000 policyholders were identified as holding 700 types of policies issued by 60 insurers that may be affected by the outcome of the test case.
The High Court’s judgment last September resolved most of the key issues (this can be read here) but both the Insurers and the FCA appealed directly to the Supreme Court on a number of issues. Two action groups – the Hiscox Action Group and the Hospitality Insurance Group Action – were also given permission to intervene on behalf of certain policyholders and present additional arguments.
What did the Supreme Court decide?
The Judgment itself is complex and runs to 112 pages, but the FCA and the Insurers are working with the Supreme Court to distil this into a set of declarations, from which the FCA will publish a set of Q&As to assist policyholders and their advisors understand the test case. The FCA will also shortly publish a list of BI policy types that potentially respond to the pandemic based on data it is gathering from insurers and will continue to keep policyholders updated through its dedicated webpage.
In the meantime, the FCA’s legal team at Herbert Smith Freehills have published a more detailed briefing. We have also summarised the key points.
In summary, the issues for the Supreme Court was the proper interpretation of four types of clauses which are found in many of the relevant policy wordings.
"Disease clauses" are clauses which, in general, provide cover for BI losses resulting from the occurrence of a notifiable disease, such as COVID-19, at or within a specified distance of the business premises.
The Supreme Court agreed with the High Court's interpretation of QBE UK Ltd's disease wording but disagreed with the High Court's interpretation of the other disease clauses. It was held that disease clauses in these policies will provide cover. However, it is important to note that these clauses will only provide cover for relevant effects of cases of COVID-19 that occur at or within a specified radius of the insured business premises. Therefore, for example where a policy provides cover for "any occurrence of a notifiable disease within a radius of 25 miles of the premises", then cover will be provided for business interruption caused by any cases of illness resulting from COVID-19 that occur within 25 miles of the business' premises.
It also considered the causation point that needs to be satisfied for there to be cover under these disease clauses. It held that it is sufficient to prove that the policyholder's business interruption results from the Government action taken in response to at least one case of COVID-19 within the relevant geographical area covered by the clause.
Prevention of access clauses and hybrid clauses
"Prevention of access clauses" are those which, in general, provide cover for business interruption losses resulting from public authority intervention preventing or hindering access to, or use of, the business premises. "Hybrid clauses" are those which combine the main elements of the disease and prevention of access clauses.
The Supreme Court held that cover may be available for partial closure of premises (as well as full closure) and for mandatory closure orders that were not legally binding.
However, cover is only available for the part of the business for which the premises cannot be used. For instance, if a restaurant which offers a takeaway service decides to close down the whole business, cover would only be available for the restaurant part of the business.
When considering the causation point, the Supreme Court took the same approach as for the disease clauses set out above in relation to hybrid clauses which refer to an occurrence of an infectious disease within a specified distance of the insured business premises. However, further conditions must be satisfied to establish causation for hybrid and prevention of access clauses. The Judgment confirms that there will be cover for BI losses produced by the causal sequence specified in the prevention of access clause. By way of an example, a policy may provide cover for "prevention of access to the Premises due to the actions or advice of a government or local due an emergency which is likely to endanger life or property". Here the policyholder would be covered for losses due to prevention of access to the premises, which is caused by the actions or advice of a government or local authority, which in turn is caused by an emergency which is likely to endanger life (or property).
The Judgment has therefore widened the cover available under a number of the prevention of access and hybrid clauses.
Trends clauses are those which, in general, provide for business interruption losses to be quantified by reference to what the performance of the business would have been had the insured peril not occurred. The Insurers sought to rely on these clauses to reduce the indemnity due to policyholders. However, the Supreme Court held that, absent clear wording, the Insurers could not rely on such clauses to reduce the indemnity due under the policy wording where the COVID-19 pandemic caused other perils. This means that an adjustment may only be made to the indemnity due where losses occurred due to circumstances unconnected with the insured peril (i.e. not losses caused by perils that also result from COVID-19).
What the judgment means for policyholders
The judgment brings to an end legal arguments under 14 types of policy issued by six insurers, and a substantial number of similar policies and improves the position significantly for BI policyholders beyond that already established by the High Court judgment.
The test case decision should remove the need for policyholders to have to pursue individual coverage claims against their insurers where the wording has been considered as part of the test case.
It was not intended however to encompass all possible disputes, but rather to resolve some key contractual uncertainties and 'causation' issues to provide clarity for policyholders and insurers in these areas.
The FCA now plans to work with insurers to ensure that claims the Supreme Court has said should be paid, are now settled. While there is an expectation by the Court and the FCA that the insurers should contact affected policyholders directly, businesses who believe they should now be paid out will need to carefully review their individual policy against the judgment to work out what the decision means for that policy.
Policyholders who remain unhappy following their insurer's assessment of their claim may be able to refer their claim to the Financial Ombudsman Service, whose role is to resolve individual disputes.
We recommend that policyholders who have BI insurance and have had a claim relating to Covid-19 rejected by their insurer, should contact either their broker or insurer directly and request that their claim be reconsidered in light of the Supreme Court's decision.
Please do contact us if you would like any specific advice in relation to your individual circumstances.