Supreme Court Decides on Sample Business Interruption Insurance Policies
The UK Supreme Court (UKSC) has now issued its judgment in the business interruption insurance test case brought by the FCA against insurers. The UKSC has dismissed the insurers’ appeals against the High Court’s decision last year.
This is welcome news for policyholders. It will make a claim under the business interruption insurance clauses of a policy easier to prepare and prove. It will also ensure that any claim covered by a policy will not be reduced in value by other COVID-19-related circumstances.
This article will cover the key points in the decision.
By way of example, these clauses will read as providing for cover where there is an occurrence of a Notifiable Disease (e.g. COVID-19) within a specified radius (e.g. 25 miles) of the insured property.
But what is an “occurrence” of a Notifiable Disease? The UKSC decided that these clauses provide cover for business interruption caused by any cases of COVID-19 occurring within the specified radius. It does not cover interruption caused by cases of COVID-19 occurring outside that radius. So, a policyholder needs to be able to point to a case of COVID-19 within the specified radius.
The UKSC went on to decide that each individual case of COVID-19 was a separate, equal cause of the Government actions that took place. What this means is that, under disease clauses, the policyholder needs to prove that their business interruption was a result of government action in response to COVID-19 cases, including at least one case in the radius stated on their policy; in most cases, this will be readily apparent.
By way of example, these clauses will read as providing cover where there is an inability to use or a prevention of access due to restrictions imposed by a public authority.
The UKSC decides that the wording “restrictions imposed” is not confined to restrictions having force of law. In the emergency circumstances of COVID-19, a reasonable person would understand the Prime Minister’s speech of 20 March 2020 (for example) as a clear and mandatory instruction to be followed and this may be capable of being a “restriction imposed”.
The UKSC also decides that “inability to use” means that something more than an impairment or hindrance in use must be established. However, an “inability to use” can still cover circumstances where a business still uses part of the premises for a limited purpose. That is because there is an inability to use another, distinct part of the business premises.
The UKSC considered an alternative wording in some policies, of a “prevention of access”. It decided that this may include prevention of access to a discrete part of the premises, or prevention of access to the premises for carrying on a discrete part of the policyholder’s activities. That means, for example, that a restaurant could still seek to rely on the clause even if it still operates a takeaway service. That is because access was prevented to a discrete part of the premises, where it would host sit-in customers.
What must be established by the policyholder in these “access” clauses (and hybrid clauses, which are a mix of wording from disease and access clauses) is more complex. That is because there are usually more elements in the policy wording to be proven by the policy holder than in the disease clauses.
One general point of encouragement for policyholders is that, where the policy requirements are satisfied, the fact that losses may also have been caused by other uninsured effects of COVID-19 (e.g. drop in demand because of COVID-19) does not prevent the policyholder having cover under the policy. This must be considered on a case-by-case basis.
Assuming that a policyholder is covered by the terms of their policy, how are the losses suffered to be calculated? Policies will set out a standard mechanism to achieve this. Part of this mechanism is usually a “trends” clause that allow the losses to be adjusted to reflect special circumstances or business trends.
The UKSC decided that, subject to specific wording, these trends clauses should not be used to reduce the losses of a policyholder’s claim because of concurrent COVID-19 related causes for the losses (e.g. if a company would have suffered a drop in demand because of COVID-19, they should still be able to claim the full amount due under the policy under the prevention of access or disease clause).
If you have an insurance policy that includes cover for business interruption and would like advice on a potential claim, please contact the Dispute Resolution team.
Disclaimer: Each insurance policy wording will need to be considered on its own wording and the surrounding facts of the particular business seeking to rely on its terms. Legal advice should be sought on individual circumstances. This article is a high-level summary of the UKSC judgment and should not be relied upon as legal advice.