Business Interruption Insurance: Summary of the Supreme Court Decision

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A positive outcome for many policy holders

The Supreme Court considered issues relating to the main operative clauses within most business interruption policies: disease clauses; prevention of access and hybrid clauses; causation; trends clauses, pre-trigger losses, and the counterfactual; and the Orient Express case.

By allowing most of the FCA’s appeals (as further explained below), it has provided much-needed clarity – to the relief of many policyholders. Indeed, policies to which this judgment is applicable should look forward to a speedier resolution now that guidance has been issued to all parties.

But it’s important to understand that although the FCA test case is considered applicable to at least 700 types of policies, each individual policy will still need to be considered against the Supreme Court’s judgment – which is likely to prove influential but cannot be considered a one-stop-shop for all business interruption policies.

To find out if your policy is suitable for claiming business interruption, the FCA has launched a simple and easy-to-use questionnaire which can be found here. If it is, and you need help to pursue your insurer, please don’t hesitate to get in touch.

In the meantime, here’s more detail about what was clarified by the Supreme Court.

Disease clauses

The Supreme Court held that the insured peril (i.e. the event that can cause damage or loss) is the business interruption caused by an occurrence of illness sustained by any person resulting from COVID-19 at a particular time and place.

This means that as a policyholder, you’ll need to prove that any loss is a result of a local occurrence of the Notifiable Disease. In other words, that you’ve suffered loss because a case of Covid-19 has occurred within the time and place specified by your policy.

While Supreme Court’s interpretation of this clause is narrower than the High Court’s in terms of the specified radius, it still resulted in the same outcome for policyholders, because of the causation arguments put forward by the Supreme Court (discussed below).

The decision was reached focusing on the RSA 3 policy, but the Supreme Court confirmed that wording differences of disease clauses within the other insurance policies would not alter their interpretation.   It also confirmed that cover for COVID-19 cannot be excluded by general exclusion clauses in the policy.

Prevention of access and hybrid clauses

The Supreme Court interpreted these clauses more broadly than the High Court and in favour of the policyholder:

  • Disease element (Notifiable Disease and locality): in policies where a geographical location is specified, the locality provision should stand. However, where locality is not specified, there will be a Notifiable Disease irrespective of where it occurred.
  • Restrictions imposed: while “restrictions imposed” would ordinarily mean mandatory measures imposed pursuant to legal powers, it doesn’t always need to be the case. A mandatory instruction issued in anticipation of legal powers could be also regarded as “restrictions imposed”. The stay at home, social distancing, and business closure orders were considered to be “restrictions imposed.”
  • Inability to use: this will be satisfied if the policyholder is not able to use the premises for a discrete part of its business activities, or if it is unable to use a discrete part of its premises for its business activities. There will not be any material difference between “inability to use” and “prevention of access” wordings.
  • Interruption: the ordinary meaning of “interruption” can encompass interference or disruption, which does not bring about a complete cessation of business or activities. This can even be slight should it have a material effect on the financial performance.

Causation

For causation to be satisfied, the Supreme Court found that the policyholder only needs to prove that the business interruption was as a result of government action taken in response to cases of disease which included at least one case within the geographical area covered by the policy.

Where there are two competing events contributing to the loss, it is enough that the insured peril contributed, even if it could not have brought about the loss in isolation.

Trends clauses, pre-trigger losses and the counterfactual

Insurers often use trends clauses to calculate the loss covered under an insurance policy. This usually results in a more accurate assessment of the loss – but it also enables insurers to reduce their liability. For example, if a business sustained a downturn in revenue as a result of public caution before any government action was taken, an insurer may attempt to use this as a comparable for their assessment of loss of revenue payable to the policyholder under the policy.

Insurers have also previously used a “counterfactual” scenario (as was the case in the Orient Express, below) whereby it is argued that “but for” the damage sustained by a policyholder, the policyholder would still have suffered loss as a result of the wider pandemic in any event and as such, there is no loss.

The Supreme Court held that the entire COVID-19 pandemic should be removed from the counterfactual, and losses assessed on the assumption that there was no COVID-19 pandemic.

Orient Express Hotels decision

The Orient Express case involved the 2005 Hurricane Katrina in New Orleans which caused widespread damage to the city resulting in an evacuation order being implemented. The hotel was also damaged, and the owner looked to claim on his business interruption policy. Indemnification was refused on the basis that loss would have been sustained by the hotel because of the evacuation order, regardless of the damage caused to the hotel.

In the FCA test case, the Supreme Court overruled the Orient Express case, stating that it had been incorrectly decided based on the “but for” causation test. The Supreme Court, therefore, removed the possibility for an outcome whereby the more widespread the damage, the less coverage given to a policyholder. This is a great step for policyholders and likely to lead to an increase in claims even outside of the COVID-19 pandemic.