The UK Supreme Court has found in favour of policyholders in the Financial Conduct Authority’s test case on business interruption insurance cover for COVID-19 related losses. It is thought by the FCA that the decision will affect 370,000 policyholders and it is estimated that the judgment will result in approximately £1.8bn being paid out to businesses in Coronavirus-related claims.
Since March 2020, the UK government’s measures to stop the spread of COVID-19 have resulted in long-term business closures across the UK, causing huge business losses and a wave of claims under business interruption insurance policies.
Some policies contain “disease clauses”, which can be triggered by the occurrence of a certain diseases within a specified distance of the business premises and “prevention of access clauses”, which can be triggered by public authority intervention which prevents access to (or use of) a business premises.
The FCA was aware of the mixed reception to claims under these policies. Many policyholders’ claims were rejected by insurers and it was acknowledged that the wordings and types of cover available were wide-ranging. To resolve this apparent uncertainty, the FCA brought a landmark test case under the Financial Markets Test Case scheme. The courts considered a range of sample policies, and so the ruling will not apply to all disputes, but clarifies key issues of contractual uncertainty for policyholders and insurers.
The case was heard by the High Court in England, which found largely in favour of policyholders in September 2020. It was then subject to a ‘leapfrog’ appeal (skipping the Court of Appeal) directly to the UK Supreme Court by the insurers. The Supreme Court’s 114-page judgment was handed down on 15 January 2021, considering a wide range of issues relating to business interruption insurance. This post focuses on issues relating to disease clauses and prevention of access clauses.
Disease clauses provide cover for business interruption losses resulting from the occurrence of a notifiable disease at or within a certain distance of a business premises.
The insurers argued that cover should only be provided where the business could show that its losses resulted from coronavirus cases which occurred within the geographical radius. The FCA argued that cover should be provided for losses sustained as a result of the pandemic as a whole, provided that at least one case of COVID-19 occurred within the geographical area.
The Supreme Court’s decision was that business interruption cover is triggered by and applies to COVID-19 cases within the geographical area, and not cases in the wider area. However, the court’s decision has the effect that the relevant wordings do not restrict cover to business interruption losses which have resulted only from cases of COVID within the radius, as opposed to other cases elsewhere. It is possible for losses to be covered in such a manner which takes into account the wider effect of the pandemic as a whole, in conjunction with the localised effect.
Prevention of access clauses cover business interruption losses where public authority intervention prevents access to or use of a business premises. When these clauses were considered by the High Court, it was satisfied that these clauses were triggered where the instruction was in ‘mandatory terms which carry the force of the law’ (in other words, a legal requirement).
The Supreme Court disagreed with the High Court, and held that a restriction should be interpreted more widely. For example, it should include a mandatory instruction which is given by the public authority, without it being legally binding.
The Court did not consider every government instruction since the outset of the pandemic, but used the example of the Stay at Home order given by the Prime Minister on 20 March 2020. This instruction was considered a mandatory and clear instruction which required compliance, despite it not being enforceable by law at that time and therefore would be sufficient, in-principle, to trigger a prevention of access clause where a business premises could not be used.
It also must be impossible to use the premises (or part of it) for a business activity. For example, a golf course which is allowed to remain open but is unable to open its clubhouse facilities could claim for losses relating to the clubhouse closure. The Court rejected the insurers’ arguments that ‘interruption’ to a business must involve a complete halt on business activity – an interference or disruption was considered sufficient.
The FCA is working with insurers to assist the Supreme Court in preparing a set of declarations from its judgment. Many insurers are now reassessing BI claims. If you have an affected claim, your insurer may be in touch shortly. However, each individual policy must be considered in line with the judgment, which sets out the general principles and basis for cover. If you are unhappy with your insurers’ decision, you may make a complaint to the Financial Ombudsman Service, who are expected to follow the course of the Supreme Court’s judgment.
At MBM Commercial, we provide bespoke, tailored advice on business interruption insurance policies, and our Dispute Resolution team will be happy assist with advice and representation in disputed claims.