The British Supreme Court cleared the way in mid-January for companies that have suffered economic losses due to COVID-19 to collect on business interruption insurance policies.

The court clarified the tests that insured parties must satisfy to claim under such policies and overruled a significant judgment that the insurers relied on in the past to limit the scope of claims.

The Supreme Court decision brings a close to a test case that the UK Financial Conduct Authority brought in the British High Court in 2020 to test when COVID-related business interruption claims should be paid under various forms of policy wordings. (For more information, see “COVID-19 and Business Interruption Claims” in the October 2020 NewsWire.)

The case is called FCA v Arch Insurance (UK) Ltd and others [2021] UKSC 1.

Policy Wordings

Business interruption policies on which businesses are trying to collect for COVID-19 related claims have clauses that fall into three categories.

One type of clause is a diseases clause that covers losses if specified diseases occur within a specified vicinity of the business premises of the insured party.

Another clause is a prevention-of-access clause that would cover losses if the insured party is barred from using its business premises due to restrictions imposed by a government.

The last type of clause is a hybrid clause that covers losses from a combination of a disease clause and a prevention-of-access clause, such as when the spread of an infectious diseases leads to prevention of access.

The High Court said in its September 2020 decision that because of the widespread nature of the COVID-19 pandemic, disease clauses should cover COVID-19 related losses, regardless of whether there is an outbreak of the disease within the specified vicinity — for example, within a 25-mile radius of the business premises of the insured party.

The court also said that prevention-of-access clauses should be construed narrowly, although in some circumstances they should still cover COVID-related claims.

For hybrid clauses, the court said that the disease-related portion of such clauses should apply just as independent disease clauses would, although the application of the prevention-of-access portion of such clauses depends on the exact policy wording and the circumstances that led to prevention of access.

Both the Financial Conduct Authority and the insurers appealed the High Court judgment to the UK Supreme Court.

The Supreme Court did not agree with the High Court that COVID-19 related losses are covered by disease clauses in all cases. It said there must be at least one case of COVID-19 within the radius specified in the policy.

It said that an insured party would need to show an “inability to use” the business premises to collect under a prevention-of-access clause. This would be satisfied if either the business was unable to use the premises for a discrete part of its business activities or was unable to use a discrete part of its premises for its business activities. In both situations, there is a complete inability of use.

“But-For” Test

The insurers argued before the Supreme Court that a COVID-19 outbreak within the specified vicinity cannot be a cause of business interruption loss if the loss would not have been suffered “but for” the COVID cases. They said they should not have to pay a claim if the same interruption of the business would have occurred anyway as a result of other cases of COVID-19 elsewhere in the country. The Supreme Court rejected this.

The Supreme Court said the UK government’s response to COVID-19 was a reaction to information about all the cases of COVID-19 in the country. The response was national in scope because the outbreak was so widespread. The court said it is unlikely there is an enclave covering the entire specified radius around any UK business that is entirely free from COVID.

The insurers wanted to establish that the “but-for” test was not satisfied by relying on a 2010 Commercial Court judgment in case called Orient-Express Hotels Ltd v Assicurazioni General SpA ([2010] EWHC 1186 (Comm)).

This case concerned a claim for business interruption loss arising from wind and water damage to a hotel in central

New Orleans as a result of hurricanes Katrina and Rita in the autumn 2005.

The insurance policy was governed by English law. It provided cover against physical damage to property on an all-risks basis.

It also provided cover for loss due to interruption or interference with the business directly arising from physical damage to the hotel. A “trends clause” in the policy limited any claim to the loss due to business interruption that would have been suffered for a period after the physical damage if the physical damage had not occurred.

The Commercial Court said the hotel could recover loss resulting from physical damage to the hotel, but the trends clause prevented recovery for the loss of business resulting from damage to the area surrounding the hotel that made the hotel less attractive to customers.

The Supreme Court said the Orient-Express case was wrongly decided and overruled it.

It applied the same test as it did for the disease clauses and noted that business interruption loss arose because both the hotel and the surrounding area and other parts of the city were damaged by the hurricanes. Each of these causes was by itself sufficient to cause the business interruption.

In such a case when the insured peril and the concurrent uninsured peril arise from the same underlying hurricane or other event, then loss resulting from both perils operating concurrently should be covered as long as the policy does not specifically exclude the loss arising from one of the perils.

Pre-Trigger Losses

One point on which the Supreme Court disagreed with the High Court is trends clauses and reduced turnover of business suffered before the insured peril was triggered.

The High Court said that if there was a measurable downturn in business turnover due to COVID-19 before the insured peril was triggered, then it would be appropriate to take the continued downturn or increased expenses into account as a trend that is not covered by the policy as a business interruption loss.

This would mean that if as a result of public concern about contracting COVID-19 and the advice given by the UK government before the national lockdown on March 20, 2020, the turnover of a pub in the week ending on March 20 was only 70% of its turnover in the equivalent week of the previous year, no claim would be paid except to the extent of any post-March 20 further deterioration in business.

The Supreme Court said the High Court was wrong. It said when calculating loss, the full loss after the trigger event should be paid. That loss in the pub case would be the full downturn in business after March 20 compared to the base year.