FCA Business Interruption Test Case ruling – a quick summary
The judgment in the FCA Business Interruption (BI) Test Case has been handed down today with the case having been ‘leapfrogged’ straight to the Supreme Court from the High Court, bypassing the Court of Appeal because of the importance and urgency of the issues raised. The Supreme Court substantially allowed the FCA’s four appeals brought on behalf of policyholders and dismissed the insurers’ appeals. The FCA Test Case ruling could affect up to 370,000 policyholders who may now receive a pay-out under BI clauses in their policies.
There were eight insurers involved in the case which covered 21 policy wordings but policyholders should not assume that just because they have BI cover under a policy of insurance that the ruling means that their claim will be paid. However, many policyholders who did not have a claim following the High Court ruling may now have a claim following the ruling of the Supreme Court.
The appeal was heard over four days from 16-19 November 2020 and the judgment runs to 114 pages. The full judgment can be found on The Supreme Court website here. The Supreme Court made Rulings on six areas:
- disease clauses;
- prevention of access and hybrid clauses;
- trends clauses;
- pre-trigger losses; and
- the Orient Express case.
Here is a summary of each finding.
These clauses generally provide cover for BI loss caused by the occurrence of a notifiable disease at or within a specified distance of the policyholder’s business premises.
The finding: Each case of illness sustained by a person as a result of COVID-19 is a separate ‘occurrence’ and these clauses only cover BI losses resulting from cases of disease which occur within the radius specified in the policy wording.
What this means: The Supreme Court construed the disease claims more narrowly than the High Court, however, because the Court agreed that the policy wordings were not expressed only to apply to occurrences of illness within the relevant radius and because of its findings on causation, these disease claims will still, in practice, apply in the circumstances of the pandemic.
Prevention of access / Hybrid clauses
These are clauses which specify a series of requirements which must be met before the insurer is liable to pay. The Supreme Court construed these claims more widely than the High Court.
The ruling: The Supreme Court looked at the wording in the Hiscox policy which provided that cover would only be provided where BI loss is caused by the policyholder’s ‘inability to use’ the insured premises. The Court held that this requirement may be satisfied when a policyholder is unable to use a premises for a discreet business activity or to use a discreet part of the premises for its business activities.
What this means: This means that some policyholders who did not have a claim following the High Court ruling may now find that they have a valid claim having regard to the wider interpretation of the clauses given by the Supreme Court.
In light of the interpretation of the findings above, the Court then had to look at causation in relation to both disease clauses and prevention of access and hybrid clauses.
The findings: Disease clauses – it is sufficient for a policyholder to show that at the time of any relevant Government measure there was at least one case of COVID-19 within the geographical area covered by the disease clause.
Prevention of access and hybrid clauses – BI losses are only covered if they result from all elements of the risk covered by the clause operating in the required causal sequence. However, the fact that such losses were also caused by other (uninsured) effects of the COVID-19 pandemic does not exclude them from cover under such clauses.
What this means: This again means that some policyholders may now have a valid claim when they did not under the High Court judgment.
These clauses provide for BI losses to be calculated by adjusting the results of the business in the previous year to take account of trends or other circumstances affecting the business in order to estimate what results could have been achieved had the insured peril not occurred.
The finding: These clauses should not be construed so as to take away cover provided by the insuring clauses and that the trends and circumstances for which the clauses require adjustments to be made do not include circumstances arising out of the same underlying or originating cause of the insured peril, ie in this case COVID-19.
What this means: In the absence of clear wording, insurers cannot reduce the indemnity otherwise due to the insured on the basis that the losses were caused equally by other uninsured perils, the underlying clause of which is also COVID-19.
This relates to where there has been a measurable downturn in the turnover of a business due to COVID-19 before the insured peril was triggered.
The finding: Adjustments should only be made to reflect circumstances affecting the business which are unconnected with COVID-19.
What this means: The High Court had held that if there was a measurable downturn in turnover of a business before the insured peril was triggered, then this ought to be taken into account as a trend or circumstance in calculating the indemnity payable in respect of the peril where the insured peril was triggered and remained operative. This has now been overturned by the Supreme Court and any circumstances affecting a business due to COVID-19 before the insured peril was triggered, should not be taken into account.
Orient Express case
This case involved a claim for BI losses relating to damage caused to a hotel in New Orleans by a hurricane. It was held in this case that cover did not extend to BI losses which would have been sustained anyway as a result of the damage to the city of New Orleans, even if the hotel itself had not been damaged.
The finding: This case was wrongly decided and should be overruled.
What this means: As the case has been overruled at the highest level, going forward this ruling will be relied upon to support an argument that insurers should construe the trends clause so as to exclude from assessment of loss circumstances which had some underlying or originating cause of the damage.
The overall result
Today’s ruling brings very good news for applicable policyholders but is a blow for insurers. The policyholder’s position has been significantly improved beyond that which was already established by the High Court judgement.
A decision has now been made at the highest level and cannot be taken further. It will now be for insurers to scrutinise individual policy wording and submitted claims and decide on whether there is cover having regard to today’s ruling.
Sheldon Mills, Executive Director, Consumers and Competition at the FCA has commented:
‘We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible. Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain the next steps.’
For any questions on this ruling or any other insurance related queries, please contact a member of the insurance team at BDB Pitmans.
For further background on this case please see our previous article.