The United Kingdom Supreme Court (UKSC) handed down its judgment on 15 January 2021 in The Financial Conduct Authority v. Arch Insurance (UK) Limited and Others. This test case was brought by the FCA on behalf of SME business interruption (BI) policyholders who have suffered financial losses as a result of COVID-19.
We have been reporting on these matters closely since March of last year, and, in our most recent alerts, we discussed the decision handed down by the High Court and the issues on appeal before the UKSC.
In this article, we summarise the UKSC’s most recent decision, set out our views on the key implications of the decision for policyholders, and provide practical tips to assist policyholders in handling their claims (subject always to their individual circumstances).
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.
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.