Insurers to pay out for Covid-19 related business interruption losses

The Issues

Policyholders whose businesses were affected by the Covid-19 pandemic suffered significant losses, resulting in a large numbers of claims being brought under business interruption (BI) insurance policies.

Many of the policyholders are small and medium enterprises whose policies are focused on property damage and only have basic cover for BI as a consequence of property damage.   However, some policies also cover BI from other causes, in particular infectious or notifiable diseases ('disease clauses') and prevention of access and public authority closures or restrictions ('prevention of access clauses'). In some cases, insurers had accepted liability under these policies.  In other cases, insurers have disputed liability while policyholders considered that they had cover leading to widespread concern about the lack of clarity and certainty.

The High Court’s judgment last September resolved most of the key issues but as parties were unable to reach agreement, insurers and the FCA made 'leapfrog' appeals to the Supreme Court.

Held

Causation

Policyholders must show that the insured event, as defined in the policy wording, caused the loss suffered. The Supreme Court found that causation was satisfied when the insured event, together with linked events, caused one inevitable result. Thus, local cases of Covid-19, the worldwide pandemic and the Government measures, advice and action together with the public response, were one cause, resulting in business interruption.

Disease clauses

The Supreme Court found that local cases of the Covid-19, along with the wider pandemic and the resulting action, could be treated as one cause. Disease clauses will therefore respond to interruption caused by Government action in response to the disease, provided there has been at least one occurrence of the disease within the specified radius.

Prevention of access and hybrid clauses

The Supreme Court applied its broad interpretation of causation. It was held that these clauses will be triggered if the interruption was a result of restrictions placed on the premises in response to cases of Covid-19, which included at least one case occurring within the specific radius.

The Supreme Court decided that these terms could include instructions that did not carry legal force but came with an expectation that legal measures would follow, or that legal measures would be introduced if the restrictions were not followed. They held that a business could be covered if:

• it has been unable to use its premises for a certain part of its business activities; or 
• it has been unable to use a certain part of its premises for its business activities.

In addition, the Supreme Court maintained that “interruption” does not mean that all business activities are stopped. Even a slight disruption to a business would be enough to trigger cover. The Supreme Court interpreted hybrid clauses broadly and found that “inability to use” premises and “prevention” of access did not always require complete closure.

Trends clauses

The Supreme Court found that trends clauses do not require losses to be adjusted on the basis that, if the insured peril had not occurred, the results of the business would still have been affected by other consequences of the COVID-19 pandemic.

Pre-trigger losses

The Supreme Court found that when making adjustments, a business’s loss should be assessed on the assumption that there was no Covid-19 pandemic at all. This means that insurers will not be able to reduce pay outs by dismissing the loss suffered by Covid-19 before the relevant trigger event.

The Orient Express

Insurers relied heavily on a previous judgment from 2010 called 'Orient Express' in their submissions on causation. The Supreme Court has ruled that the case was wrongly decided. The judgment suggests that the effects of certain elements of a composite insured peril should not diminish the scope of the indemnity due to an insured if they arise from the same original fortuity which the parties to the insurance would expect to occur concurrently with the insured peril (even if not expressly specified in the coverage clause). Similarly the effects of uninsured perils should not diminish the scope of indemnity where they arise from the same original fortuity as the insured peril.

The Supreme Court was careful to make clear that whether such principles apply will turn closely on the policy wording and the intended cover, but the Supreme Court’s conclusions certainly have potential significance for determining the scope of cover under insurance policies generally, beyond those considered in this case.

Comment

The Supreme Court decision is positive for businesses and many policyholders will now be covered for Covid-19 related losses, who were not covered under the High Court’s decision.

The judgment is legally binding on the eight insurers that were parties to the test case and it also provides authoritative guidance for the interpretation of similar wordings. In addition, it cannot be appealed by any party. As a result, businesses now have much needed clarity as to whether they will be covered.

The Supreme Court’s construction of causation and wide interpretation of “inability to use” and “prevention”  means that businesses with disease, denial of access and hybrid clauses may all be entitled to cover for Covid-19 related loss.  

It will be crucial for businesses to reconsider their Business Interruption policy wording in light of the Supreme Court’s decision.
 

The full judgement can be accessed here

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