The Supreme Court has found substantially in favour of business interruption policy holders in a case brought by the Financial Conduct Authority (FCA).
Business owners have been attempting to make insurance claims following closure of their enterprises during the Covid-19 disruption. Insurance companies have been refuting claims for a number of reasons, including disputing whether a policyholder had chosen to close, rather than been forced to close by law and whether the disease could be said to be in the locality of the business.
Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2021] UKSC1
In June 2020, the FCA commenced a test case against eight insurance companies to try and obtain clarification for policyholders. The case looked at 21 sample policies from the eight insurers, with the FCA estimating that a total of around 700 policies are in existence from around 60 different insurers.
Following a hearing in the High Court, the case leapfrogged the Appeal Court, going straight to the Supreme Court for their decision.
The Court considered whether the insurers should be required to pay out under the terms of the disease clauses of their business interruption cover, in particular in respect of two issues, firstly, where the notifiable disease occurs and secondly, whether a claimant could rely on a prevention of access clause or hybrid clause where the authorities had required premises to close.
The decision
The Supreme Court unanimously allowed all four of the FCA’s arguments, with two being qualified. This is a positive result for policyholders, meaning that those with business interruption clauses with the same terminology as those considered by the court can rely on their cover in respect of Covid-19.
The case was fairly complex, resulting in a lengthy judgment. The FCA’s press release following the case can be read here, with the key points below.
Disease clauses
Cover can be relied upon under a disease clause where there is at least one Covid-19 case within the geographical area specified in the policy, to be decided with reference to government data. Insurers cannot claim that it is a worldwide issue and not a local incident. If cases are not within the geographical area, the insured is not covered under the disease clause.
Prevention of access and hybrid clauses
Insurers had tried to claim that the requirement that businesses close was not backed by legislation and that government and local authority requests were guidance and not law.
The Supreme Court found that in announcing that particular businesses must close, both the businesses and the public reasonably understood that this guidance must be complied with and they would not feel it necessary to enquire into the legal basis for the requirement.
The instructions were held to be a ‘restriction imposed’, whether or not they were legally enforceable.
With regard to the inability to use premises, if premises could not be used for a discrete business activity or part of the premises could not be used, then a claim should succeed. By way of example, if a department store had to close except for its pharmacy, it should be able to claim for its inability to use the rest of the premises.
Trends clauses and pre-trigger losses
A trends clause is used by insurers to quantify the amount of a claim by looking at gross profit, annual turnover and standard turnover.
Insurers put the case that businesses would have had losses in any event from the wider effects of Covid-19, which was a trend, meaning they were not liable to pay full compensation.
The Supreme Court held that a trends clause was not an exclusion clause, but should be construed together with the insuring clauses. The aim in compensating a business was to put them in the position they would have been in but for the insured peril and the conditions caused by this same originating clause, ie. the pandemic.
With regard to pre-trigger losses, the same logic applies. This means that if a pub suffered a 30% downturn in the week ending 20 March due to the Covid-19 outbreak but was not ordered by the government to close until 20 March, the insurance payment should not be calculated on the figures for the previous week.
The court noted that a trends clause aims to calculate figures that would have been achieved had the insured peril not occurred, ie. what a business would have made if there had not been a pandemic.
The FCA have put together a Business interruption insurance - policy checker to help claimants assess whether they have a valid claim.
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If your business has been affected by the pandemic and you need advice from an expert company and commercial lawyer, email us at info@witansolicitors.co.uk or fill in our contact form. We have offices in Birmingham and Northampton.
