On 15 January 2021, the Supreme Court handed down its landmark judgment in the FCA test case, bringing positive news to many policyholders that have suffered business interruption losses as a result of the COVID-19 pandemic.

Many small businesses have insurance policies which cover them for loss arising from interruption to the business due to various causes such as property damage caused by a fire or flood. Some policyholders, however, took out certain extensions relating to the occurrence of an infectious disease at or near the insured's premises and/or prevention of access/closure due to actions by a public authority in response to an incident or occurrence of a notifiable disease.

Insurers have declined to pay on the ground that such policies do not cover effects of the pandemic. The appeal was heard urgently to clarify whether or not there is cover, in principle, for COVID-19 related losses under a variety of different standard insurance policy wordings.

As stated by the FCA, while the judgment does not determine how much is payable under individual policies, it provides much of the basis for pay outs by insurers on valid claims. In practical terms, 14 of the 21 sample wordings submitted by the FCA in its representative sample have been held by the courts of England & Wales to provide cover, in principle. 

More importantly, claims under a substantial number of similar policies in the wider market may now be successful. The FCA previously reported that around 370,000 policyholders could be potentially affected by the test case.

What does the judgment mean for policyholders?

As Lord Briggs of the Supreme Court neatly put it, the practical effect of the judgment is that all of the insuring clauses in issue on appeal will provide cover for business interruption caused by the COVID-19 pandemic, and importantly, any relevant trends clause will not reduce amounts payable. In practical terms, while policyholders still need to assess how close their wordings are to the representative sample and if their policy is directly affected by the test case, the vast majority of policies tested by the courts should now respond to losses suffered as a result of COVID-19.

This is welcome news for many businesses who have suffered enormously as a result of the pandemic and Government's response to it. The judgment has provided final certainty and clarification on the matter. It also has significant wider ramifications for insurance law particularly on the question of causation.

Some issues remain unresolved, however, including the question of aggregation (which is particularly relevant to multi-site businesses) additional causation issues specific to loss of rent, and claims under a property owners policy and tricky questions of quantum. Quantum issues remain a matter for the claims process of each insurer taking into account any policy terms setting limits to claims amounts or indemnity periods. 

Key takeaways from the judgment

The key takeaways from the Supreme Court's judgment include:

• The Supreme Court dismissed the Insurers' appeals and substantially allowed the FCA's appeal.
• On the disease clauses, the Supreme Court took a more restrictive view than the High Court (see our detailed analysis of the High Court's judgment and table of results). It found that the clauses should be interpreted as providing cover for the occurrence of disease – "occurrence" being when individuals sustained illness from COVID-19 at a particular time at a particular place and not an "outbreak" of disease – within the specified geographical radius and not interruption caused by cases occurring outside that area. The Judges said that it was clear as a matter of plain language that the clauses cover only cases of illness resulting from COVID-19 that occur within the specified radius and to include any occurrence of a notifiable disease outside of the radius of 25 miles was to "stand the clause on its head." It's hoped that establishing this will not be too difficult for policyholders given that COVID-19 was essentially everywhere in March 2020. Furthermore, as a matter of causation, the Supreme Court held that each individual case of illness resulting from COVID-19 was a separate and equally effective cause of the Government's actions in response to the pandemic (see below). As such, policyholders need only prove one case of COVID-19 within the specific geographical radius at the time of the Government measures to recover business interruption losses arising out of the pandemic under the tested disease clauses. 
• The Supreme Court's findings mean that the relevant prevention of access/hybrid clauses are likely to be triggered more easily than as interpreted by the High Court. The Supreme Court made clear that these clauses are not limited to exercise or threatened exercise of legal powers. For example, when the Prime Minister instructed named businesses to close in his statement on 20 March 2020, that was a clear, mandatory instruction which businesses and the public would understand had to be complied with (and therefore fell within the meaning of "restrictions imposed"). The PM statement gave rise to prevention of access. Additionally, the Court held that the clause may be triggered when policyholders were prevented access to a discrete part of the premises or to the entirety of the premises for the purposes of carrying on a discrete part of the policyholders' business activities – a very helpful finding for hospitality businesses who continued take-away services while having to close the dine-in experience. Further "interruption" is not limited to complete closure of the insured's premises and includes interference or disruption to business activities.
• On the key issue of causation, the insurers argued that the policyholders need to show, at a minimum, that the loss would not have been sustained but for the occurrence of the insured peril. Given the widespread nature of the pandemic, policyholders would have suffered the business interruption losses even if the insured risk or peril had not occurred, and as such the policies did not respond. The High Court did not focus on causation in any detail following the interpretations they had adopted but, in contrast, the Supreme Court spent significant time debating causation.
• Much of the judgment is dedicated to the thorny question of causation and some of the Supreme Court's findings represent a significant departure from existing insurance law principles. That said, it is true that there are certain circumstances where the "but for" causation test does not work – in this case there being a number of events/perils which all cause a result but none of them individually are necessarily sufficient to cause the result by itself. In other words, policyholders were said to have suffered losses relating to uninsured events such as the government restrictions or public response to the pandemic which could not be causally connected to the insured peril itself being the "thing" that caused the loss (ie the specific case of COVID-19 within the relevant policy area). In a bold move, the Supreme Court sought to do away with the "but for" test and found that the insured peril was COVID-19 and that unlike the typical number of concurrent causes of say two or three, here it could exceed a million, with each and every separate case of COVID-19 identified as an equally operative concurrent cause of the national response to the pandemic.  The Supreme Court also overruled the only reported case on comparable facts, namely the Orient-Express case relating to business interruption losses arising out of Hurricane Katrina.
• The Supreme Court rejected the insurers’ argument, concluding that the relevant policies do, in principle, respond to cover losses resulting from the localised occurrence of COVID-19 in combination with the wider pandemic. The Supreme Court also found that commonly used "trends clauses" in the relevant policies should only be applied with the effect of excluding losses that do not relate to the pandemic and not any which are inextricably linked to the insured peril, that is COVID-19. This is a huge relief for affected policyholders and will hopefully mean fewer reductions in indemnity pay outs. 
• The Supreme Court has said it is now hopeful that insurers will act quickly in applying this judgment to resolve valid claims including making urgent interim payments. Those impacted policyholders should receive communications from their insurers shortly on the status of their claims and next steps. The FCA is also publishing a Q&A document on the application of the judgment to claims. There is also guidance for policyholders on proving the presence of COVID-19 for the purposes of establishing cover. 

How can we help?

We have been closely involved in the FCA test case as part of our role as adviser to UK Hospitality, as well as acting for other policyholders in separate litigation across a range of sectors.

• We can analyse the terms of the policyholder's business policy against the detailed reasoning in the Supreme Court judgment to determine whether the policyholder's losses are covered.
• If the losses are covered, we can assist the policyholder with determining the amount of the losses suffered and with gathering evidence to support and prove a valid claim for those losses.
• We can liaise with loss-adjusters to manage the loss-adjusting process.
• We can also assist with putting the policyholder in the best position to seek an interim payment over losses suffered or an early settlement of the claim.

Please contact Julian Randall, Katie Chandler or Edward Spencer to find out more about how we can help.