Business Interruption Insurance – a positive outcome at the Supreme Court for policyholders

The FCA, on behalf of policyholders, has succeeded with its arguments in the Supreme Court regarding business interruption insurance (BII) covering losses sustained as a result of Covid-19.

The FCA test case was brought in May 2020 in order to determine issues relating to BII considering the Covid-19 pandemic. It was seeking to provide certainty to policyholders and the insurance industry as to when BII cover should be provided. Today’s decision is very good news for policyholders.

What did the case consider?

The case has focussed upon the following extension clauses in BII policies:

• Notifiable disease clauses
• Prevention of access to premises clauses
• Hybrid clauses.

What are the key outcomes from the Supreme Court?

An overview of the judgment reached by the Supreme Court in respect of the above extension clauses is summarised below.

Notifiable Disease

A typical ‘notifiable disease’ clause provides cover for:

“any … occurrence of a Notifiable Disease within a radius of 25 miles of the Premises”.

“Notifiable Disease” was defined as “illness sustained by any person resulting from… any human infectious or human contagious disease… an outbreak of which the competent local authority has stipulated shall be notified to them.”

The Supreme Court concluded that a policyholder will need to prove that the interruption to its business was a result of government action taken in response to cases of disease, which included at least one case of Covid-19 within the geographical area covered by the clause.

Therefore, on the basis that a policyholder can prove that there was at least one case of Covid-19 within a 25 mile radius of the premises, it should be able to claim for all of the losses flowing from Covid-19 and the government response generally.

In respect of QBE policies, these were to be treated the same as the other notifiable disease policies. This opens the door to QBE policyholders to bring claims pursuant to the notifiable disease clause.

Prevention of Access

The Supreme Court considered these clauses more widely than the High Court and more in favour of policyholders.

The Supreme Court concluded that these clauses can be triggered if the business loses access to only part of the premises as a result of a public authority intervention.

The Supreme Court also concluded that there is no requirement within the prevention of access clauses for there to be a law ordering closure. Some of the Prime Minister’s statements in March, (including his ‘stay at home’ Regulation) may amount to a ‘restriction being imposed’ upon businesses for the purposes of this BII cover.

Policyholders are recommended to review these clauses in light of the Supreme Court judgment as there may now be grounds to bring a claim.

Losses

Helpfully, the Supreme Court also concluded that when considering a policyholder’s loss, the insurers should not consider the impact of Covid-19 generally upon the business to reduce the losses being claimed. When considering the standard turnover or gross profit from previous trading to calculate the losses a business has suffered as a result of Covid-19, the figures should only be adjusted to take account of circumstances unrelated to Covid-19 i.e. change in management (by way of example).

Further, any losses a business suffered due to Covid-19 before the BII policy was triggered could also not be taken into account when assessing loss i.e. if a pub suffered a 30% downturn at the beginning of March due to Covid-19, but its policy was not triggered until the government ordered a closure of pubs, this downturn in profit could not be relied upon to reduce a policyholder’s loss.

Who is affected by the Supreme Court decision?

The FCA estimates that approximately 370,000 policyholders across 60 different insurers could be affected by the test case.

Businesses with business interruption insurance (BII) policies should review their policies to see if, in light of the Supreme Court’s judgment, they have a viable claim to recover losses suffered as a result of the Covid-19 pandemic.