As mentioned in the High Court decision, the appeal before the United Kingdom’s Supreme Court concerned a variety of “wordings” in business insurance policies of small and medium-sized businesses, which covered business interruption losses resulting from the COVID-19 pandemic and public health measures taken by the United Kingdom’s government in response to the pandemic from March 2020.
The proceedings were initially brought in by the FCA concerning the Financial Markets Test Case Scheme along with an agreement that was reached with eight insurance companies to resolve issues of general importance that required immediately relevant and authoritative English guidance. The court fundamentally reviewed the wordings on 21 sample insurance policies. Although the court accepted many of the arguments put forward by the FCA about the effect of the wordings, both the FCA and HAG (interveners) appealed certain issues on which it had not succeeded in the High Court.
In essence, the Court addressed six issues arising on the appeal of the FCA: (1) the interpretation of “disease clauses”; (2) the interpretation of “prevention of access” clauses; (3) the question of what causal link must be shown between business interruption losses and the occurrence of notifiable diseases; (4) the effect of “trend clauses”; (5) the significance in quantifying business interruption losses of effects of the pandemic on the business which occurred before the cover was triggered; and (6) about causation and the interpretation of trend clauses, the status of the decision of the Commercial Court in Orient-Express Hotels Ltd v. Assicurazioni Generali SpA.
The Supreme Court’s decision
The bench of the Supreme Court hearing the case was composed of Lord Hamblen, Lord Leggatt, Lord Briggs, Lord Hodge, and Lord Reed (the President of the Supreme Court). Lord Hamblen and Lord Leggatt, with whom Lord Reed agreed, gave the main judgment. Lord Briggs gave a separate concurring judgment with whom Lord Hodge agreed.
In the court’s 114-page judgment, much of the discussion revolved around the six issues upon which the FCA and HAG had appealed. In relation to the disease clauses, the Supreme Court considered the wordings of the Royal & Sun Alliance Insurance Ltd (RSA) policy as an exemplar. The clause essentially covered business interruption losses sustained from any occurrence of a notifiable disease (COVID-19 was notified by the UK Government on 5th March 2020) within a specified geographical radius (usually 25 miles) of the insured premises. The Court ultimately interpreted the clause as covering business interruption losses arising from COVID-19 provided there had been an occurrence; that is, at least one case of infection could be established within the geographical radius. Although Lord Hamblen and Lord Leggatt reached similar conclusions regarding the scope of coverage in the wordings of the policies, both of them do not accept the meaning of the words.
Similarly, regarding the prevention of access and hybrid clauses, the court stated that these specified a series of requirements, which had to be fulfilled before the insurers were liable to pay. Some of these clauses state that they only apply where there are “restrictions imposed” by a public authority following an occurrence of notifiable disease. In the Court’s opinion, this requirement will only be satisfied by a measure that is expressed in mandatory terms which have the force of law.
The Supreme Court rejected this interpretation on the grounds that it was “too narrow” and contended that an instruction given by a public authority may amount to a “restriction imposed” if it carries the imminent threat of legal compulsion or is in mandatory and clear terms and indicates the compliance is required without recourse to legal powers. Although the Supreme Court did not rule on whether individual measures satisfied the test, it did state that the arguments are stronger about some general measures, such as the mandatory terms from the Prime Minister.
Similarly, the Hiscox (another appellant insurer) wording provided cover only where the business interruption loss was caused by the policyholder’s “inability to use” the insured premises. The Court held this wording to mean a complete and not merely a “partial inability” to use the premise; the policyholder must establish inability rather than hindrance of the use of the insured premises. The Court interpreted “prevention of access” to the premise in a similar fashion.
Concerning the question of causation, the central point of determination for the court was whether the business interruption losses arising from the public health measures taken in response to the COVID-19 pandemic were, in law, caused by cases of the disease that occurred within the specified radius of the insured premises. In this determination, the Court found that the relevant measures that were taken to combat all the cases of COVID-19 in the whole country and all the individual cases of infection which had occurred by the date of any Government measure were equally effective “proximate” causes of that measure. On this basis, it was held that it was sufficient for a policyholder to show that at the time of any relevant Government geographical area covered by the clause; effectively, rejecting the insurer’s argument of the “but for” test.
Regarding the trend clauses, the Court observed that almost all the policy wordings contained some type of “trend clauses”, which essentially provided for business interruption losses to be calculated by adjusting the results of the business in the previous years by considering the trends of circumstances affecting the business to estimate nearly as possible the results that would have been achieved if the insured peril had not occurred. The Court held that the clauses should not be construed to take away cover provided by the insuring clauses and the trends and circumstances for which the clauses require adjustments to be made; they do not include circumstances arising out of the same underlying or originating case as the insured peril.
As far as the “pre-trigger losses” were concerned, the Court, subject to the qualifications, permitted adjustments to be made under the trend clauses to reflect a measurable downturn in the turnover of a business due to COVID-19 before the insured peril was triggered. The Supreme Court rejected this approach entirely. It stated, following its interpretation of the trend clauses, adjustments were to be made only to reflect circumstances affecting the business which are unconnected with COVID-19.
The final point of deliberation for the Supreme Court was the status of the Orient-Express case. That case essentially concerned a similar policy to the policy under consideration in this case but related to business interruption losses arising from hurricane damage in the city of New Orleans. In that case, a panel of three arbitrators (which included Mr. George Leggatt QC, and subsequently when appealed to the Commercial Court, Hamblen J) accepted that insurer’s arguments that the cover did not extend to business interruption losses which would have been sustained anyway because of damage to the city of New Orleans, even if the hotel in dispute, was not itself damaged. The insurers in this dispute tried to rely on the decision of the Orient-Express case to argue causation of loss and the effect of trend clauses. However, the Supreme Court rejected their argument and held that Orient-Express was wrongly decided and thus overruled it.
A copy of the Court’s judgment can be found here.
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