Supreme Court Ruling on Business whether Interruption Insurance Triggered by the Response to the Pandemic
The Supreme Court has partly allowed an appeal by the Financial Conduct Authority (“FCA”) on behalf of policyholders and dismissed the insurers’ appeals in the business interruption insurance test case brought by the FCA. Link: https://www.supremecourt.uk/cases/docs/uksc-2020-0177-judgment.pdf
This judgment will result in more policy holders being able to rely on their business interruption insurance policies to recover loss suffered due to the COVID-19 pandemic and the losses recoverable under responding policies may in some cases be greater.
Business interruption insurance protects policyholders against the risk of financial losses and related expenses incurred as a result of disrupted operations arising from physical damage and, in some instances, non-physical damage, e.g. the impact of a notifiable disease or prevention of access to the place of business. Many businesses have business interruption cover in place, but it is most common in the hospitality and leisure sector. Business interruption policies are different to the building insurance and “loss of rent” policies typically taken out by landlords at the tenants’ cost.
As a result of the COVID-19 pandemic, business owners have suffered major losses and many turned to their business interruption policies to cover the losses suffered. Insurers disputed that the business interruption policies provided cover and in response, proceedings were brought by the FCA – acting on behalf of policyholders – to obtain court declarations as to whether 21 sample business interruption policies issued by eight insurers provided cover in principle for business interruption losses arising from the pandemic.
The High Court ruled in September 2020 that cover was available under most (but not all) of the policy wordings considered. This decision was appealed and permission was granted for the appeal to ‘leapfrog’ the Court of Appeal and be heard directly by the Supreme Court. The Supreme Court substantially allowed the appeals of the FCA on certain grounds upon which they did not succeed at first instance, whilst unanimously dismissing the insurers’ appeals. The effect is to expand the number of policies which will now respond and, in some cases, increase the amount of loss which may be covered.
The key elements of the Supreme Court’s decision on the cover offered by business interruption policies with non-damage clauses in relation business interruption losses arising from the pandemic (“pandemic cover”) is set out below. There does not need to be a complete cessation of the policyholder’s business or activities. It is enough for there to be interference or disruption if it impacts the financial performance of the business.
The Supreme Court came to the same conclusion as the High Court on this “disease clauses” but for different reasons. In principle, clauses of this nature provide cover for business interruption caused by at least one case of illness resulting from COVID-19 occurring within the specified radius of the premises set in the policy. The fact that there were also cases outside this radius which caused interruption to the business does not affect the cover provided. A causal link between the relevant cases within the specified radius and the interruption to the business will need to be shown. However, where the interruption stems from lockdown restrictions, a sufficient causal link is showing that at least one case occurred in the relevant radius before those restrictions were introduced.
The Supreme Court widened the potential cover offered by these types of clause in two ways: − Where a mandatory restriction is required, Government guidance can in principle be mandatory if it carries the imminent threat of legal compulsion or its terms and context clearly indicate that compliance is required without recourse to legal powers. In essence, the Prime Minister’s broadcasts where he instructed the public to “stay at home” should now be considered a policy trigger. This is in line with the Government’s previous announcement that following a meeting with a small number of insurers, the entire insurance industry had agreed that those instructions would be treated as binding restrictions for the purposes of business interruption policies.
NPL Legal will continue to closely monitor developments in this area of the law in order to provide our clients with the most up to date and cogent advice.
