Business Interruption Losses: A Win for Small Firms

When the UK first entered a national lockdown in March last year, some businesses that were forced to close submitted claims through their business interruption insurance policies for the loss of earnings suffered during the lockdown. However, many insurers refused to pay, prompting the FCA to take a test case of ’28 clauses in the 21 lead policies written by the named insurers’[1] under the Financial Markets Test Case Scheme. Today, the Supreme Court handed down their judgment in this case, focussing on the following key issues:

  • the interpretation of “disease clause” (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);
  • the effect of “trends clauses” (which prescribe a standard method of quantifying business interruption losses by comparing the performance of a business to an earlier period of trading);
  • the significance in quantifying business interruption losses of effects of the pandemic on the business which occurred before the cover was triggered (“Pre-Trigger Losses”); and
  • in relation to causation and the interpretation of trends clauses, the status of the decision of the Commercial Court in Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm).[2]

Disease clauses

Lord Hamblen and Lord Leggatt disagreed with the High Court’s interpretation of an exemplar clause in an insurance policy of Royal & Sun Alliance Insurance Plc, which ‘covers business interruption losses resulting from any occurrence of a notifiable disease within a specified geographical radius (typically 25 miles) of the insured premises.’[3] The High Court, the Lords argue, had mistakenly constructed this clause to mean ‘a Notifiable Disease of which there is any occurrence within a radius of 25 miles of the Premises’[4] (Supreme Court’s Emphasis) which the Supreme Court argued ‘[stood] the clause on its head.’[5] Further, they concluded that the definition of ‘notifiable disease’ makes it clear that the insured peril is not the disease itself, but individual cases of ‘illness sustained by any person resulting from’ a relevant disease, and suggest that this approach to interpretation should apply to the wording of other disease clauses.[6] Lord Briggs and Lord Hodge, however, would have upheld the High Court’s interpretation of the clause, but otherwise agree with the main judgment.

Prevention of access and hybrid clauses

These clauses ‘specify a series of requirements which must all be met before the insurer is liable to pay.’[7] In some policies, clauses apply only when a public authority imposes restrictions following an occurrence of a notifiable disease. The Supreme Court disagreed with the interpretation of the High Court, who had held that ‘this requirement is satisfied only by a measure expressed in mandatory terms which had the force of law.’[8] The Supreme Court criticised this interpretation as too narrow, instead holding that ‘an instruction given by a public authority may amount to a “restriction imposed” if it carries the imminent threat of legal compulsion or is in mandatory and clear terms and indicates that compliance is required without recourse to legal powers.’[9] The Supreme Court also noted that some general measures, for example certain ‘instructions in mandatory terms from the Prime Minister’[10] are more likely to satisfy this test.[11]

The Supreme Court also held that business interruption loss resulting from ‘inability to use’ the insured premises is to be construed as complete, and not partial inability to use. As such hinderance of use would not suffice. However, they also ruled that this requirement may be satisfied where a policyholder is unable to use the premises for a discrete business activity or is unable to use a discrete part of the premises for its business activities. They further clarified that ‘a department store which had to close all parts of the store except its pharmacy would potentially be a case of inability to use a discrete part of its business premises.’[12]

Causation

The judgment also confirmed the findings of the High Court relating to the legal causation of business interruption losses. They held that ‘all the individual cases of Covid-19 which had occurred by the date of any Government measure were equally effective “proximate” causes of that measure’ and it is ‘therefore sufficient for a policyholder to show that at the time of any relevant Government measure there was at least one case of Covid-19 within the geographical area covered by the clause.’[13]

Trends Clauses

The Supreme Court also held that trends 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 causes as the insured peril (i.e. the present case effects of the Covid-19 pandemic).’[14]

This ruling explicitly recognised that ‘the aim of such clauses 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’, and so ‘the trends or circumstances referred to in the clause for which adjustments are to be made should generally be construed as meaning trends or circumstances unrelated in that way to the insured peril.’[15]

Pre-Trigger Losses

The Supreme Court departed from the opinion of the High Court on the issue of adjustments to be made under the trends clauses to reflect a measurable downturn in the turnover of a business prior to the triggering of the insured peril clause. The Supreme Court confirmed that adjustments should only be made to reflect circumstances affecting the business which are unconnected with Covid-19’[16] and thus downturns prior to the triggering of the insured peril but as a result of Covid-19 are not to be taken into account.

Status of Orient-Express

This judgment represents a departure from the decision of the High Court in Orient Express [2010] EWHC 1186, whereby policy cover ‘did not extend to include business interruption losses which would have been sustained anyway as a result of the damage to the city of New Orleans even if the hotel itself had not been damaged.’[17]

Impact/Benefits for Eligible Businesses

Manoj Vaghela, partner at Charles Russell Speechlys, said: ‘this allows businesses to recover losses caused by Covid-19 cases within, for example, a certain radius of their premises even if it would still have suffered loss of turnover because of Covid cases outside of that area.’[18] This forces insurance companies to pay out on these disputed policies, with claims estimated to be worth at least £1.2bn.’[19]According to the BBC, this will benefit tens of thousands of small businesses across the country, covering losses from the first national lockdown. This ruling provides guidance to insurance firms, courts and businesses relating to hundreds of policies, affecting 370,000 small businesses.[20] Sheldon Mills, from the FCA, said: ‘Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Today’s judgment decisively removes many of the roadblocks to claims by policyholders.’[21]

However, since this issue was first explored, insurance policies will have been amended, and so new and renewing customers will not be able to claim these losses from the most recent bout of lockdown measures unless clearly stated as part of their cover.[22]

Scotland and Northern Ireland are expected to use this judgment to rule in similar cases.


[1] Hiscox Action Group v Arch Insurance (UK) Ltd and others [2021] UKSC 1

[2] The Supreme Court Press Summary, 15 January 2021, available at <https://www.supremecourt.uk/cases/docs/uksc-2020-0177-press-summary.pdf&gt;

[3] Ibid

[4] Hiscox Action Group v Arch Insurance (UK) Ltd and others [2021] UKSC 1, [61] available at <https://www.supremecourt.uk/cases/docs/uksc-2020-0177-judgment.pdf>

[5] Ibid

[6] Ibid, [82]

[7] Press Summary, 15 January 2021

[8] Ibid

[9] Ibid; Hiscox Action Group, [121]

[10] Press Summary, 15 January 2021

[11] Hiscox Action Group, [110], [124]

[12] Hiscox Action Group, [138]

[13] Press Summary 15 January 2021; Hiscox Action Group, [212]

[14] Ibid

[15] Press Summary 15 January 2021; Hiscox Action Group, [268]

[16] Press Summary 15 January 2021; Hiscox Action Group, [294]

[17] Press Summary 15 January 2021; Hiscox Action Group, [299-300]

[18] Insurance Business, ‘Recealed: The Supreme Court ruling for FCA business interrupton insurance case, 15 January 2021, available at https://www.insurancebusinessmag.com/uk/news/breaking-news/revealed-the-supreme-court-ruling-for-fca-business-interruption-insurance-case-243648.aspx

[19] Sky News, ‘Covid-19: Supreme Court backs small firms over business interruption insurance claims, 15 January 2021, available at https://news.sky.com/story/covid-19-supreme-court-backs-small-firms-over-business-interruption-insurance-claims-12188322

[20] BBC News, ‘Insurers must pay small firms for Covid lockdown losses’, 15 January 2021, available at https://www.bbc.co.uk/news/business-55661702

[21] Ibid

[22] Ibid

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