On 3 November 2020, we reported the implications of the first instance judgment in FCA v Arch Insurance (UK) Ltd & Ors in our Insights article here.
Now, the Supreme Court has handed down judgment in the Financial Conduct Authority’s (FCA) appeal and it has been hailed as a victory by many small businesses. As Lord Hamblen – who, with Lord Leggett gave the main judgment – announced: “some 700 types of policies across over 60 different insurers and 370,000 policyholders could potentially be affected by the outcome of this litigation.”
Could you be one of those policyholders? Insurers are still examining very carefully the consequences of the complex judgment and at this early stage it is still not clear as to many insurers’ approach.
As the FCA itself begins to publish information about the judgment here, this note expands on our earlier Insights article, and outlines what the Supreme Court judgment may mean for many small businesses who are pursuing claims and seeking much needed respite from the financial repercussions of the Covid-19 health emergency.
The background
Many businesses have suffered, and are suffering, significant interruption to trading due to Government restrictions designed to respond to the Coronavirus pandemic. As a result, a large number of businesses have lodged claims under business interruption cover in their insurance policies.
Business Interruption cover often extends to damage to property that prevents a business from functioning normally. In some cases, it extends to cover interruptions caused by disease and/or prevention of access to business premises that brings a business to a standstill.
Whilst many insurers have accepted claims lodged and made payments in respect of stoppages caused by Covid-19 and related Government restrictions, others have interpreted policy wording narrowly and refused payment.
The FCA therefore brought a test case under the Financial Markets Test Case Scheme in order that the Courts could resolve interpretation questions surrounding business interruption cover policy wording. This led to 21 types of policy from 8 insurers being analysed in the High Court. Broadly, and briefly, the High Court considered whether disease clauses covered the facts of the Covid-19 pandemic, to what extent prevention of access to business premises could apply – for example, given Government restrictions on the operation of trading – and how business interruption cover combining disease clauses, and prevention of access clauses, should be interpreted.
In each case, the Court found that some level of protection was provided by the different clauses it analysed.
The Appeal – Some Key Points
However, insurers and the FCA both appealed to the Supreme Court. Insurers appealed on various grounds and the FCA appealed on four grounds. The Supreme Court dismissed all the insurers’ appeals and upheld all of the FCA’s grounds of appeal.
The judgment is long and complex, running to 112 pages and covering multiple issues. Here is a summary of some key findings:
- It confirms that disease clauses provided cover even when examined by reference to individual trigger events or insured perils in such clauses. This is because individual trigger events or insured perils satisfied the rules of causation.
- There is no prerequisite for an actual legislative step to trigger prevention of access cover, or prevention of access/disease hybrid clauses. The Covid-19 emergency is the underlying causative event and does not compete with other causative factors, for example Government restrictions- because without Covid-19 there would be no Government restrictions of the kind in question. Businesses ordered to close where there was no legislation requiring their closure could, therefore, still have the benefit of business interruption cover.
- Clauses that provide a formula by which to calculate insurance payments by reference to trends, for example in levels of business, turnover or income – “trends clauses” – are intended to address losses that are wholly outside the insured peril. Therefore, pay-outs should be calculated by reference to what would have been earned had there been no COVID-19.
- Insurers cannot rely on concurrent uninsured effects of COVID-19 in order to reduce the indemnity they offer on account of business interruption caused by COVID-19.
What Else Did the Supreme Court Consider?
Amongst other matters the Supreme Court was asked by the FCA and insurers alike to consider causation in detail, i.e. what caused business’ losses – Covid-19 itself, the Government’s response to the virus or something else.
Insurers in particular argued that businesses should have to show, as a minimum, that they would not have suffered loss but for the occurrence of an insured peril. So, if a policy named a virus, or more commonly a “notifiable disease” then any insured loss must flow from that. Their argument ran that because the Covid-19 emergency is so widespread a business would suffer business interruption losses for one reason or another eventually, whether by way of the virus itself, Government policy, the downturn in public confidence or some other result of the virus spreading.
The Supreme Court disagreed. The Supreme Court Justices instead determined that a “but for” test was not always necessary or determinative and, in the case of policy wording before the Court, analysis of causation should instead focus on whether the insured peril brings about a loss with a sufficient degree of inevitability. Losses covered by business interruption cover could therefore result from local and wider issues stemming from the disease, not just a localised outbreak of Covid-19.
This marks a reversal from some previous case law such as in Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] Lloyds Rep IR 531, the so called Orient-Express case.
So What Now for Businesses?
If your business holds business interruption cover, and you have questions about the extent of the cover you have, you should seek advice.
Quite what the judgment means for you will depend on the wording of your cover and the circumstances of your business. We share some possible positives and negatives below.
Some Positives
The judgment undoubtedly brings positive news for policyholders.
To name a few positives:
- More clarity has been given on the consequences of a broad range of policy wording, allowing more claims and pay-outs to be granted;
- The insurance industry expects to pay out over £1.8 billion in COVID-19 related claims;
- The test case removed the need for a large number of policyholders to resolve issues individually with their insurers, and as such offers them a quick and cost effective solution to key contractual uncertainties;
- Cover is not only triggered by outbreaks of COVID-19 in proximity to a business but also by UK-wide restrictions and consequences of the spread of Covid-19, including Government restrictions not having legal force, notwithstanding any wording in the policy itself;
- Settlement offers that have already been made, may now be revised in light of the Supreme Court decision and need not be limited by calculations based on trends immediately pre-triggering the insurance cover.
Possible negatives?
Whilst this judgment undoubtedly will help many businesses in crisis find their feet again, some grey areas remain, even to the extent that further litigation may follow:
- The judgment focused on very specific policy wording and as such, there are likely to still be further arguments to be had with insurers that will end up in the Courts.
- Whilst clarity has been provided, businesses must still demonstrate the losses suffered and this will not always be an easy task.
- The judgment has shown how insurance is such an essential service during critical and volatile periods, and as such, future policies will be re-examined – not only in relation to business interruption policies, but for all types of policies.
- Some policies may contain time-sensitive provisions. Therefore, some otherwise valid claims may be declined by insurers.
- Trends clauses continue to pose a challenge because they are not always clear, and are perhaps the most likely source of further litigation as businesses seek recompense from their insurers for adequate sums over periods in which they say their business was interrupted.
What Should You Do Next?
An insurance pay-out can make a huge difference to your business, and due to possible time limits on claims in your policy do consider whether it is worth approaching your insurers even if just to give early notice of a possible claim.
Therefore:
- consider your policy against the judgment to find out what it means for you;
- if you have already received a settlement offer from your insurer, consider whether your claim should now be revised in light of the Supreme Court decision;
- If you have any questions approach your broker, solicitor or insurer for answers.
Streathers Solicitors LLP
24 February 2021
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*The Briefing Note reflects the position as at the date of publication. The information in this Briefing Note is not intended to amount to legal advice to any person on a specific matter or case. You are advised to obtain specific, personal advice from us about your case or matter and not rely on this Briefing Note.
