UK Supreme Court Judgement on Business Interruption – Members Update & Webinar
Wed Jan 27 2021
The UK Supreme Court delivered its judgment in the Financial Conduct Authority’s (FCA)’s business interruption insurance test case.
The Supreme Court substantially allowed the FCA’s appeal on behalf of policyholders. This completes the legal process for impacted policies and there should now be pay-outs where the Court has deemed the policy should respond to COVID 19.
Most SME policies are focused on property damage and only have basic cover for Business Interruption (BI) as a consequence of physical property damage. But some policies also cover BI from other causes, in particular infectious or notifiable diseases (‘disease clauses’) and prevention of access and public authority closures or restrictions (‘prevention of access clauses’). This is the same in Ireland where all of these covers are sold.
In some cases, insurers accepted liability under these policies. In other cases, insurers disputed liability.
The FCA’s aim in bringing the test case was to clarify key issues of contractual uncertainty for as many policyholders and insurers as possible. The FCA selected a representative sample of 21 types of policy issued by eight insurers. The FCA’s role was to put forward policyholders’ arguments to their best advantage in the public interest.
The High Court’s judgment last September resolved most of the key issues, but insurers and the FCA were unable to agree and made ‘leapfrog’ appeals to the Supreme Court (without having to go to the Court of Appeal first).
The Supreme Court Judgment: a summary of the key points is below:
- The FCA argued for policyholders that the ‘disease’ and ‘prevention of access’ clauses in the representative sample of 21 policy types do provide cover in the circumstances of the coronavirus (Covid-19) pandemic, and that the trigger for cover caused policyholders’ losses.
- The High Court’s judgment last September found that most of the disease clauses and certain prevention of access clauses (12 policy types from the sample of 21, issued by six insurers) provide cover (depending upon policy wording) and that the pandemic and the Government and public response caused the business interruption losses. The six insurers appealed those conclusions for 11 of the policy types. The Supreme Court has now dismissed those appeals, but for different reasons from those of the High Court. Insurers involved in the case had relied heavily on a previous judgment from 2010 called ‘Orient Express’ in their submissions on causation (i.e. on what actually caused the losses now being claimed). The Supreme Court has ruled that the Orient Express case was wrongly decided. This will have much wider implications beyond the pandemic for business interruption policies, as it means that such policies are more likely to respond to other types of ‘wide area damage’ such as storms or floods. I should imagine that this will mean policy wording overhauls now for some insurers.
- On the FCA’s appeal, the Supreme Court ruled that cover may be available for partial closure of premises (as well as full closure) and for mandatory closure orders that were not legally binding; that valid claims should not be reduced because the loss would have resulted in any event from the pandemic; and that two additional policy types from insurer QBE provide cover. This will mean that more policyholders will have valid claims and some pay-outs will be higher. I know that in its defence to the claims against it in Ireland, FBD inter alia claimed that the damage caused to the pubs would have resulted in any event from the pandemic- that argument was not accepted by the UK Supreme Court.
- The judgment ends legal arguments under 14 types of policy issued by six insurers, and a substantial number of similar policies in the wider market (I would argue in Ireland too, where these and other similar wordings were available and where the judgment of the UK Supreme Court will be of persuasive effect in the Courts), which will now lead to claims being successful.
- The test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers. The judgment does not determine how much is payable under individual policies (Quantum), but provides much of the basis for doing so.
- Each policy needs to be considered against the detailed judgment to work out what it means for that policy. To enable and facilitate this, the Supreme Court’s judgment will be distilled into a set of declarations. The FCA and Defendant insurers are working with the Supreme Court to enable the Court to issue declarations.
- The FCA will publish a set of Q&As for policyholders to assist them and their advisers in understanding the test case. The FCA will also publish a list of BI policy types that potentially respond to the pandemic based on data from insurers.
Meanwhile the outcome in the FBD case is expected to be handed down on 5 February 2021 having been adjourned to allow the parties to make legal submissions related to the UK decision.
Brokers Ireland is delighted to confirm that Peter Lennon of RDJ will be doing a webinar presentation for our Members, on 10 February 2021 with his thoughts on the judgment and the implications for Brokers. Please register below for this webinar: