FCA v Arch Insurance (UK) Ltd and Others – The Business Interruption Insurance Test Case
Since the first introduction of lockdown measures by the UK Government on 23 March 2020, many businesses have been forced to close. Those with the benefit of Business Interruption Insurance Cover (BII) have sought to rely on it, only for many insurers to decline their claims on the basis that the policy does not cover events arising from the Covid-19 pandemic.
Sintons has been advising businesses who have faced such issues with their insurance policies. We may be able to assist your business if you have had an insurance claim declined.
The uncertainty in this area led the Financial Conduct Authority (FCA) to begin test case proceedings on behalf of policyholders against (and with the agreement of) eight insurance companies in June 2020. The aim of the test case was to clarify whether 21 sample policy wordings provide BII arising from Covid-19 and the public health measures taken by the UK Government in response to it.
The High Court handed down its Judgment on 15 September 2020. Various aspects of that Judgment were appealed to the Supreme Court and the Judgment on the appeal was handed down on 15 January 2021.
It is important to note that the extent to which losses arising from Covid-19 are covered by BII is highly dependent upon the wording of the individual policy. There is no universal answer and policyholders should seek legal advice if they are unsure of their position.
The key issues in dispute related to:
- Clauses that provided cover in the event that an occurrence of a prescribed class of disease was identified within a prescribed distance from the insured business (Disease Clauses);
- Clauses that provided cover in the event that a public authority imposed restrictions preventing access to or use of the insured business premises following an insured event (Denial of Access Clauses);
- Clauses that provided for the valuation of any insured losses to be based on trends and other circumstances that would have affected the business regardless of the insured event (Trends Clauses); and
- The 2010 High Court decision in Orient-Express Hotels Ltd v Assicurazioni Generali SpA (Orient-Express), which related to a BII claim arising from hurricane damage to a hotel in New Orleans.
The High Court held that most of the Disease Clauses in question provided BII as long as there was at least one instance of Covid-19 within the distance from the insured business defined in the policy. It also held that indemnity was not necessarily limited to losses arising only from instances of Covid-19 within that defined distance.
This was appealed by the insurers but, although the Supreme Court disagreed with the High Court’s technical reasoning, it reached the same practical conclusion.
Denial of Access Clauses
The High Court held that where a policy provided BII in the event of the insured business being closed due to “restrictions imposed by a public authority”, such restrictions were required to be legally enforceable to trigger BII.
The Supreme Court disagreed, giving the example that the Prime Minister’s instruction on 20 March 2020 for certain businesses to close that night was not immediately enshrined in law, but was nevertheless a restriction imposed by a public authority. However, the Supreme Court noted that where a policy provided BII in the event of an “enforced closure of an Insured Location”, that policy was not triggered by advice, social distancing and instructions to stay at home.
The High Court held, and the Supreme Court agreed, that restrictions did not need to be imposed specifically upon the insured person or property in order to trigger BII. It was sufficient that restrictions were imposed preventing the wider public from accessing the business.
The High Court also held that BII was only triggered in the event of a complete inability to access the insured business. However, the Supreme Court disagreed with that and ruled that it was sufficient for a part of the insured business or business premises to be inaccessible, although it accepted that losses would be reduced where some part of the business could continue to operate.
The High Court held that Trends Clauses operate only in the calculation of insured losses, rather than in the scope of the indemnity available. As such, if BII is triggered by Covid-19, the calculation of the insured losses cannot then be limited by the existence of a downward trend in the economy also caused by Covid-19. It also held that the purpose of Trends Clauses is to put the insured business into the position it would have been in had the insured event not occurred.
By slightly different reasoning, the Supreme Court agreed with that ruling.
The decision in 2010 was that the policy taken out in relation to a hotel that was damaged by hurricanes Katrina and Rita did not provide any BII for losses incurred as a result of damage to the wider New Orleans region, on the basis that such losses would have been suffered even if the hotel itself had not been damaged. The insurers relied on this as a notable part of their defence.
The High Court found that the present case was sufficiently different from Orient-Express that it was not bound to follow it. The Supreme Court went further and overruled Orient-Express, declaring that it had been incorrectly decided.
In summary, the Supreme Court’s ruling is a victory for policyholders. However, the wording of the policy is key to the outcome of any insurance claim and insurers are now likely to be very careful about the words used in policies containing BII.
If you have a dispute regarding your BII policy and you would like legal advice, contact our Commercial Dispute Resolution team.