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Hot off the press — summary of the Supreme Court judgment in FCA business interruption test case

The Supreme Court has today (Friday 15 January 2021) handed down its much-anticipated decision in the FCA business interruption test case.

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?

Disease clauses

  • The Supreme Court deviated from the findings of the High Court in respect of the construction of disease clauses although, for reasons of causation, (referred to below) such interpretation did not alter the overall finding of prima facie cover under disease clauses.
  • The Supreme Court disagreed with the High Court’s interpretation of “occurrence” and found that it is synonymous with “event”, i.e. “something which happens at a particular time, at a particular place, in a particular way” (Axa Reinsurance (UK) plc v Field [1996] 1 WLR 1026). It follows that each case of COVID-19 across the United Kingdom was a separate occurrence of the disease, rather than defining “occurrence” as the general outbreak of Covid-19 as a whole.
  • Although an infectious disease has the potential to affect a wide area and spread outside of any geographical restriction, this did not mean that the policy wording could be manipulated to extend any geographical requirement. Therefore, any cases of COVID-19 outside of the prescribed radius do not form part of the insured peril and cover is only provided for interruption caused by cases of COVID-19 within the specified radius.
  • The Supreme Court therefore found that there was no difference between policies which referred to an “occurrence” of a disease and those which referred to an “incident” or “event”. This removed the differentiation at first instance between the majority of the representative disease clauses and QBE 2 and 3.

Prevention of access/hybrid clauses

The points on appeal relevant to prevention of access and hybrid clauses included (i) the High Court’s findings that “restrictions imposed” or orders of a relevant authority required the force of law, and (ii) that an “inability to use” or “prevention of access” required a complete cessation of business or total closure of the insured premises.

Restrictions imposed

  • The Supreme Court widened the definition of “restrictions imposed” by a competent authority and removed the strict requirement that such measures have the force of law.
  • The Supreme Court agreed that “imposed” connotes compulsion but considered that a mandatory instruction from a competent authority could qualify as a “restriction imposed” even if it did not involve the exercise of legal powers.
  • The pronouncement of the Prime Minister of 20 March 2020 which required businesses to close was a “clear, mandatory instruction given on behalf of the UK Government” even when it was not yet reinforced by legislation.
  • Consideration should be given to how a reasonable policyholder would interpret the word “imposed”. The Supreme Court noted that an instruction may qualify as a “restriction imposed” if it would be reasonably understood that compliance would be required. Such instruction must be “in mandatory terms, but also in clear enough terms to enable the addressee to know with reasonable certainty what compliance requires”. Such assessment will of course be fact-specific and open to discussion.
  • The Supreme Court did not conclude whether “restrictions imposed” would extend to the general measures introduced in March 2020 including the stay at home message, social distancing advice, and the prohibition on gatherings and commented that this point would not be resolved by the test case and would be left over “for agreement or further argument, although the argument is clearly stronger in relation to the latter”. Uncertainty on this issue therefore remains.
  • This wider definition of “restrictions imposed” did not extend to policies that required “enforced closure” which would not be triggered by advice or exhortations.

Inability to use

  • The Supreme Court agreed that an inability to use would not be satisfied by an impairment or hindrance in use. However, it did not agree that such clauses would require a complete inability to use the premises for all purposes. Instead, the judgment finds that “inability to use” would be satisfied if “the policyholder is unable to use the premises for a discrete part of its business activities or if it is unable to use a discrete part of its premises for its business activities”.
  • However, it must still be an inability to use part or all of the premises, rather than a disruption or hindrance. In highlighting this, the Supreme Court confirmed that it considered it to be unlikely that a Category 3 or Category 5 business (businesses which were not ordered to close) would be able to establish an inability to use the premises.

Prevention of access

  • In much the same way, the Supreme Court decided that a business could suffer a prevention of access if it experienced such prevention “to a discrete part of the premises and/or for the purpose of carrying on a discrete part of the policyholder’s business activities”.
  • In applying this conclusion to the example of a restaurant which started a takeaway business when required to close, the Supreme Court held that there could be a prevention of access/inability to use the dining area of the restaurant and/or a prevention of access or inability to use the premises for the business activity of providing a dine-in service.
  • The Supreme Court further held that the Prime Minister’s statement on 16 March 2020 telling people to stay at home did not cause a prevention of access to an insured business. Further, cases in which the stay at home order found in Regulation 6 of the 26 March Regulations qualified as a prevention of access would likely be rare.

Causation, trends clauses and pre-trigger losses

The Supreme Court provided detailed and helpful analysis of the correct test of causation and the application of the test of proximate cause, including the consequences of its findings on the application of trends clauses and the effect of pre-trigger losses.

  • The starting point when considering causation should be to focus on the “common sense” view of what actually caused the loss claimed.
  • The Supreme Court decided that, whilst the ‘but for’ test was almost always the correct test of causation, it would be inadequate in certain circumstances.
  • Since the Supreme Court found that disease clauses provided cover only for losses caused by occurrences of COVID-19 within the specified radius, it had to determine whether such occurrence was a proximate cause of the loss. In doing so:
  • The Supreme Court held that all cases of COVID-19 across the United Kingdom were “equal causes of the imposition of national measures” and that each occurrence of COVID-19 was a separate cause of the loss and they together formed multiple concurrent causes of the Government action and subsequent losses.
  • It would be enough for a policyholder to show that its business interruption was a result of the Government action which was taken in response to all cases of COVID-19, as long as they could evidence at least one case of Covid-19 at the time within the geographical limit.
  • Under prevention of access clauses, it would not be correct to reject cover because loss would have been suffered anyway due to other consequences of the COVID-19 measures such as the general public reaction to the pandemic. Just because such losses would have occurred even without the imposition of restrictions does not mean that they would not be recoverable.
  • Cover for risk of all elements of the insured peril “acting in causal combination to cause business interruption loss” whether concurrently caused by other uninsured, non-excluded consequences of the pandemic.

Trends clauses

  • Trends clauses should not be applied to delineate the scope of cover and are solely part of the quantification machinery. The Supreme Court therefore held that trends clauses should be construed consistently with the insuring clauses and should not be treated as a form of exclusion.
  • The purpose of a trends clause is to “arrive at the results that would have been achieved but for the insured peril and circumstances arising out of the same underlying or originating cause”.
  • Therefore, trends clauses should not be interpreted to reduce the level of cover on the basis that the business would have suffered a reduction in turnover anyway due to uninsured losses which were “inextricably linked” to the insured peril, i.e. uninsured losses which had the same underlying or originating cause.

Pre-trigger losses

  • The Supreme Court allowed the FCA’s appeal concerning the treatment of pre-trigger losses. Whilst the High Court had determined that insurers could account for a downturn in trade due to the effects of COVID-19 prior to cover being triggered, the Supreme Court did not agree with this approach.

Orient Express

One of the headline points from today’s judgment is the Supreme Court’s decision that the case of Orient Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm) was wrongly decided and should be reversed.

  • The Supreme Court found that where an insured peril and uninsured peril arise from the same underlying cause, i.e. the hurricane in Orient Express, and operate concurrently, loss resulting from both causes would be covered (unless such uninsured peril was expressly excluded). The Supreme Court’s assessment was that circumstances which had the “same underlying originating cause” as the insured damage should be excluded from the application of the trends clause, i.e. any damage stemming from the occurrence of the hurricane should not be included in any trends assessment.
  • Lords Hamblen and Leggatt recognised the role they played in the decision in Orient Express, commenting that they “invoke whatever ways by which we may “gracefully and good naturedly” surrender “former views to a better considered position.””

The way forward

We note the following comment from the judgment:

It is hoped that this determination will facilitate prompt settlement of many of the claims and achieve very considerable savings in the time and cost of resolving individual claims.”

No doubt the decision goes some way to providing certainty on the nature and scope of cover provided under the sample policies analysed in the test case. It also provides clarity on the application of trends clauses and puts to bed issues relating to the decision in Orient Express. That certainty is welcomed.

However, throughout these proceedings, it has been acknowledged that there is a need to consider the specific wording in question, the facts relating to the claim under it, and to apply the law to those facts. No two claims are the same and it will therefore be necessary to consider and apply the Supreme Court’s decision to each matter - that will produce discrepancies and/or distinctions. Further, not all policy wordings mirror the sample considered by the court. Differences in policy wordings produce different outcomes, and there will remain scope for much debate — as claims are reviewed on a case by case basis issues will emerge that simply have not been addressed in these proceedings. It is safe to say that this judgment does not (and was not intended to) provide all the answers to policy coverage for all COVID-19 BI claims and that there will likely be more debate on the subject to come.

For further support or guidance on this issue, contact our insurance law solicitors.