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Supreme Court defeat for Insurers in FCA Business Interruption Insurance Test Case

Posted on 15 January 2021

The Supreme Court has now given its much anticipated judgment in the FCA business interruption test case. It is a comprehensive and resounding victory for policyholders. To recap, the first instance Court had found broadly for policyholders in treating COVID-19 as one indivisible cause; on issues of causation, such as the operation of business trends clauses and the application of the so called "but for" test; and on the majority of the specific clauses in issue.

Insurers chose to appeal on all issues that had gone against them, with the FCA, and the Intervener group, the Hiscox Action Group ("the HAG"), represented by Richard Leedham, Ralph Fearnhead and their team from Mishcon de Reya, appealing on more limited grounds, given their overall success at first instance.  In brief, in a lead judgment given jointly by Lord Leggatt and Lord Hamblen, insurers lost on all grounds of appeal. The FCA and the HAG were broadly successful in their targeted appeals, to the effect that:

  1. The Supreme Court found that the Commercial Court was wrong to hold that the amount of any cover could be reduced to reflect any "pre trigger" ( ie pre restriction) downturn in the turnover of the business due to COVID-19 and its consequences which would have continued even if cover had not been triggered. This is so as the Commercial Court had correctly found that losses should be assessed on the basis that there was no COVID-19 pandemic and consistent with that conclusion, the Court should have concluded that pre trigger losses caused by the pandemic would not have continued during the operation of the insured peril (para 296)
  2. In wordings such as the Hiscox policies, in assessing what are "restrictions imposed", these need not, contrary to the Commercial Court decision, have the force of law, so that clear, mandatory instructions given by the Government could amount to such restrictions (para 120,123). In doing so the Supreme Court affirmed the Commercial Court's ruling that Regulation 6 ( the "stay at home" regulation) could be a "restriction imposed" as indeed could various of the other measures announced between 16 and 20 March 2020 to the extent their effect was on premises even if not specifically directed at them as such (128)
  3. An inability to use a business premises, another key term in the Hiscox wordings, is not a complete inability to use save for de minimis use, "but may include an inability to use either the whole or a discrete part of its premises for either the whole or a discrete part of its business activities".( para 145)
  4. The Commercial Court had been wrong to treat "incident" and "event" as more narrow than "occurrence" in the QBE 2 and 3 "disease" wordings (para 93), and had then failed to follow through its own logic to conclude that there was cover only if an interruption or interference was caused by such events within the radius. The clauses in the QBE 2 and 3 policies were to be treated the same as all other disease clauses- namely that "only the effects of any case occurring within the radius are covered, but those effects include the effects on the business of restrictions imposed in response to multiple cases of disease any one or more of which occurs within the radius" (para 207). In other words, each individual case of Covid within the radius that had occurred by the date of Government action was a separate and equally effective cause of that action and the public's response to it- ie the interruption of business-(212). This reasoning, as in the Commercial Court applies whether the radius is 1 mile, or 25 miles, or indeed any distance.

As an aside, the Court rejected insurers' appeal against the Commercial Court's finding that in the context of causation and business trends, it was artificial to assess the policyholder's loss by reference to a situation where the specifically covered circumstance had not occurred but the broader pandemic had still occurred. In doing so the Supreme Court also ruled that not only was the well-known case of Orient Express Hotels v Generali distinguishable, but if necessary would have found it was wrongly decided and went on to say it should be overruled. It can therefore no longer be cited by insurers as authority for the "but for" doctrine operating to deny claims where there are two concurrent causes of business interruption loss of income (in that case, damage to a hotel, and wider damage to the city of New Orleans which would have meant no one would have visited the hotel in any event, the former insured, the latter not), as neither satisfy the "but for" test because of the existence of the other. Instead, the correct position is loss resulting from both causes operating concurrently are covered, provided both arise from the same underlying fortuity (ie hurricane, or pandemic) and the uninsured peril is not specifically excluded.  To those following the test case it will be well known and therefore of some force, that Lord Leggatt and Lord Hamblen were both involved in Orient Express as arbitrator, and the Judge on the appeal respectively. In reaching a different conclusion now to one they both reached over ten years ago, without anywhere near as much detailed argument and in the confines of the appeal of an arbitration award, they acknowledged, citing other Judges who had done the same thing, invoking "whatever ways by which we may gracefully and good naturedly surrender former views to a better considered position." (para 311)

Thus, whilst some factual issues will need to be determined on a case by case basis as regards issues 2 and 3 above, the coverage arguments for policyholders on all these points have widened. But the fundamental point is that all the main issues, found by the Commercial Court to be in policyholders' favour, were upheld.

Standing back for a moment, it is hugely impressive, if not unprecedented, that the Supreme Court has given such a thorough 166 page judgment within 2 months of the end of a 4 day hearing, in a period which not only covers the Christmas holidays but the massive upheaval caused by the rise of COVID-19 cases, the second and third lockdowns and other restrictive measures. They are to be congratulated for that. However, the challenge to the initial judgment, delivered on 15th September 2020, and which has now been affirmed in all material respects, has caused a further 4 month delay in what the Supreme Court has now determined were always valid claims being paid. All policyholders should bear this in mind when now making their claims, and their additional claims for damages for delay under the Enterprise Act, as enshrined in Section 13A of the Insurance Act 2015.  

The overall position on this cannot be put any better than by Lord Briggs, who gave a dissenting view only on the reasoning (he came to the same conclusion) of one issue as regards disease clauses. He said (314 onwards):

"The practical effect of [Lord Leggatt and Lord Hamblen's] analysis is that all of the insuring clauses which are in issue on the appeal to this court will provide cover for[the] business interruption caused by the COVID-19 pandemic, and that the trends clauses will not cut it down in the calculation of the amounts payable."  He went on: "The contrary view, contended for by most of the insurers, was in the main that, either because of the narrow geographical limit of cover imposed by the radius limitations, or because of the express “but for” provision in most of the trends clauses, there was little or no effective cover for business interruption caused by the national response to COVID-19. This was not, of course, a disease which anyone could have had specifically in mind when the policies in issue were written and marketed. But it is clear from the use of the definition of a “Notifiable Disease” in most of the relevant clauses, and equivalent wording in the remainder, that COVID-19 (when it appeared) fell squarely within the types of disease for which all the relevant disease and hybrid clauses provided cover: see in particular paras 51 to 53 of the majority judgment. Thus it cannot be said that cover for business interruption attributable to the reaction to a disease like COVID-19 lay outside the purview of the policies in issue.

The consequence therefore is that, on the insurers’ case, the cover apparently provided for business interruption caused by the effects of a national pandemic type of notifiable disease was in reality illusory, just when it might have been supposed to have been most needed by policyholders. (our emphasis) That outcome seemed to me to be clearly contrary to the spirit and intent of the relevant provisions of the policies in issue. It therefore comes as no surprise to me that all the judges who have considered these issues have been unanimous in rejecting that outcome, albeit that this court has done so, rightly in my view, more comprehensively than did the court below."

In light of this judgment and in light of the Court's exhortation for the parties to now agree appropriate declarations in the limited situations where they are needed, we hope that insurers will now recognise and accept they have been wrong to fight these claims, and will start making immediate payments to the many thousands of policyholders who so desperately need them.

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