Now that the dust has settled from the Financial Conduct Authority (FCA)’s test case over disputed business interruption (BI) claims, the (re)insurance sector – and its lawyers – can now assess the long-term implications of the Supreme Court ruling.
The Supreme Court handed down its ruling in the FCA’s Covid-19 test case on 15 January, substantially upholding the FCA’s appeals and dismissing insurers’ appeals from the High Court judgment.
The overall outcome is that the Supreme Court has materially broadened the cover available to policyholders for BI loss caused by the effects of the Covid-19 pandemic compared with the first-instance judgment.
Further, the judgment is likely to have implications for property insurance generally, and in the market more widely due to its in-depth analysis of causation, rejection of insurers’ arguments on the application of standard “trends” clauses in property damage/BI policies, and its reversal of the longstanding decision in Orient-Express Hotels.
Implications for the Insurance Market
Insurers and policyholders alike will now be considering their policy wordings to ascertain the extent to which the Supreme Court’s judgment affects claims.
Despite the very detailed judgment there may be issues that remain unresolved in individual cases. In addition, not every issue was successfully appealed, and the judgment needs to be read together with the High Court judgment to understand how individual policy wordings should be interpreted and claims adjustment should take place.
In particular, the Supreme Court’s judgment did not address how an insured might establish the prevalence of disease within the radius for the purpose of establishing cover under “disease” or “hybrid” clauses.
This may not be straightforward in some cases. The position here remains as set out in the High Court judgment. The FCA has consulted on draft guidance on this issue – with an extended deadline of 22 January 2021 for responses on issues arising out of the Supreme Court’s judgment.
Insurers must have regard to the FCA’s guidance of 17 June 2020 which summarises the steps they need to take to review claims and complaints and to communicate with policyholders. The FCA’s Dear CEO letter of 22 January indicates that it is essential that insurers reassess and settle claims quickly, making interim payments where appropriate.
The letter also directs insurers to consider the FCA’s statement of August 2020 on deductions for some types of government support, and it states its expectation that the treatment of such support is considered at board level.
There is little doubt that insurers’ exposures, and therefore their reserves, will be moving upwards. This, in turn, will have a knock-on effect on their outwards reinsurance programmes.
The Supreme Court’s novel approach to causation will have lawyers pondering how this can be applied in future cases across the insurance markets.
However, perhaps the most obvious blow to insurers (and reinsurers) is the Supreme Court’s decision to overrule the insurer-friendly Orient-Express Hotels judgment, as this aspect of the ruling is not confined to non-damage BI claims, but also property damage claims generally.
It remains to be seen how the market responds after the dust has settled on a judgment that will have both immediate and longer-term consequences.
Supreme Court judgment: Causation
The issue of causation received significant attention in the judgment, including a whirlwind review of the 400-year history of causation.
The central issue was the application of the traditional “but for” test. Insurers argued that it was necessary for an insured to show that the loss would not have been sustained “but for” the occurrence of the insured peril.
Insurers argued that the widespread nature of the pandemic in the UK meant that an insured would have suffered the same (or similar) BI losses even if the insured’s particular business had, somehow, remained unaffected by any insured peril.
The court comprehensively rejected this argument and observed that in insurance law the test of identifying the “proximate cause” of loss is to find the most “efficient” or “effective” cause of the loss.
The court’s starting point was that the parties to the policies under consideration are presumed to have known that some infectious diseases, including a new disease, can spread rapidly, widely and unpredictably and may not be confined to an arbitrary, circular area around an insured’s premises.
It was highly likely that there would also be cases outside the radius and that any public authority response would be in respect of the outbreak as a whole.
The Supreme Court found that it is sufficient for insureds to prove that the interruption was a result of governmental action taken in response to cases of disease which included at least one within the specified area required by the extension.
“Prevention of access” and “hybrid” policies
The “prevention of access” and “hybrid” wordings require that more than one condition must be satisfied in order to establish that BI loss has been caused by an insured peril.
The court held that the reason why such losses would have occurred in any event is that there are two (or more) causes – on the one hand the composite insured peril described in the policy and on the other hand the (uninsured but not excluded) pandemic and its broader economic and social effects, each of which would by itself have inevitably brought about the loss without the other(s).
The Orient-Express Hotels case
The Supreme Court’s treatment of the controversial case of Orient-Express Hotels is perhaps the aspect of the judgment which will have the longest-lasting impact on the insurance market.
Insurers relied on Orient-Express Hotels in relation to their submissions on the “but for” test and trends clauses discussed above.
However, consistent with their approach in relation to causation generally, and the interpretation of the “trends” clauses, the Supreme Court held that Orient-Express Hotels was wrongly decided and overruled it.
This outcome is likely to have significant implications for the adjustment of both property damage and non-damage BI claims in the market moving forward.
Taylor has experience in international coverage disputes in the context of both direct insurance claims and facultative and treaty reinsurance business in the live and run-off markets, with an emphasis on heavy industrial, property, aviation and liability risks.
Saunders’ primary area of practice is advising on complex policy coverage and acting in (re)insurance litigation and arbitration disputes, primarily acting for insurers and reinsurers.