The UKSC gave its judgment under the following headings: (i) disease clauses, (ii) prevention of access and hybrid clauses, (iii) causation, (iv) trends clauses, (v) pre-trigger losses, and (vi) the Orient-Express decision.
(i) Disease clauses1
The UKSC upheld the first instance court’s decision on the interpretation of the specified “radius” provision in the disease wording, determining that the disease clauses provide cover for BI resulting from an occurrence of COVID-19 (meaning at least one case) within the specified geographical radius of the premises from which business is conducted.
Further, the UKSC accepted the insurers’ arguments that each case of illness sustained by a person as a result of COVID-19 is a separate “occurrence”. However, this was somewhat a pyrrhic victory in light of the findings on causation that all individual cases were equal proximate causes.
(ii) Prevention of access and hybrid clauses2
The UKSC agreed with the High Court that there must be an “inability” to use the premises, rather than something less, such as “impairment” or “hindrance” of use. However, “inability” may be satisfied where a policyholder is unable to use the premises for a discrete business activity or is unable to use a discrete part of the premises for its business activities.
We anticipate that this will have a positive impact for certain businesses, for example, restaurants that had to close the dining area of their premises but were able to offer some limited takeaway service. A restaurant or shop that stayed open for takeaway purposes may now claim for the loss of in-person business.
It is clear that “interruption” may encompass interference or disruption that does not necessarily bring about a complete cessation of business or activities, provided it has a material effect on the financial performance of the insured’s business.
Importantly, the UKSC rejected the High Court’s interpretation that “restrictions imposed” required measures expressed in mandatory terms carrying the force of law and that, therefore, “instructions” or the equivalent given by the government that did not have the force of law do not fall within the description. In allowing the FCA’s appeal, the UKSC held that an instruction given by a public authority could amount to a “restriction imposed” if it either carries the imminent threat of legal compulsion, or is an instruction in mandatory and sufficiently clear terms that the insured and the public would reasonably understand had to be complied with, regardless of whether it was legally capable of being enforced.
(iii) Causation
As we set out in one of our earlier alerts, the insurers tried to argue that policyholders would have suffered the same or similar BI losses even if the insured risk or peril had not occurred, as a result of which the claims failed either because the loss was not caused by an insured peril or because of how the trends clauses require the loss to be quantified. This was firmly rejected by the UKSC.
Disease clauses: The UKSC held that the disease clauses are, in principle, triggered by the occurrence of at least one case of COVID-19 within the geographical area covered by the clause. Significantly, and in a judgment that may have broad-reaching implications, the UKSC rejected the blanket applicability of the ‘but for’ causation test as a matter of interpretation of disease clauses. Specifically in relation to COVID-19, the UKSC agreed with the High Court that all of the individual cases of COVID-19 that had occurred by the date of any relevant government measure were equally effective ‘proximate’ causes of that measure (and of the public response to it). Simply put, the UKSC concluded that “in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of illness resulting from COVID-19, it is sufficient to prove that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause”.
Prevention of access and hybrid clauses: Disagreeing with the finding of the High Court, the UKSC decision makes cover more readily available under these clauses. The ‘peril’ covered by these wordings comprises a series of elements that are required to occur in a sequence in order to give rise to a right of indemnity. Importantly, (i) there is no requirement for legislation ordering closure, and (ii) being prevented from using, or being unable to use, part of the premises may be sufficient (that is, complete closure may not be required). All of the elements of the clause must be met and must have a causal connection to the loss, but, helpfully, the pandemic (as the underlying or originating cause) will not be treated as a competing cause when assessing loss.
(iv) Trends clauses
Trends clauses provide for BI losses to be quantified by reference to what the performance of the business would have been had the insured peril not occurred. Insurers argued that they were not liable to indemnify policyholders for losses that would have arisen regardless of the operation of the insured perils by reason of the wider consequences of the COVID-19 pandemic.
The UKSC disagreed. It held that trends clauses should be construed so that the standard turnover or gross profit derived from previous trading activity is adjusted only to reflect circumstances unconnected with the insured peril. The trends or circumstances referred to in the clause for which adjustments are to be made should generally be construed as meaning trends or circumstances unrelated to the insured peril and not circumstances which are inextricably linked with the insured peril (in the sense that they have the same underlying or originating cause).
In practice, this means that, absent any clear wording to the contrary, insurers cannot reduce the indemnity otherwise due to the insured on the basis that the losses were caused equally by other (uninsured) perils, which includes the COVID-19 pandemic.
(v) Pre-trigger losses
The High Court permitted adjustments made under trends clauses to reflect the downturn of a business due to COVID-19 before the insured peril was triggered.
The UKSC rejected this approach and held that “in calculating loss, the assumption should be made that pre-trigger losses caused by the pandemic would not have continued during the operation of the insured peril”. As with the trends clauses, adjustment should only be made to reflect circumstances affecting the business that are unconnected to COVID-19.
(vi) Orient-Express case
The UKSC held that the decision in Orient-Express3 (relied upon heavily by the insurers) was wrongly decided and should be overruled. The court in Orient-Express held that the business interruption was caused by two concurrent causes, neither of which was the sole cause of the loss. The UKSC found that the arbitral tribunal and the court had erred in those proceedings in their treatment of the trends clause. In particular, the UKSC found that they had failed to exclude from the assessment of the loss those circumstances which had the same underlying or originating cause as the damage – in that case, the hurricanes.
Issues arising
Ultimately, we anticipate active claims management and payments out by insurers where the policy wording falls clearly within the scope of the UKSC decision. This is reinforced in the FCA’s “Dear CEO” letter published on 22 January 2021, which strongly encourages all insurers to take steps to settle claims as quickly as possible.
We also anticipate (as indicated in the “Dear CEO” letter) that the FCA will continue to closely monitor the process to ensure that insurers treat policyholders fairly.
In the meantime, there are a number of key points arising from the UKSC decision of which, in our view, policyholders, risk and insurance managers, and others operating in the insurance industry should be aware.
(i) Causation, trends clauses, and Orient-Express
As already widely reported, the UKSC decision is considered to be a landmark decision on causation. Quoting Mark Pring (partner at Reed Smith), the Evening Standard reported on 15 January 2021: "The finding on causation will have very significant consequences for business interruption policies and many other types of policy”.4 As described above, the UKSC found that each individual case of COVID-19 was a separate but equally effective cause of the loss.
The decision of the UKSC indicated that the ‘but for’ test – which is the standard test to determine whether an insured action or peril caused the loss suffered – should not be used in certain circumstances. This is an important finding; it is rare that a court will disapply the ‘but for’ test, which has long been the prominent test as to whether a peril caused the loss suffered.
When it comes to policy interpretation, the principle is arguably unchanged: what matters is precisely what risk the insurers have agreed to cover. This analysis involves applying the factual position to the specific policy wording and asking the following questions:
a) Is there a causal connection between the peril covered by the policy and the loss?
b) Did excluded perils have any causal connection to the loss? (If yes, the loss will generally be excluded following the decision in Wayne Tank & Pump5) and
c) Are there two or more causes of the loss which were equally effective, at least one of which is insured and the other not excluded?
The problem faced by the UKSC was that, for disease clauses, each incident of COVID-19 was a separate “occurrence” and, therefore, could not be said to have ‘caused’ the loss. On a strict application of the ‘but for’ test, the effect would be that there was no cover. The UKSC recognised that, clearly, that cannot be what the parties intended when they bought and/or wrote BI cover.
Disease clauses – Each incident of COVID-19 has been found to be an “occurrence”. In principle, therefore, there are hundreds of concurrent causes. The UKSC did not see this issue as insurmountable and considered that it is sufficient for a policyholder to prove that the interruption was caused by government action taken in response to cases of disease, which included at least one case within the geographic area specified by the policy. The findings on “occurrence” demonstrate a key driver in the UKSC’s approach to matters of contractual construction; these are policies written for SME policyholders, and the important question to identify is: for which losses, did policyholders and insurers agree should be indemnified, as a result of the occurrence of the insured peril?
Prevention of access and hybrid clauses – As described above, these clauses require all of the causal elements to act in sequence to cause the loss. Importantly, not only do all of these elements need to be in place, but also, together, they need to be the proximate cause of the loss. If the sole effective cause was the COVID-19 pandemic, then there would be no cover.
Trends clauses – There has been much debate about the operation of these clauses, and the UKSC decision has provided clear guidance on the three main issues:
- The trends clauses are part of the machinery for quantifying loss. They do not address or seek to delineate the scope of the indemnity, which is the function of the insuring clauses in the policy.
- The trends clauses should, if possible, be construed consistently with the insuring clauses in the policy.
- To construe the trends clauses consistently with the insuring clauses means that, if possible, they should be construed so as not to take away the cover provided by the insuring clauses. To do so would effectively transform quantification machinery into a form of exclusion.
This seems complex, but, ultimately, insurers cannot seek to rely on a trends clause to reduce the indemnity due on the basis that the losses were equally caused by other concurrent causes. COVID-19 and its consequences must be stripped out of the calculation as to the financial position of the insured’s business as if the insured peril had not occurred.
The decision on the impact of the trends clauses cannot be underestimated. Insurers will likely have been relying on the wider economic downturn to reduce their exposure even if coverage was in principle triggered under the applicable insuring clause.
The insurance market more generally has seen a hardening in recent years, and we can expect to see insurers reviewing these clauses in detail. In particular, policyholders can expect that some of the ‘upwards only’ trends clauses will be removed from policy wordings at renewal.
As to the decision in Orient-Express, that this decision has now been overruled has important implications for BI claims beyond those stemming from losses caused by COVID-19. While the UKSC decision is welcomed, we anticipate that insurers and policyholders alike will be re-reviewing other claims in which losses caused by concurrent causes were initially denied.
(ii) Aggregation and disease clauses
The UKSC concluded that each case of illness sustained by a person as a result of COVID-19 is a separate “occurrence”. In principle, this is helpful to enable a policyholder to demonstrate that the insuring clause is triggered.
However, it is important to consider how this finding may impact policyholders commercially. As a starting point, we recommend checking your policy for aggregation language. Typically, a policy will allow for claims arising out of the same facts, or based on the same originating cause, to be aggregated together, such that they are treated as a single loss.
One benefit of this for a policyholder is that a series of small claims may be viewed as a single claim, and, therefore, the total loss may quickly exceed any deductible payable – meaning that insurers will have to start paying an indemnity. If each claim is treated as a separate claim, the policyholder would have to pay a deductible in respect of each claim.
Conversely, if a series of claims are treated as a single claim and are combined together, the total loss may then exceed the limits of liability available under the policy.
It is therefore essential to consider aggregation language carefully, in light of the policy as a whole and with regard to any particular separate policy limits – for example, whether different limits apply for different areas of the business or for different premises or locations.
(iii) Radius
The UKSC found that the 25-mile radius (which is found, for example, in QBE 1 and RSA 3 policy wordings) was enforceable.
One of the key issues raised before the High Court was how the policyholder proves the presence of COVID-19 in a specified radius. The “Declarations” previously issued by the High Court set out the types of evidence the policyholders may use. For example, under Declaration 8.2(b), policyholders can use data published by NHS England on a daily basis recording the number of individuals who died in NHS Hospital Trusts in England. From this data, it can be inferred as to when COVID-19 was present in that NHS Hospital Trust, and an inference may then be drawn that COVID-19 was present in the relevant policy area at a particular date. Similarly, under Declaration 8.2(c), a policyholder can use the weekly data published by the ONS recording the number of deaths that have occurred in England and Wales each week by a local authority or health board where the death certificate mentions COVID-19.
The FCA has published draft guidance6 further explaining the types of evidence and methodologies which policyholders may use when proving the presence of COVID-19 in a particular area. Insurers are being strongly encouraged to adopt these methodologies, which are in line with the FCA Principles of Business, the Insurance Conduct of Business Sourcebook, and the Dispute Resolution Complaints Sourcebook.
As explained in our previous alert, proving an occurrence of COVID-19 within a particular radius from the insured’s premises, within a specified vicinity or area, or an ‘occurrence’ with no reference to a particular vicinity or area is expected to be a fact-intensive exercise.
Policy wordings will vary as to the specific geographical area in which an incident of COVID-19 needs to have occurred to trigger cover. Given the amount of publicly available information from, for example, the NHS and ONS, policyholders with a policy specifying a 25-mile radius may well be able to demonstrate the presence of COVID-19 in that area prior to the government restrictions. In that regard, the UKSC noted the submissions of the FCA that a radius of 25 miles is “an area of a little under 2,000 square miles. To put this in perspective, this is bigger than any city in the UK, more than three times the size of Surrey, roughly the combined size of Oxfordshire, Berkshire and Buckinghamshire, and around a quarter of Wales.”
Practically speaking, policyholders whose wording specifies a one-mile radius may find that the publicly available data is too general and, accordingly, will need to rely on their own data collection about local reports or employees reporting instances of COVID-19.
Practical tips
There are several practical steps that all BI policyholders should take in light of the UKSC judgment.
- Check policy wordings: If a policyholder has experienced BI loss due to the COVID-19 pandemic, the first step is to identify which of the three categories their policy wording fits into, or aligns most closely to – whether it is disease, prevention of access, or hybrid wording. The UKSC decision has confirmed that coverage for BI losses due to COVID-19 would be available under all three types of wordings, making it more likely that your BI policy will provide some cover for COVID-19-related losses.
- Liaise with brokers and insurers: Insurers and brokers have largely put coverage discussions on hold pending a decision in the test case, even if a policy was not one of the 21 wordings being considered. We strongly recommend that policyholders contact their brokers or insurers promptly to press for cover and an indemnity in respect of a claim.
- Review any proposed offer from your insurer to settle BI claims: If a policyholder was engaging with its broker or insurer about settling an existing BI claim prior to the decision of the UKSC, it may be that such terms should be reconsidered in light of the latest decision – for example, in light of the decision on the trends clauses. In addition, we understand that insurers in some cases have sought to reduce their liability by making deductions for government support that may have been received during the pandemic. The FCA has stated that any such exercise should be conducted on a case-by-case basis, and has warned insurers that it may intervene if it does not think insurers are approaching this in a fair manner.
- Record gathering: As mentioned in previous alerts, it is integral that a policyholder maintains good records of the losses sustained to their business during the past year to satisfy the required causation of the losses, and to quantify the losses. If the BI policy contains a trends clause, any general downturn caused by COVID-19 in the lead up to any action or decision that closed or partially closed the relevant business does not need to be taken into account when determining or adjusting the true loss sustained by the policyholder. Therefore, prior year financials and any forecasts and budgets prepared for 2020 will be essential in evidencing the amount of the loss.
- Prevalence of COVID-19: For policyholders with geographic requirements to show the prevalence of COVID-19 within a specific area (disease wordings and certain hybrid wordings), the burden lies on the policyholder to prove that there was a case of COVID-19 within that area. Accordingly, we recommend in the first instance to consider the FCA’s draft guidance on the types of evidence that would demonstrate the prevalence of COVID-19.
- Renewal: We expect insurers will seek to reduce their future risk exposure by altering and amending the BI coverage they are willing to provide. In particular, (i) new policies are expected to expressly exclude losses resulting from the pandemic, and (ii) the trends clause may also be narrowed. It is therefore important to review a draft insuring clause, trends clauses, and any exclusions to ensure that you understand the coverage being offered and whether it is sufficient for the policyholder’s business needs. The scope of the insurance offered and the premium to be paid are based on the policyholder’s particular risk, and we expect insurers to ask additional and more detailed questions about the policyholder’s current and future risk of exposure to the impact of COVID-19 and pandemics generally and any operational resilience policies and procedures in place.
- Disease clauses, in general, provide cover for BI losses resulting from the occurrence of a notifiable disease at or within a specified distance of the business premises. COVID-19 was made a notifiable disease in England on 5 March 2020 (for the rest of the UK, the relevant dates are: 22 February 2020 in Scotland; 29 February 2020 in Northern Ireland; and 6 March 2020 in Wales).
- Prevention of access clauses provide cover for BI losses resulting from public authority intervention that prevents or hinders access to, or use of, the business premises. Hybrid clauses combine the main elements of disease and prevention of access clauses.
- Orient-Express Hotels Ltd v. Assicurazioni General SpA [2010] EWHC 1186 (Comm) [2010] Lloyd’s Rep. IR 531.
- standard.co.uk.
- Wayne Tank & Pump Co Ltd v. The Employers' Liability Assurance Corporation Ltd [1974] QB 57.
- fca.org.uk.
In-depth 2021-028
