Supreme Court Judgement in Business Interruption Test Case
Are you covered for business interruption losses due to Covid?
On 15 January 2021, following an appeal from the High Court, the Supreme Court (SC) handed down judgement in the Business Interruption (BI) insurance test case of The Financial Conduct Authority v Arch and Others.
The test case was issued by the Financial Conduct Authority (FCA) on behalf of concerned policyholders, predominantly small and medium sized businesses, on 9 June 2020 to determine issues of principal in respect of insurance policy coverage under various sample wordings in relation to claims by policyholders to be indemnified for BI losses as a result of Government advice and restrictions imposed in response to the Covid-19 pandemic.
The defendants in the case were eight leading providers of BI insurance.
The agreed aim of the test case was to achieve as much clarity as possible for the maximum number of policyholders and their insurers by considering a representative sample of 21 standard form BI insurance policies in light of the assumed and agreed facts.
The High Court’s decision, which held in favour of the FCA on most of the main issues brought before it, was subsequently appealed directly to the Supreme Court under the “leapfrog” procedure enabling cases in exceptional circumstances to by-pass the Court of Appeal.
The Supreme Court’s decision
In short, the SC dismissed all the insurers’ appeals unanimously and allowed all the FCA’s four grounds of appeal, with some qualifications.
In particular, in relation to so-called ‘disease clauses’, which generally provide cover for BI loss caused by the occurrence of a notifiable disease at or within a specified distance of the policyholder’s premises, the court considered two issues, namely (1) the meaning of the words “any occurrence of a Notifiable Disease within a radius of 25 miles of the Premises” (i.e. what is the insured peril) and (2) what causal link between the insured peril and the interruption to the business is required to entitle the policyholder to be indemnified.
In respect of the first issue, the SC found that the meaning of the words “occurrence of a Notifiable Disease” refer to an occurrence of illness sustained by a particular person at a particular time and place, meaning that such a clause covers only cases of illness resulting from Covid-19 occurring within a 25-mile radius.
Significantly, however, the SC held that the language of the clause does not confine cover to BI resulting only from cases of a notifiable disease within the 25-mile radius, as opposed to other cases elsewhere, and in interpreting the wording, significance should be attached to the potential of the notifiable disease to affect a wide area. These matters were particularly relevant to the court’s approach to the second issue of causation.
Here the SC found that it is highly likely that an outbreak of an infectious disease would include cases both inside and outside the specified radius and measures taken by a public authority which affected the business would be in response to the outbreak as a whole and not just the cases falling inside the specified radius. Consequently, the SC rejected the insurers’ argument that the occurrence of one or more cases of Covid-19 within the specified radius cannot be a cause of BI loss if the loss would not have been suffered but for those cases, because the same interruption would have occurred regardless, as a result of other cases elsewhere in the country.
Therefore, the SC held that it is sufficient to show that BI loss was the result of Government action taken in response to cases which included at least one within the specified radius.
Prevention of access clauses
Another important aspect of the SC’s decision was in relation to prevention of access clauses. These generally provide cover for BI losses resulting from public authority intervention preventing access to, or use of, the insured premises.
The SC held that the requirement of an “inability to use” an insured premises is satisfied either 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. The court provided an example of a golf club that highlights both scenarios which is allowed to remain open but with its clubhouse closed so that there is an inability to use a discrete part of its premises (namely the clubhouse) for a discrete part of its business (the provision of food and drink).
However, it should be noted that there would only be cover for that part of the business for which the premises cannot be used. For instance, if a restaurant that also offers takeaway services decided to close its entire business, it would only be able to claim in relation to the restaurant part of the business.
The SC’s judgement will be welcomed by policyholders and could be hugely important in keeping many businesses afloat over the coming weeks and months. The decision undoubtedly brings much-needed certainty to the market and will help to resolve many disputes that policyholders may otherwise have had with their insurers.
While it is important to note that the availability of a pay-out will depend on the individual circumstances and specific wording of the policy, the decision nevertheless is positive news for businesses as they seek to recover from the impact of the pandemic.