As The Insurer revealed yesterday, on Friday the Supreme Court will hand down its judgment on the Financial Conduct Authority (FCA)’s appealed landmark test case on disputed Covid-19 business interruption (BI) claims in a verdict expected to have far-reaching consequences for both UK carriers and policyholders.
The test litigation is the first of its kind in the UK and the Supreme Court’s ruling will affect around 60 insurers and some 370,000 policyholders.
It will clearly be significant for policies covering non-damage BI, but it is also possible that the decision will have wider implications, as the appeal submissions addressed some key insurance issues, in particular relating to causation.
The case was brought by the FCA as the first Financial Markets Test Case on an expedited basis, including a leap-frog appeal to the Supreme Court. Sample policy wordings were selected and the case proceeded on the basis of agreed facts.
The key question was whether cover was triggered under the policy wordings for BI losses due to the Covid-19 pandemic and the response to it, in particular the UK’s first national lockdown from March onwards. In an unprecedented move, the FCA took arguments on behalf of policyholders, and eight insurers participated as defendants.
The High Court categorised the cover into three categories:
- “Disease” clauses that provide BI cover, broadly speaking, triggered by an occurrence or manifestation of a notifiable disease within the vicinity, or a specified radius (e.g. 25 miles), of the insured premises. The High Court found that this type of cover could, in principle, be triggered by BI caused by the UK government’s national response to Covid-19, so long as some instance of disease could be demonstrated within the relevant vicinity.
- “Prevention of access” clauses that provide cover, broadly speaking, for a prevention or denial of access to or use of insured premises as a consequence of action by authorities. The High Court found that whether there was cover was highly dependent on individual wordings.
- So-called “hybrid” clauses that refer to both restrictions on insured premises and the occurrence or manifestation of notifiable disease. The FCA was largely, although not wholly, successful in arguing these provided cover for the pandemic.
Issues before the Supreme Court
Not every finding of the High Court is under appeal. Some of the key battle lines are set out below.
- Whether and the extent to which an insurer, when adjusting a claim, can take into account pre-trigger Covid-19-related negative effects on revenue to reduce the indemnity payable.
- Whether “prevention of access” and “hybrid” clauses are triggered by public authority actions which do not have the force of law. For example, some businesses claim they suffered interruption losses because of social distancing measures and other guidance which was never legally mandated.
- Whether “prevention of access” and “hybrid” wordings require total closure of a business, or if it is sufficient that there was a change in its operations, for example, by the closure of a part of the business for which the premises is used (e.g. eat-in or shop-in services) or, perhaps, restrictions experienced by a substantial part of its customer base.
- Whether references to “incidents” or “events” in the relevant policy wordings mean that coverage is intended only to cover disease within the relevant radius limit. For example, where cover is triggered by the “occurrence” of a notifiable disease within a 25-mile radius of the premises, is the insured covered only to the extent interruption was caused by the disease within that area?
- The High Court held that the insured peril is a “composite” one, made up of component parts and that occurrences of Covid-19 within the relevant policy area formed “part of one indivisible cause” that was indistinguishable from the national outbreak as a whole. Insurers challenged this finding in relation to composite peril, arguing that this effectively means that insurers are providing pandemic cover when they only intended to provide cover where the business was interrupted due to localised incidents (e.g. a gas leak or terrorist attack). This was described by one insurer as an “impermissible and radical recasting of the bargain”.
- Insurers say that the High Court’s decision offends against established principles of insurance law relating to proximate causation. They say that, at best, there are concurrent insured and uninsured causes of the interruption losses, and in this situation the law says that the policy does not respond. How the Supreme Court applies established causation principles to the novel fact scenario of a global pandemic closing down a large part of the UK economy could have significant implications well beyond this case.
- Insurers have also challenged the High Court’s criticism of the previous ‘insurer-friendly’ authority of Orient Express Hotels. The Supreme Court will have the final say as to the correct approach, an aspect of the ruling that may have significant implications for the adjustment of both property damage and non-damage BI claims in the market moving forward.
Almost nine months have passed since the FCA announced on 1 May 2020 that it would obtain a court declaration to resolve contractual uncertainty in BI insurance cover. Whilst it is a credit to all involved that such complex issues have been determined in such a short timeframe, it is hoped that the Supreme Court judgment is in sufficiently clear terms that it is possible to apply its decision with certainty to other policy wordings that have not been expressly considered, and does not simply raise new questions in this regard.
The insurance market and policyholders alike do not, in any event, have much longer to wait for the outcome. The focus of both the insurance and reinsurance markets will then turn to what happens next.
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.