UK FCA test case on business interruption insurance: Supreme Court decision preview

The UK Supreme Court will, on Friday 15 January, hand down its decision in the non-damage business interruption insurance test case.

The test litigation is the first of its kind in the UK, and the ruling will affect around 60 insurers and 370,000 policyholders. It will clearly be significant for policies covering non-damage business interruption, but it's also possible the decision will have wider implications, as the appeal submissions addressed some key insurance issues, particularly relating to causation.

Recap

The case was brought by the FCA as the first Financial Markets Test Case on an expedited basis, including a leapfrog appeal to the Supreme Court. Sample policy wordings were selected and the case proceeded on the basis of agreed facts.

The key question was whether cover was triggered under the policy wordings for business interruption losses due to the COVID-19 pandemic and the response to it, particularly the first national lockdown from March 2020.

In an unprecedented move, the FCA took arguments on behalf of policyholders, and eight insurers participated as respondents.

The High Court categorised the cover into three categories:

• "Disease" clauses that provide business interruption cover, broadly speaking, triggered by an occurrence or manifestation of a notifiable disease within the vicinity, or a specified radius (eg 25 miles), of the insured premises. The High Court found this type of cover could, in principle, be triggered by business interruption caused by the UK government's national response to COVID-19, if some instance of disease could be demonstrated in the relevant vicinity.
• "Prevention of access" clauses that provide cover, broadly speaking, for a prevention or denial of access to or use of insured premises as a consequence of action by authorities. The High Court found whether there was cover was highly dependent on individual wordings.
• So-called "hybrid" clauses that refer to both restrictions on insured premises and the occurrence or manifestation of notifiable disease. The FCA was largely, but not wholly, successful in arguing these provided cover for the pandemic.

Issues for the Supreme Court

Not every finding of the High Court is under appeal. Here are some of the key battle lines:

• Whether (and if so, the extent to which) an insurer, when adjusting a claim, can take into account pre-trigger coronavirus-related negative effects on revenue to reduce the indemnity payable.
• Whether prevention of access and hybrid clauses are triggered by public authority actions that do not have the force of law. For example, some businesses claim they suffered interruption losses because of social distancing measures and other guidance that was never legally mandated.
• Whether prevention of access and hybrid wordings require total closure of a business, or if it is sufficient that there was a change in its operations – for example, by the closure of a part of the business for which the premises is used (eg eat-in or shop-in services), or, perhaps, restrictions experienced by a substantial part of its customer base.
• Whether references to "incidents" or "events" in the relevant policy wordings mean coverage is intended to cover only disease within the relevant radius limit. For example, where cover is triggered by the "occurrence" of a notifiable disease within a 25-mile radius of the premises, is the insured covered only to the extent interruption was caused by the disease within that area?
• The High Court held that the insured peril is a "composite" one, made up of component parts, and that occurrences of COVID-19 in the relevant policy area formed "part of one indivisible cause" that was indistinguishable from the national outbreak as a whole. Insurers challenged this finding in relation to composite peril, arguing this effectively means insurers are providing pandemic cover when they intended to provide cover only where the business was interrupted due to localised incidents (eg a gas leak or terrorist attack). This was described by one insurer as an "impermissible and radical recasting of the bargain."
• Insurers say the High Court's decision offends established principles of insurance law relating to proximate causation. They say that, at best, there are concurrent insured and uninsured causes of the interruption losses, and in this situation the law says the policy does not respond. How the Supreme Court applies established causation principles to the novel fact scenario of a global pandemic closing down a large part of the UK economy could have significant implications well beyond this case.
• Insurers have also challenged the High Court's criticism of the previous "insurer-friendly" authority of Orient Express Hotels. The Supreme Court will have the final say on the correct approach, an aspect of the ruling that may have significant implications for the adjustment of both property damage and non-damage business interruption claims in the market moving forward.

Conclusion

Almost nine months have passed since the FCA announced, on 1 May 2020, its intention to obtain a court declaration to resolve contractual uncertainty in business interruption insurance cover.

Though it is a credit to all involved that such complex issues have been determined in such a short timeframe, it is hoped the Supreme Court judgment is sufficiently clear that the decision can be applied with certainty to other policy wordings that have not been expressly considered, and does not simply raise new questions in this regard.

The insurance market and policyholders alike do not have much longer to wait for the outcome. The focus of both the insurance and reinsurance markets will then turn to what happens next.

The original version of this article was published by The Insurer.