Business Interruption Insurance – the Supreme Court ruling on the FCA test case

The Supreme Court has handed down judgment in the FCA test case on business interruption (“BI”) insurance, confirming that many BI insurance policies will provide cover for losses resulting from the COVID-19 pandemic.

The case is complex and the Supreme Court judgment (like the High Court judgment) is lengthy. We focus here on some of the practical implications of the case for businesses.

COVID-19 and business interruption

Over the last 10 months vast numbers of businesses have suffered losses relating to the COVID-19 pandemic, with the retail and leisure sectors particularly impacted by forced closures. Many businesses have BI insurance in place to provide cover for losses arising from interruption to the business due to various causes or “insured risks”. Standard policies often refer to interruption caused by property damage only, in which case the outcome of the FCA test case will not be relevant. However, some policies provide wider cover for losses relating to infectious/notifiable diseases and public authority restrictions. Following the March 2020 lockdown, thousands of policyholders made claims on their BI insurance policies, with many insurers rejecting the claims on the basis the effects of the COVID-19 pandemic are not covered by the policies. This led to the FCA, as regulator of the insurers, receiving numerous complaints from policyholders.

In June 2020 the FCA sought a court declaration under the Financial Market Test Case Scheme to resolve contractual uncertainty and questions around causation in BI insurance cover.  Eight insurers participated in the test case and twenty-one sample wordings from BI policies were selected. Points the High Court considered included:

1. The construction of certain insured risks to clarify whether they covered COVID-19 and the restrictions imposed, notably looking at:

• clauses typically providing cover for BI caused by the occurrence of a notifiable disease within a specified distance of the policyholder’s business premises (“Disease Clauses”);
• clauses triggered by public authority intervention preventing access to, or use of, premises (“Prevention of Access Clauses”); and
• clauses containing wording from both Disease and Prevention of Access clauses (“Hybrid Clauses”).

2. How the issue of causation between the relevant insured risk and the losses should be approached.

3. Questions relevant to the quantification of losses covered by Disease Clauses and Prevention of Access Clauses, including the effect of “pre-trigger losses” and “trends clauses”. These clauses set out how BI losses will be quantified by comparing the performance of a business to an earlier period of trading, making an allowance for business trends that would have affected the business even if the insured risk had not occurred.

The High Court ruling

The High Court decision was considered to be favourable to the FCA and policyholders. While there are variations in the policy wordings and each policy would need to be considered individually, the High Court found that most of the Disease Clauses considered in the case provide cover for losses relating to the wider COVID-19 pandemic.

The High Court also found that some of the Prevention of Access and Hybrid Clauses provide cover. However, it adopted a narrow interpretation of certain wording, including:

• Nature of the public authority restrictions: Prevention of Access and Hybrid Clauses would only provide cover where measures were imposed by public authorities through statutory instruments e.g. the Regulations made on 21 and 26 March. Instructions given by the UK Government which did not have the force of law would not satisfy the description, such as the announcements prior to 21 March. Losses arising from those earlier announcements would not be covered.

• Extent of the prevention of access / use:  Policies covering “prevention” of access would require the complete closure of the premises for the relevant business purposes. The High Court considered that a restaurant that previously offered both dine-in and take-away options pre-pandemic would not be “prevented” from accessing the premises if limited to a take-away offering due to the pandemic (although a restaurant that did previously only have a dine-in offering may be covered).

Six of the insurers appealed the decision and the FCA appealed on 4 points. Permission was given to appeal directly to the Supreme Court, by-passing the Court of Appeal, so that a final decision (and certainty) could be achieved quickly. The appeal was heard in November and judgment was handed down on 15 January.

The Supreme Court ruling

The Supreme Court dismissed the appeals of the insurers and allowed the four appeals of the FCA (in two cases on a qualified basis).

1. Disease Clauses and Causation:

While the Supreme Court interpreted the Disease Clauses more narrowly than the High Court and adopted a different approach to causation, the overall outcome was similar; the Disease Clauses cover COVID-19. The Supreme Court considered that the Disease Clauses only cover the effects of COVID-19 cases within the geographical area specified in the policy. However, each individual case was considered to be a separate and equally effective cause of the national restrictions. The Supreme Court rejected the argument of insurers that even if there was a local outbreak, there would be no cover if losses would have been suffered in any event from the wider outbreak. In practice, as long as there has been at least one case of COVID-19 in the geographical area specified in the policy, the policyholder could be covered for losses suffered as a result of the wider pandemic (not just losses specific to that single local case).

2. Prevention of Access Clauses:

• Nature of the public authority restrictions: The Supreme Court found that mandatory closure orders that were not legally binding could also afford insurance cover. This means that losses suffered following the instructions to “stay at home” and for certain businesses to close (given before the formal Regulations of 21 and 26 March) could be covered by the BI policy.  

• Extent of the prevention of access / use: The Supreme Court held in favour of the FCA’s appeal, finding that policyholders may be covered under their policies for partial closure of premises as well as full closure of premises. The Supreme Court considered it would be illogical to distinguish between restaurants that did and did not offer take-away prior to the pandemic. While “prevention” of access requires prevention, not merely hindrance, it may include prevention of access to a discrete part of the premises (e.g. the dining area of a restaurant) or to a discrete part of the policyholder’s business activities (e.g. providing a dine-in service) even though take-away can continue.

3. Trends clauses and pre-trigger losses:

The Supreme Court rejected the argument of insurers that because trading had already been affected by the pandemic before the relevant insured event (e.g. mandatory closure) the amounts payable would be reduced. The Supreme Court found that trends or circumstances for which adjustments should be made do not include those arising out of the same underlying cause as the insured risk, namely the COVID-19 pandemic. Similarly, pre-trigger losses resulting from the insured risk should be disregarded. If a shop was forced to close, it may be covered by a Prevention of Access Clause. This would involve comparing the actual turnover during the closure with the standard turnover. If the shop had already suffered a reduction in turnover prior to the closure due to the pandemic, that reduction would be disregarded in calculating the standard turnover since those trends and losses arise out of the same cause as the shop closure i.e. the pandemic. 

Although this judgment is only directly legally binding on those insurers who participated in this test case, it will provide guidance for all policies with similar wording. The judgment in full can be found here.

Next steps for policyholders

1. Check the wording of your BI policy. If it only covers physical damage to the property, the FCA test case will not be relevant. If, however, the BI policy wording is the same as, or similar to, the wording considered in the FCA test case and you have not yet made a claim, contact your insurers/brokers. Even where a claim has previously been rejected, the insurers should now be revisiting the claim in light of the Supreme Court judgment.  

2. The FCA is publishing a number of materials on its website to assist policyholders with their claims, including guidance notes, lists of policies that may be affected and Q&A. The FCA and Supreme Court are also preparing declarations confirming the extent to which the relevant policies cover BI losses arising from the pandemic. Policyholders may want to refer to these documents when reviewing their own policies and making claims.

3. This decision relates to existing policies. As a result of the judgment, insurers may review the wording of their policies and the premiums payable. Policyholders should consider these carefully on any renewal.   

Significance for Commercial Lettings

1. Negotiations: Where tenants are required under their leases to continue to pay rent despite the pandemic / lockdowns, many have been negotiating rent payment arrangements with their landlords. A number of factors are frequently taken into account in these negotiations, including the ability of the tenant to pay and the financial liabilities of the landlord (such as mortgages on the property). The extent to which tenants are covered by insurance for losses suffered due to the pandemic would be relevant to these negotiations, and landlords may want to ask their tenants about this.

2. Loss of rent insurance: While the FCA test case only focused on BI insurance, the principles established by the Supreme Court may be relevant to other insurance cover, such as loss of rent insurance put in place by landlords. Like BI cover, policies often cover loss of rent relating to physical damage to the premises. However, if the cover is more extensive, containing similar Disease Clauses, Prevention of Access Clauses or Hybrid Clauses to those considered in the test case, the Supreme Court decision could be persuasive.