The UK's Supreme Court has released its much anticipated landmark judgment in the Financial Conduct Authority (FCA) business interruption (BI) insurance test case.
In what is very positive news for those policyholders who have BI extensions of the type considered in the appeal, the Court's decision serves to broaden cover across a number of wordings. Overruling the long criticised decision in Orient Express Hotels and restricting any attempt by insurers to reduce claim values as a result of pre-trigger losses the judgment will surely have significant knock-on effects for the insurance industry for the next decade.
The background
The Supreme Court decision comes on the back of the High Court's first instance judgment that was released in September to much fanfare. The decision was favourable to insureds in a number of respects, suggesting that there could be cover for losses arising from national COVID-19 restrictions under certain types of policy wording, namely:
- Wide-vicinity disease clauses where the insured would generally be covered for losses when it could be evidenced that there was an occurrence of COVID-19 within a stated vicinity (usually 25 miles) of insured premises.
- 'Hybrid' disease clauses where policies would respond where the insured was able to evidence restrictions imposed on premises as a result of COVID-19.
- Non-Damage Denial of Access clauses where there was no mention of a vicinity to insured premises.
However, less well publicised, were the areas where the Court considered that there would be no cover for insureds:
- In the QBE disease clauses considered by the Court that referenced an 'event' (QBE2 & QBE3). The Court considered that the use of the word 'event' indicated an intention for the coverage to be localised, meaning there would be no cover for losses caused by national restrictions.
- In respect of Hybrid Clauses where the insured was unable to evidence that their business had been closed in the entirety (partial closure was insufficient) by the force of law. Therefore only insureds who were ordered to close in the entirety by a public authority (such as the UK Government) would have any cover.
- Non-Damage Denial of Access clauses where there was reference to a 'danger', 'disturbance' or 'emergency' in the 'vicinity' around insured premises. This type of extension was considered to only provide localised cover that would not meet losses caused by national restrictions.
- Where businesses had already seen revenue fall prior to the triggering of insurance cover as a result of the wider effects of the pandemic this trend could be used by the insurer to significantly reduce the value of any claim, even to nil.
Whilst it was hoped by the FCA that a final appeal to the Supreme Court could be avoided, this was not to be the case and a 'leapfrog' appeal (where the case moves from the High Court directly to the Supreme Court without being heard in the Court of Appeal first) was pursued.
The grounds of appeal
The FCA's appeals on behalf of policyholders were categorised into four distinct elements:
- Whether and the extent to which pre-trigger COVID-19 related negative effects on revenue should be taken into account to reduce the indemnity.
- That prevention of access and hybrid wordings are triggered by actions without force of law.
- The prevention of access and hybrid wordings do not require total closure of the business, and a fundamental change by closure of a part of the business for which the premises is used or prohibition on a substantial part of the customer base can be sufficient.
- References to 'incidents' or 'events' in ancillary wording to the triggers (exemplified in the QBE 2 & 3 wordings) does not mean that the cover is intended only to cover disease within the 25/1 mile limit.
The FCA chose to not appeal the High Court's decision that those Non-Damage Denial of Access extensions that mentioned an 'emergency' or 'danger or disturbance' in the 'vicinity' or within a stated radius of premises did not provide cover for losses resulting from national restrictions.
In response the 6 remaining insurers in the test case (Arch, Argenta, Hiscox, MS Amlin, RSA and QBE) pursued a plethora of appeals, the main line of argument being that the High Court had erred in its decision in distinguishing (and thereby declining to apply) the well-known judgment in Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm). This case, which has featured heavily in the FCA test case, said that business interruption losses resulting from property damage could not be claimed where the loss would have been sustained in any event as a result of widespread damage to the area surrounding insured premises.
The Supreme Court decision
The Supreme Court's decision will be very welcome news to policyholders, with the majority of the FCA's appeals allowed.
In particular the Supreme Court ruled that:
- Each individual instance of COVID-19 should be considered to be an 'occurrence'; the wider outbreak/pandemic is not an 'occurrence' as it does not happen 'at a particular time, at a particular place and in a particular way'.
- The nature of the QBE 2 & QBE 3 wordings is identical to the other disease clauses considered in that there is cover for an occurrence of notifiable disease within the stated radius of insured premises.
- The disease wordings cover occurrences within a stated vicinity however that does not preclude claims for losses sustained as a result of national restrictions.
- Wordings that required the imposition of restrictions do not require the force of law as long as from the 'context of the instruction, compliance with it is required, and would reasonably be understood to be required, without the need for recourse to legal powers'. These restrictions would normally be on the use of the insured premises, but could be on other entities such as members of the public (with respect to the 'stay at home' order).
- An 'inability to use' must be total (i.e. not merely hindrance or impairment), however this does not have to be in relation to the whole business premises. The requirement would be satisfied where 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'.
- In a similar vein, a 'prevention of access' must be total (i.e. not merely hindrance or impairment of access) but again this may access to a discrete part of the premises and/or prevention of access for the purpose of carrying on a discrete part of the policyholder's business activities.
- Trends clauses should not be used to reduce the value of a claim where the pre-trigger downturn of business was as a result of the source of the insured peril (i.e. COVID-19).
- 'But for' causation is not always a necessary requirement and can be insufficient in certain circumstances. The Court ruled that this was the case here.
- In relation to the disease and hybrid wordings, it was sufficient that the occurrences of disease that were covered (i.e. those that were within the stated radius of the premises) were part of the cause of the loss alongside the wider pandemic, even if those localised occurrences could not have brought about the loss on their own.
- The Court acknowledged that proximate causation and the 'but for' test would remain the appropriate legal test in most instances. However here the intention of the parties was considered alongside the nature of a disease and the Court found that the reasonable observer would not impart a requirement of proximate causation with respect to a peril that could inevitably spread beyond the stated radius, thereby causing the imposition of restrictions.
- The decision in Orient Express Hotels was wrong and it was overruled.
Summary
The Supreme Court's decision serves to largely confirm cover for those with wide-vicinity disease clauses; in particular it is very welcome news to those with QBE2 and QBE3 wordings which reference an 'event' who now are likely to have cover for losses resulting from national restrictions (subject to their ability to evidence instances of disease within the stated radius). It broadens the cover under Hybrid clauses to not necessarily require the total closure of premises or the formal imposition of legally enforceable restrictions. Non-Damage Denial of Access clauses will also be broadened in a similar manner to Hybrid clauses, however the decision does not mean there will be cover for those extensions which the High Court previously ruled only provided 'localised' cover. It does also not mean that there will be cover for those types of clauses not included within the FCA action (such as those on a 'specified list' of diseases basis and those that require the presence of a disease at premises, amongst others). In relation to trends clauses, the Supreme Court judgment means that insurers will not be able to use pre-trigger downturns in trade resulting from COVID-19 to reduce the value of a claim.
Whilst 'but for' proximate causation will still be the 'go to' legal test of causation the Court has opened the gates to departing from it where its application results in a reduction in cover that cannot have been the intention of the contracting parties. It also allows for claims to arise from a large number of multiple competing causes where the peril insured is not the predominant cause of the loss (albeit it is still significant and the other causes are not excluded) and it would be reasonably expected that the other causes would arise from the same type of incident (in this case individual occurrences of the disease leading to national restrictions).
In overruling Orient Express Hotels the Court has significantly broadened business interruption cover for incidents which cause wide area damage. This is likely to have knock on effects on premiums as underwriters reconsider the level of cover their policies provide. Furthermore, whilst the decision is a useful one for policyholders, it is expected that widespread satellite litigation is likely to follow to address a plethora of issues in this area that were specifically omitted from the FCA's case.
Whilst this is undoubtedly a positive decision for many policyholders, insureds are advised that indemnity and the level of policy coverage is very much dependent on their specific policy wording; this should be thoroughly checked against the Supreme Court (and High Court) rulings.
Samuel Ellerton
Regional Claims Leader
Tel.: +44 (0)121 232 4563
Email: Sam.ellerton@uk.lockton.com
Disclaimer
This article is in no way intended to provide legal advice. The recipient of this note should obtain independent legal advice from a suitable practitioner as required. Lockton Companies LLP does not accept any liability with respect to reliance upon the content or accuracy of this article.