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Business interruption insurance test case appeal: what restrictions trigger cover?

Alex Marler, Partner, looks at one aspect of the judgment: the question of what amounts to a “restriction imposed by a public authority”.

To trigger cover for business interruption losses under a relevant policy, must a restriction be backed by law – or do general instructions from the Government suffice?

Since March 2020, the UK Government has issued instructions and guidance, and enacted legislation, aimed at mitigating the effects of the COVID-19 pandemic. This has covered restrictions on gathering and travelling, keeping a specified distance from others, the wearing of masks, and the closure of schools and certain categories of business. In many cases instructions have been issued first, with the law catching up later (if at all).

There has been a significant amount of legal and political debate regarding what precisely is covered by the successive pieces of legislation, the constitutional legitimacy of the process by which these have been enacted, the status of instructions and guidance issued by the Government but not backed by law, and the enforcement of the rules and guidance.

A significant point in this regard emerged from Friday’s appeal judgment from the Supreme Court – but significant questions remain.

Many of the policies under consideration by the court covered business interruption loss caused by “restrictions imposed by a public authority” or similar. In the first instance, the High Court accepted the insurers’ arguments that a “restriction imposed” meant only something both expressed as mandatory and backed by the force of law (i.e. the various pieces of COVID-19-related primary and secondary legislation that have been enacted). 

The FCA and the ‘Hiscox Interveners’ appealed this point on behalf of policyholders – arguing for a wider interpretation, and that instructions issued by the Government amounted to restrictions triggering cover – even if at the time there was no law to back up such instructions. 

The Supreme Court has today overturned the High Court’s ruling on this point, finding that an instruction by a public authority can amount to a “restriction imposed” whether or not such instruction is backed by the force of law.  Essentially the court held that what matters is how those affected (businesses and the public) would have understood the instruction. For example, the Prime Minister’s 20 March 2020 public declaration that certain businesses must close overnight would have been taken by business owners not as a suggestion which they could choose to take or leave, but rather as a mandatory instruction with which they were obliged to comply. 

Whilst the Supreme Court has left for later argument or agreement the question of whether any specific given instruction amounted to a “restriction imposed”, it has now held that a lack of legal basis is not a bar, and given a clear indication that if the instruction would have seemed mandatory to the reasonable policyholder, for present purposes it is to be treated as such. 

The immediate implication for insurers and policyholders is that the former will have to pay out more to the latter than may have been anticipated – most obviously for the periods between the Government’s various public instructions and the subsequent enacting of corresponding laws. There may well then be further debate on instructions issued by the Government and not in fact followed by any parallel legislation. 

How will insurers respond to this particular aspect of the appeal judgment? Most obvious might be a general reduction in the scope of cover offered, or a tightening of the relevant wording - perhaps adding words to stipulate that cover is only for losses suffered due to restrictions that have a legal basis. Even that might not be enough – the court’s comments in reaching its decision on the point make clear that businesses and the public cannot necessarily be expected to investigate the legal basis of such instructions, if the clear impression is that they are mandatory.

More broadly, this aspect of the judgment will do nothing to allay the concerns of those uneasy about what they see as rule of law and human rights issues with the Government’s approach to COVID-19 legislation and guidance. 

The judgment of course does not deal with the way in which COVID-19 legislation has been scrutinised and brought into force.  Nor of course does it convert into law any public authority instructions or guidance – nobody can (properly) be arrested or punished for declining to follow any instructions or entreaties that the Prime Minister, Public Health England or such may issue, unless their actions breach an actual corresponding law. 

However, the Supreme Court’s conclusion that such instructions may be treated as mandatory even if lacking any legal basis -  and even if only for these specific insurance purposes - may add to the concerns of some that the (understandable) focus on imposing measures for the protection of the public is allowing important distinctions between what is law and what is not to be blurred or misconstrued.

Read our summary of the Supreme Court judgment in FCA business interruption test case

The Supreme Court handed down its much-anticipated decision in the FCA business interruption test case on Friday 15 January 2021. Lead judgment was given by Lords Hamblen and Leggatt with Lord Reed in agreement. Lord Briggs gave a concurring judgment with which Lord Hodge agreed.

After seven months of intense debate, where does the Supreme Court judgment leave us in respect of business interruption claims for COVID-19-related losses?

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