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Business Interruption Insurance: The Supreme Court Judgment

This alert provides an update on the highly anticipated appeal judgment in the Financial Conduct Authority’s (“FCA”) business interruption (“BI”) insurance test case.

On 15 January 2021, the Supreme Court backed an appeal by the FCA and dismissed the appeals of the insurers meaning that thousands of policyholders may now be able to recover business interruption losses caused by Covid-19.

In summary, the Supreme Court’s landmark judgment entitles many policyholders to claim for losses caused by:

1. the presence of Covid-19 in their local geographical area; and

2. guidance from the government to close their business premises.

Below we summarise the key issues which arise from the judgment and the implications of the judgment for businesses:

Disease Clauses

Disease clauses usually cover losses caused by the occurrence of a notifiable or infectious disease within a specified radius of the insured’s premises. The Supreme Court found that such clauses will cover Covid-19 as long as there has been at least one case of the disease within the radius specified in the policy.

Given the very high numbers of confirmed Covid-19 cases, many policyholders will be able to establish that Covid-19 has occurred within the required radius and ought therefore to be entitled to cover.

Prevention of Access Clauses

These clauses specify certain requirements which must be met in order for a policy to respond.  Generally such clauses cover losses resulting from the denial of access to business premises arising from Government actions, advice or restrictions within a certain radius of the business premises.

The Supreme Court found that such restrictions could include restrictions which do not carry legal force, but which carry with them an expectation that legal measures could follow or be introduced if the restrictions are not followed.  The Supreme Court disagreed with the High Court’s finding that prevention of access clauses would only respond where a business was required to close completely and instead found that such policies could respond where a business had been unable to use their premises for a certain part of their business activity or had been unable to use a certain part of their premises for their business activity.

This means, for example, that restaurants/cafes that adapted and offered a take-away service during lockdown could still claim for business interruption losses arising from the interruption to their usual dine-in service.

Causation

For all claims, policyholders must be able to demonstrate that the insured event defined in their policy of insurance caused their loss.  The Supreme Court found that there can be multiple causes of the loss claimed and where, for example, Government action is the cause of the loss claimed each of the individual causes of illness within the relevant radius leading to the Government’s response would be a separate and equally effective cause of the Government’s action.

Trends Clauses

Most BI insurance policies contain trends clauses, which provide for BI losses to be calculated by adjusting the results of the business in the previous year  to account for trends or other circumstances which have affected the business, in order to estimate what results would have been achieved had the BI not occurred. The Supreme Court found that pay outs to businesses can only be adjusted to reflect circumstances unconnected to the insured event meaning that insurers must discount Covid-19 and its consequences when adjusting pay outs.

Impact of the Judgment

Thousands of policyholders will now be covered for BI losses arising from the Covid-19 pandemic and insurers are likely to pay claims quickly. All business should reconsider their BI policy wording in light of the Supreme Court’s decision.

It should be noted that the Supreme Court’s decision is final and as such, affected businesses will now have clarity as to whether their BI losses will be covered under their policies of insurances.  The judgment also provides authoritative guidance as to the interpretation of policies with similar wording to the policies considered in the test case.  The decision could provide a vital lifeline for many struggling businesses.

It is important to remember however that all policies must be considered individually.  We are able to provide advice in relation to the interpretation of specific policies.

If you have any queries, please contact our Dispute Resolution and Litigation team on 01228 552600 or 01524 548494.

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