Posted Thursday 21st January 2021
The Financial Conduct Authority -v- Arch and Others
On 15 January 2021 the Supreme Court handed down a ruling that has provided much needed clarity concerning the interpretation of business interruption insurance policies in the context of the pandemic. The ruling will allow hundreds of thousands of policyholders to claim for business interruption loss caused by Covid-19 and the resulting Government imposed lockdown. Shortly after the ruling The Financial Times reported that the cost of UK business interruption claims could be close to £1bn.
Business interruption insurance will typically cover loss in circumstances where a business is interrupted because of physical damage to premises (i.e. flood, fire, storm etc.). These types of clauses often include additional cover for loss that is not consequent on physical damage, and it was this latter aspect that was considered by the Court.
The case was brought in early-June 2020 by the FCA, against 8 representative insurers, under the Financial Markets Test Case Scheme. The case proceeded to the Supreme Court as a ‘leapfrog’ appeal following an initial judgment handed down in mid-September 2020 by the High Court. The Supreme Court considered 21 sample policy wordings from the 8 insurer defendants – although it is estimated that policies provided by up to 60 other insurers could be affected.
The court specifically addressed the following four types of clauses which are found in insurance policies of this type: 1. Disease clauses; 2. Prevention of access clauses; 3. Trends clauses; and 4. Hybrid clauses (a combination of disease and prevention of access clauses). Set out below is a brief analysis of the first three types of clauses:
“Disease clauses” provide cover for business interruption losses resulting from the occurrence of a notifiable disease at or within a specified distance of a business’ premises. The Court considered the following example wording:
“We [the insurer] shall indemnify You [the insured] in respect of interruption or interference with the Business…following an occurrence of a Notifiable Disease at the Premises [or any] occurrence of a Notifiable Disease within a radius of 25 miles of the Premises”.
The insurers argued that this clause only applied if the disease originated within 25 miles of the premises and that any disease that originated outside of that radius should not be covered. The FCA’s position was that the clause should cover the loss caused by a disease wherever that disease originated provided that there is at least one case of the disease within the specified radius.
The Court accepted the FCA’s argument and concluded that a “Disease clause” does provide cover for loss caused by business interruption because of Covid-19-related illness that occurred within a specified radius of a business’ premises.
“Prevention of access clauses” provide cover for business interruption losses resulting from public authority/government intervention which prevents or hinders access or use of business premises. The Court considered various policy wording examples, one of which is as follows:
“[the insurer will cover] loss…resulting from…Prevention of access to the Premises due to the actions or advice of a government or local authority due to an emergency which is likely to endanger life or property”.
The Court considered two main issues presented by clauses of this type: First, the nature of the public authority/government’s intervention required to trigger the clause, and secondly, the nature of the prevention of access.
In relation to the first point, the Court held that the measures imposed must be mandatory but the Court clarified that those measures don’t necessarily need to have the force of law. This is particularly helpful as there has often been a disconnect between measures set out in legislation and measures arising from government guidance/ministerial speeches or daily briefings. The Court specifically noted that an instruction given by the Prime Minister in a speech, that certain businesses must close, was capable of triggering a clause of this type.
With regard to the second point, the Court again agreed with the arguments put forth by the FCA in that the ‘inability to use’ premises is satisfied if the policyholder is unable 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”. Therefore, clauses of this type will cover loss caused by the prevention of access to a part of, or the whole of, a business’ premises whether or not the prevention of access affects the whole of a business or only a small part of it. The Court gave the example of a restaurant staying open for takeaway food, and confirmed that such a business is likely to be able to claim for the loss of in-person business.
A business interruption clause will generally cover the loss caused by the insured peril with the amount of loss typically being calculated with reference to a business’ turnover in a preceding period (usually 12 months).
Policies of this type include a ‘trends’ clause which provides that the calculation of the loss suffered is to be adjusted to take into account a counterfactual scenario/overarching business trends. For example, if a business’ turnover has steadily decreased in the preceding 12 months, the policy is likely to provide that the loss is to be calculated to take into account that downward trend.
Trends clauses were of crucial importance in this case. The insurers sought to argue that the broader impact of the pandemic should be taken into account in the counterfactual analysis when calculating loss, which would effectively render the loss suffered by the policyholders to be negligible.
In a welcome development for policyholders the Supreme Court disagreed and held that the impact of the pandemic should not be taken into account in the counterfactual scenario when calculating loss. In other words, loss should be calculated with reference to pre-pandemic turnover.
The ruling provides welcome clarity on the extent of cover provided by business interruption clauses in relation to the Covid-19 pandemic. However, insurance policies are often nuanced and each policy will need to be considered on its own terms. If you are unsure whether your policy covers this type of loss its prudent to seek specialist advice as early as possible. If you think you have a potential claim it’s often important to act promptly and ensure that you don’t take steps that may invalidate the insurance policy.
This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.
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