Click here for the press release version.
Supreme Court ‘substantially allows’ FCA appeal on business interruption insurance claims
On Friday 15 January 2021, the Supreme Court delivered its highly anticipated judgment in the Financial Conduct Authority’s (FCA)’s business interruption insurance test case. As a result, many businesses will receive payments from insurance policies to cover their Covid-19 losses, providing them with the support needed to continue trading post-pandemic.
Back in September 2020, following an uproar from businesses across the UK, the FCA’s test case removed many roadblocks to successful claims and insurers became legally obliged to compensate clients for their Covid-19 losses. Read more on the The FCA v Arch and Others [2020] EWHC 2448 (Comm) case and its examined policies here.
The recent judgment addresses appeals brought by The FCA, the Hiscox Action Group (the “Interveners”) and six of the eight insurer defendants in the test case, in which the High Court handed down judgment on 15 September 2020. The Supreme Court judgment, which followed a “leapfrog” appeal from the High Court and an expedited hearing given the urgency of the case, brings definitive guidance on the proper operation of cover under certain non-damage business interruption insurance extensions and clarity to policyholders and insurers alike.
Background
The High Court proceedings were brought by the FCA (who was advancing the claim for policyholders) against the eight defendant Insurers.
The proceedings commenced on 9 June 2020 and were heard in July 2020 on an expedited basis under the Financial Market Test Case Scheme (the “Scheme”) set out at Practice Direction 51M of the Civil Procedure Rules. The Scheme can be used for certain claims that deal with issues of general importance which require immediate judicial guidance.
At first instance, the High Court considered policy wordings under 21 sample insurance wordings relating to business interruption insurance cover. Business interruption insurance will potentially cover the insured for damage to physical property which would lead to loss of profits and additional expenses that can arise from such damage. Many policies also extend the scope of this to include non-physical damage which leads to the insured suffering loss. It was this latter type of business interruption which was considered in the case – with significant disagreement arising between policyholders (many of whom are SMEs) and their insurers as to whether losses arising from the Government imposed national lockdowns and business closures were covered by such policies.
The High Court’s decision was handed down in November 2020, and the FCA, the Interveners and six of the insurers appealed the decision. The appeals were heard by the Supreme Court under the “leapfrog” procedure which enables an appeal in exceptional circumstances to bypass the Court of Appeal and proceed directly to the Supreme Court. The hearing took place in November 2020.
Points of Appeal
The points of appeal put forward by the parties were technical and nuanced, and can be broadly categorised as relating to:
- Certain matters of construction relating to “disease clauses” (that is, those which can be triggered by the occurrence of COVID-19, typically within a specified distance of the insured’s premises), “prevention of access clauses” (that is, those caused by public authority intervention preventing access to, or use of, premises as a result of COVID-19), and “hybrid clauses” (that is, those clauses that contain wording from both disease and prevention of access clauses).
- Whether the High Court was correct to apply certain counterfactual scenarios in relation to the operation of the clauses in relevant business interruption policies which provided for loss adjustments (the “trends clauses”).
- Whether the High Court was correct in its analysis of Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm).
The FCA were largely successful on its points of appeal and the judgment itself can be accessed at this link.
The FCA contended that the “disease” and “prevention of access” clauses in the representative sample of 21 policy types provide cover to policyholders in the context of the COVID-19 pandemic.
The High Court’s judgment in September stated that most of the disease clauses and certain prevention of access clauses (12 policy types from the sample of 21, issued by six insurers) provide cover and that COVID-19, and the Government and public’s response caused business interruption losses. The six insurers appealed those conclusions for 11 of the policy types, but the Supreme Court has dismissed those appeals, albeit for different reasons from those of the High Court.
On the FCA’s appeal, the Supreme Court ruled that cover may be available for partial closure of premises (as well as full closure) and for mandatory closure orders that were not legally binding; that valid claims should not be reduced because the loss would have resulted in any event from the pandemic; and that two additional policy types from insurer QBE provide cover.
What does this mean?
The Supreme Court’s judgment will be distilled into a set of declarations. The decision effectively removes the need for policyholders to resolve many key issues individually with their insurers and provides much needed clarity as to whether business interruption will provide coverage. This means that thousands of policyholders who were ordered to close their business premises during the first national lockdown, in response to the Covid-19 pandemic, will now have their claims for business interruption losses paid. It also means that some pay-outs – in respect of valid claims – will be higher than they may have been otherwise.
However, whilst welcome news to SMEs, each policy will also still need to be considered on its own terms against the detailed judgment and the facts of each potential claim. The test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers.
How Berkeley Rowe can assist
Policyholders with affected claims can expect to hear from their insurer soon and those with questions should approach their broker, insurer or other advisers. Berkeley Rowe has extensive experience and expertise in dealing with disputes between policyholders and insurers, as well as reviewing policy wordings.
Please do get in contact should you have a potential dispute you wish to discuss, or would like a comprehensive and thorough examination of your current policy coverage.