Many small and medium-sized enterprises were badly affected by the first lockdown and suffered significant losses. This led to an increase in the number of business interruption insurance claims. However, until recently, uncertainty reigned as there are a wide-range of policies covering business interruption and it was unclear whether COVID-19 would permit their application. The Financial Conduct Authority (FCA) urgently tried to clarify the situation by bringing a test case to court on behalf of SMEs against eight insurers. Here is a breakdown of the case and the issues at stake.
As businesses tried to claim insurance payments from issuers, it was unclear whether the latter were liable for the impact of COVID-19 on businesses and, if so, under what conditions. The FCA’s test case was able to clarify many of these potential litigious claims. The case selected a representative sample of 21 types of policies from eight insurance giants such as Hiscox, RSA, QBE and Zurich which it brought to court on behalf of businesses. The case is significant in scope: it will impact 700 types of policies, 60 insurers, 370,000 policyholders and billions in insurance claims.
The High Court’s judgement in September offered an initial lifeline to businesses and a highly anticipated set of guidances to insurers. Different conclusions were reached depending on the wording of the agreements, but in the majority of cases, the High Court sided with the FCA, represented by Herbert Smith Freehills. The Court considered three particular types of clauses:
disease clauses (which cover business interruption in consequence of a notifiable disease within a specified radius),
prevention of access clauses (which cover business interruption in consequence of prevention to access or use of the premises by government or another authority)
hybrid clauses (which cover restrictions in relation to notifiable diseases and restrictions imposed by a public authority).
The High Court concluded that disease clauses would apply as individual outbreaks of COVID-19 constituted a notifiable disease, so long as cases appeared in the prescribed radius. In particular, the Court declared that the interruption did not need to be directly attributable to the disease, but could be an indirect cause of it. Meanwhile, prevention of access clauses were analysed more restrictively, such that their application will be more nuanced despite similarities in cases. Hybrid clauses will also require close examination, on a case-by-case basis.
However, several issues remain unresolved, such as causation and trend clauses. The FCA, due to time concerns, appealed directly to the Supreme Court through ‘leapfrog’ appeals (appeals which by-pass the Court of Appeal) and the Supreme Court ruled in favour of businesses on January 15th.
The Court unanimously dismissed the insurers’ appeals and allowed all four of the FCA’s appeals. It declared that hybrid and prevention of access clauses will be triggered more readily than what the High Court had ruled. Losing access to a part of the premises is sufficient, even in lieu of a legislative order, and need not be linked to the pandemic through a direct “but for” cause. The Supreme Court has effectively lowered the threshold for the application of hybrid and prevention of access clauses. The judgement also dealt with ‘trend clauses’: those that limit the indemnity payable by the application of general ‘trends’ (i.e. unrelated economic crises…etc). These clauses try to predict what the scenario would have been but for the event for which the business is claiming its insurance. The Supreme Court disagreed with the insurers’ argument relying on Orient Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm) and found that the business interruption was inextricably linked to the insured peril and thus not excludable. The Court went one step further to overturn Orient Express v. Assicurazioni.
The tangible effect of the ruling is that all policies stipulated on the appeal will provide cover for business interruption caused by COVID-19. Tens of thousands of SMEs will receive insurance payouts covering losses incurred during the first national lockdown. As Sheldon Mills, the executive director responsible for consumers and competition at the FCA, said, “today’s judgment decisively removes many of the roadblocks to claims by policyholders”. Paul Lewis from Herbert Smith Freehills, who represented the FCA, described the result as “very positive”. This comes as a relief to businesses which have suffered additional costs with the unpredictable tier system imposed by the government. Individual payouts are in the tens of thousands of pounds and should reset business to a pre-pandemic position.
Although the ruling affects many of the current claims, barristers predict that more litigation will come, over both the clauses that were not covered by the FCA’s test case and over the amounts owed. This may require law firms to provide information to clients ex ante concerning new interpretations of their contracts. Moreover, given that the initial High Court ruling did not explicitly approve all claims and that some were not appealed insurers will have to closely examine the judgement in order to see which policy applies in each case. The ruling will cost the insurance sector an estimated £900 million.
The Supreme Court’s ruling will also have long-term legal consequences for insurance claims; it overturned an important legal precedent which established that losses due to natural disasters should not take into account the economic impact of the disaster. The ‘but for’ test of causation will not necessarily determine the application of trend clauses, thus giving more discretion to courts. Furthermore, the consequences of an insured peril should not diminish the scope of the indemnity. The Supreme Court’s conclusion has the potential to determine the scope of many other insurance policies beyond COVID-19. Insurance companies will need a large part of their policies’ wording in order to mitigate their liability.