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Business Interruption Insurance – Relief for Businesses?

On 15th January 2021 the UK Supreme Court handed down its decision in respect of a number of related appeals concerning issues of principle on the interpretation of business interruption policy coverage and causation in respect of claims for losses arising in the context of the COVID-19 pandemic. The result provides some hope for businesses that their policies may respond for some of the losses suffered as a consequence of the guidance and laws passed in response to the pandemic.

The appeals stemmed from a decision of the English High Court in a case brought by the Financial Conduct Authority against eight of the major providers of business interruption insurance. The case was brought under UK statutory provisions which empowered the FCA to bring a test case. The approach of the case was to consider a representative sample of standard form business interruption policies in the light of agreed and assumed facts. A total of 21 policies were considered. It was acknowledged that there are perhaps a further 700 different policies provided by approximately 60 insurers which have not been specifically considered.

At trial the FCA was substantially successful. The appeals were, therefore, largely brought by the relevant insurers. It is impossible to do justice to the excellent submissions of counsel for all parties and their Lordships’ careful judgment in this short note. The full judgment can be read here.

The Issues

The Supreme Court considered the following issues:

  • The interpretation of “disease clauses” (which cover business interruption losses resulting from any occurrence of a notifiable disease within a specified distance of insured premises);
  • The interpretation of “prevention of access” clauses (which cover business interruption losses resulting from public authority intervention preventing access to, or the use of, business premises) and “hybrid clauses” (which contain both disease and prevention of access elements);
  • The question of what causal link must be shown between business interruption losses and the occurrence of a notifiable disease (or other insured peril specified in the relevant policy wording) (“causation”);
  • The effect of “trends clauses” (which prescribe a method of quantifying business interruption losses by comparing the performance of a business to an earlier period of trading adjusted to take into account other factors which would likely have impacted on business performance); and
  • In relation to causation and the interpretation of trends clauses, the status of the decision of the English Commercial Court in Orient-Express Hotels Ltd v Assicurazioni Generali SpA (trading as Generali Global Risk) [2010] EWHC 1186 (Comm) (“Orient-Express”)

The UK Timeline

The agreed and assumed factual matrix is set out in full in the High Court judgment. At its absolute fundamentals, it was:

  • On 12th January 2020 the World Health Organisation declared that a novel coronavirus strain had been identified in China. The virus was named “SARS-CoV-2” and the disease it caused “COVID-19”. On 30th January the WHO declared the outbreak to be of “international concern.”
  • On 5th March 2020, COVID-19 was categorised as a “notifiable disease” and SARS-CoV-2 a “causative agent” under the relevant UK statutory regime.
  • The WHO declared a pandemic on 12th March 2020.
  • On 16th March 2020 the UK Prime Minister held a press conference urging people to stay at home and work from home where they possibly could. On 20th March the schools were closed. Cafes, pubs, bars, restaurants, nightclubs, theatres, cinemas, gyms and leisure centres were all told to close as soon as possible and not to re-open the next day.
  • On 21st March 2020 the UK Government made Regulations which provided for the closure of certain businesses (including all of those listed above, as well as bingo halls, concert halls, betting shops, spas, museums and galleries. Contravention of the Regulations was made a criminal offence.
  • On 23rd March 2020 the Prime Minister instructed everyone to remain at home except for shopping for essential items and essential travel to and from work (where people could not work at home). He announced the immediate closure of all non-essential shops and a prohibition on gatherings of more than 2 people in a public place and all social events (with the exception of funerals). Businesses were advised that if they breached the Regulations they would be subject to prohibition notices and potentially unlimited fines.
  • The Coronavirus Act 2020 was passed on 25th March 2020.
  • The 21st March Regulations were repealed and replaced with more extensive Regulations on 26th March 2020. These required the closure of nail, beauty and hair salons and barbers, tattoo and piercing parlours, playgrounds, outdoor markets and car showrooms, retail shops, holiday accommodation and places of worship. People were also prohibited from leaving their homes “without reasonable excuse”.

Various legislative changes have been made since, both to relax and to tighten the various restrictions in force as the pandemic progressed.

The Decision

In very broad summary:

  • Disease Clauses. Typically these clauses concern business interruption losses resulting from any occurrence of a notifiable disease at, or within a specified geographical radius of, the insured premises. The Supreme Court held that such clauses provide cover for only the relevant effects of cases of COVID-19 that occur at, or within a specified radius, of the insured premises. They do not cover effects of cases of COVID-19 that occur outside that geographical area.
  • Prevention of Access Clauses (where policy wording relies on there being a ‘prevention of access’ to business premises, or a combination of a prevention of access and the occurrence of a notifiable disease, in order for cover to be engaged).
    • It is possible that mandatory instructions issued by the Government (but lacking the force of law) could trigger cover.
    • Cover might respond if the business is prevented from accessing its premises for a discrete part of its business activities, or if it is unable to use or access a discrete part of its premises for its business activities (i.e. it does not require a complete inability to access business premises or undertake any business activities for the policy to respond).
    • It is possible (but probably rare) for restrictions imposed on customers visiting a business premises to trigger cover under the policy wording of this type of insurance. Businesses affected by a drop in trade as a consequence of ‘stay at home’ advice (but not actually ordered to close) will not be able to make a successful claim.
  • Causation. The crux of this issue was the “but for” test – insurers had argued that the decision of the High Court was inconsistent with the “but for” test; how can it be said that the losses would not have been incurred “but for” the specific case(s) within the relevant radius when the restrictions would have been imposed anyway because of cases outside the relevant radius. The Supreme Court held that:
    • In assessing the cause of the restrictions on businesses which were imposed by the UK government in order to control the pandemic, each individual case of COVID-19 ought to be treated as an equal cause of the imposition of the national measures (in other words, if a case had occurred within the required radius then it was causative of the restrictions). In other words, the “but for” test did not, or did not necessarily, have to be satisfied.
    • In “disease clauses” it would be sufficient to prove that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause.
    • The issue was more difficult in “prevention of access” and hybrid wordings. The Supreme Court held that business interruption losses are covered only if they result from all the elements of the risk covered by the clause operating in the required causal sequence. However, the fact that such losses were also caused by other (uninsured) effects of the COVID-19 pandemic does not exclude them from cover under such clauses.
  • Trends Clauses. Almost all the policy wordings considered contained “trends clauses” which provide for business interruption losses to be calculated by adjusting the results of the business in the previous year to take account of ‘trends’ or other circumstances affecting the business in order to estimate as nearly as possible what results would have been achieved if the insured peril had not occurred. The Supreme Court held that these clauses should not be construed so as to take away cover provided by the insuring clauses and that the trends and circumstances for which the clauses require adjustments to be made do not include circumstances arising out of the same underlying or originating cause as the insured peril (i.e. in the present case the effects of the COVID-19 pandemic).
  • Orient Express. The Orient Express case was a decision by the English Commercial Court on appeal from an arbitral decision as to the interpretation of a trends clause similar to those under consideration before the Supreme Court. It concerned damage to a hotel in New Orleans as a result of damage from a hurricane. The arbitral panel and the Commercial Court held that the business interruption policy did not cover losses which the hotel would have suffered in any event as a result of damage to the city of New Orleans (even if the hotel itself was not damaged). As can be seen from the above, the Supreme Court held that this case was wrongly decided. Interestingly, one member of the arbitral panel and the Commercial Court judge who decided the Orient Express case have both become judges of the Supreme Court (Lord Leggatt and Lord Hamblen) – in fact two of the five judges who heard the present case!

What about Jersey?

This is a UK case determining UK law. The Jersey courts may determine that Jersey law is not the same. Ultimately, I think it unlikely that the Jersey courts would come to a different view for the following reasons:

  • Whilst the decision of the Supreme Court is not binding, it is highly persuasive – it is the reasoned decision of five of the most senior judges in the UK, each of which is also a member of the Judicial Committee of the Privy Council (Jersey’s highest court), following four days of argument presented by some of the leading QCs in this area instructed by some of the leading UK firms of solicitors.
  • The insurers writing business in Jersey are, to a large extent, the same as those writing business in the UK, or are affiliated with UK insurers, and will likely be accessing the same re-insurance markets. In the circumstances, there is likely to be a degree of similarity in the wording of the various business interruption policies in operation in Jersey and those considered by the Supreme Court.

In any event, it is important to remember that the test case was not intended to address all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for both policyholders and insurers. The expressed wish of the Supreme Court was to enable all parties, businesses and insurers alike, to understand the proper interpretation of the various policies so that claims can be resolved sensibly, efficiently and quickly. Ultimately, much will depend on the precise wording of the policy in question and the precise factual circumstances applying to the business in question. For those business owners who have suffered losses as a result of the pandemic it is certainly worth reviewing your policy documents.

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