The Financial Conduct Authority’s (“FCA“) test case on non-physical damage business interruption (“BI”) insurance has been the focal point for policyholders suffering from BI financial losses as a result of Covid-19.
The Supreme Court’s decision last Friday dismissed all of the insurers’ appeals, meaning tens of thousands of businesses will receive an insurance pay out to cover losses occurring during the UK’s first lockdown. The Court’s decision will affect around 60 insurers and 370,000 policyholders.
When this test case was brought by the FCA in 2020, many insurers had refused to pay out under the policies, arguing only the most specialist policies had cover for such unprecedented restrictions. The Supreme Court examined each of the disease clauses, prevention of access clauses and hybrid clauses in the context of the national lockdown measures.
Whilst they disagreed with the High Court’s reasoning, the Supreme Court agreed that the disease clauses would provide policyholders with cover for the national lockdown if there had been and “occurrence” within the area specified by the particular policy.
The Supreme Court also clarified that, in respect of the prevention of access and hybrid clauses, there would be cover where there was an inability to use the premises for a discrete business activity or an inability to use a discrete part of the premises. The Court also confirmed that a Government instruction would count as a “restriction” where it carried the imminent threat of legal compulsion or that compliance is required. This means those businesses who shut their doors off the back of Government announcements but before the measure were made law, would be covered.
The Supreme Court also examined the High Court’s analysis of the controversial precedent set in Orient-Express Hotels v Assicurazioni Generali (2010), focusing on causation issues in insurance claims. The insurers had relied on this precedent in their challenge. The Justices made the decision to overturn the controversial precedent. Justice Nicholas Hamblen said, “the Supreme Court concludes that the Orient Express case was wrongly decided and should be overruled.”
The swift decision made by the Supreme Court will bring certainty on policy liability to both insurers and policyholders affected by the Government’s lockdown measures. Policyholders and intermediaries should now ensure that insurers are pushing ahead with resolving BI claims.
The next issue will of course be how much exactly insurers will pay out. There will undoubtedly be questions of how to factor in Government support received by policyholders. Businesses who operate out of more than one premises may also find themselves in dispute over whether closures of all of their premises counts as a single event or multiple events for the purpose of the insurers “aggregate liability” for pay-outs. We expect further disputes on these issues for some time to come yet.