Business interruption insurance: Hats off to the Supreme Court

Stuart Pemble is inspired by the Supreme Court’s erudition, decency and speedy dispute resolution in its decision on whether business interruption insurance policies can cover losses caused by Covid-19. Key point The Supreme Court has cleared the way for policyholders with certain types of business interruption insurance to claim for losses caused by the pandemic. Anyone who has read Bleak House will need no introduction to the idea that civil litigation can waste a lot of time and even more money. And, while Jarndyce v Jarndyce is (thankfully) both a fictional case and one set more than 150 years ago, the risks that parties to civil disputes face remain a challenge for judicial systems everywhere. So, although acknowledging that our own legal system doesn’t lack its troubles, it is only right to record that the Supreme Court reaching its decision on whether certain business interruption insurance policies cover losses caused by the Covid-19 pandemic in just over seven months after proceedings were commenced is worthy of considerable praise. And while the insured beneficiaries seeking compensation in Financial Conduct Authority v Arch Insurance Ltd and others [2021] UKSC 1; [2021] PLSCS 12 may well have wished for an even speedier resolution, the Financial Markets Test Case Scheme (under which the proceedings were brought) has fulfilled its purpose of achieving “immediately relevant and authoritative English law guidance”. As Lords Hamblen and Leggatt concluded in their leading 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.” The issues Most business interruption insurance policies only cover physical damage to property and not losses of the sort caused by the pandemic. However, some contain extensions – disease clauses, prevention of access clauses and hybrid clauses (which combine the main elements of disease and prevention of access) – which respectively relate to losses caused by (i) notifiable diseases (Covid-19 is one); (ii) public authorities preventing or hindering access to or the use of business premises; or (iii) both. The Supreme Court (considering a number of test cases involving leading insurers, each of which wanted to limit its exposure to potential claims) had to decide whether the pandemic and the UK government’s response to it meant that the insured beneficiaries could claim under the extensions. There was also an issue as to the effect of trends clauses, which provide for business interruption loss to be quantified by reference to what the performance of the business would have been had the insured peril not occurred. At first instance (see https://www.egi.co.uk/legal/does-business-interruption-insurance-cover-covid-19/), the Divisional Court, while acknowledging that individual cases will depend on the precise words of the policies used, held that disease clauses were more likely to provide cover than prevention of access ones (and interpreted hybrid clauses accordingly) and that trends clauses should not be construed narrowly so as effectively to avoid cover. Most disease clauses state that they provide cover in relation to occurrences of the disease within a specified radius of the premises in question. The insurers argued that this meant that only losses resulting from cases of Covid-19 within that radius were caught. The Divisional Court disagreed, holding that all losses suffered by the insured business which were caused by the pandemic were covered, so long as there was at least one case of Covid-19 within the radius. The Supreme Court’s decision Lords Hamblen and Leggatt felt that the Divisional Court had incorrectly interpreted the wording used in most disease clauses. However, that didn’t matter because all cases of Covid-19 were equally proximate causes of the restrictions imposed by the government as a result of the pandemic. So long as the policyholder could show that there was at least one case of Covid-19 within the radius at the time of the relevant government restriction, they were entitled to claim for all of their losses. Acknowledging that this went against the normal “but for” test for causation, the Supreme Court stressed that there were some cases where the “but for” test is inadequate. There can be situations (and the pandemic was one) where a series of events all cause a result, although none of them was individually either necessary or sufficient to cause the result by itself. The Supreme Court felt that the Divisional Court’s conclusion, that prevention of access (and the prevention of access elements of hybrid clauses) could only apply if a public authority placed restrictions in mandatory terms which had the force of law, was too narrow. Without reaching a decision on individual measures, the court held that an instruction of a public authority may amount to a restriction imposed sufficient to entitle the insured to cover under such clauses if the instruction carried the imminent threat of legal compulsion or was in mandatory and clear terms and indicated that compliance was required without recourse to legal powers. Further, in relation to policies which refer to an “inability to use” or “prevention of access to” the premises, that inability/prevention did not need to be a complete as opposed to a partial one. It would be sufficient if a policyholder was unable to use/access part of its premises or to use/access the premises (or part of it) for a discrete business activity. The Supreme Court agreed that trends clauses should not be construed so as to remove cover that would otherwise be provided and that the trends which must be taken into account when adjusting compensation (for example, reduced sales) cannot include any circumstances arising out of the same underlying or originating cause as insured peril (in this case, the pandemic). This includes downturns in turnover which had already started to happen as a result of the pandemic but before the insured event (for example, the announcement putting the nation into lockdown) occurred. Stuart Pemble is a partner at Mills & Reeve