In November 2020, the Supreme Court heard an appeal from the Financial Conduct Authority in relation to various insurance companies failing to pay out business interruption cover to policyholders who had been badly affected by Covid-19.

Due to the pressing need for a judgement in this area of the law, 8 cases concerning non-payment by insurance companies have been expedited through the court system and heard concurrently. A judgement in these 8 cases was released on the morning of 15 January 2021.

Summary

In short, the Supreme Court has dismissed the appeals of the insurance companies and by doing so has established that in almost 700 different policy wordings from 350 different insurers relating to business interruption insurance, the insurer is unable to withhold pay outs to effected businesses.

The key points that the court were required to assess are as follows:

Disease Clauses

Such clauses in an insurance policy cover the policyholder in the event that their business is affected by a notifiable disease within a specified geographical radius of their premises.

The Supreme Court ruled that as Covid-19 has been a notifiable disease since 5 March 2020, if there is a single recorded cases of Covid-19 within the specified area, this is sufficient to trigger a Disease clause.

Prevention of Access Clauses

Most insurance policies for business interruption include a Prevention of Access clause that specifies that the insurer only has to pay out on the policy in the event that the policyholder is unable to access their premises due to legally enforced restrictions.

The insurers argued that mere announcements of restrictions by a public authority which are not legally enforced, do not amount to a legally imposed restriction as there is no operation of law preventing the policyholder from accessing their premises.

Contrary to this interpretation the Supreme Court has found this to be too narrow an application and has instead stated that instruction given by a public authority may amount to a valid restriction for the purposes of the policy if the restriction is said to be mandatory and stated in clear terms. This specifically includes general measures announced by the Prime Minister.

Furthermore, while the Supreme Court has maintained that mere “hindrance” does not satisfy a prevention of access, if a business is unable to use an essential part of their premises, or unable to carry out an essential business related function at the premises, this will satisfy the clause.

Causation

In order for the insurers to pay out on a business interruption policy, the insured needs to prove that their losses have been caused by the notifiable disease. The Supreme Court held that provided the policyholder can prove that there was at least one case of the disease within the specified radius at the time the loss was incurred, then the loss is covered by the policy.

It does not matter that the restrictions were caused by the cumulative weight of infections from outside of the specified radius, nor do policyholders need to prove that their loss was directly caused by a case or cases within the specified radius, the mere existence of such cases is enough to satisfy causation.

Trends Clauses and Pre-Trigger Losses

The loss that an insurer is required to cover is generally calculated by assessing the results of the previous year and making adjustments to account for other circumstances that would have affected the business. This provides an estimate as to how the business would have performed were it not for the interruption by the disease. When making these adjustments, the Supreme Court made it clear that the insurer must only reflect the circumstances affecting the business which are unconnected to Covid-19.

Furthermore, such clauses are not to be interpreted or construed in any way that may undermine the coverage provided by Disease and Prevention of Access clauses.

In doing so, the Supreme Court has overruled a precedent provided by the case of The Orient-Express Hotel which has established that the cover of business interruption polices does not extend to those losses that would have been sustained anyway had the business not been required to close due to the restrictions imposed.

For example, had bars and restaurants not have been told to close and no restrictions were imposed as regards access to the premises, they would not have been able to claim for losses resulting from a significant downturn in business due to public fears over the spread of Covid-19 in hospitality settings. The Supreme Court ruling has reversed this precedent so that such losses are in fact recoverable.

Conclusion

If your business has been significantly affected by the Covid-19 restrictions and your insurer has refused to pay out on your business interruption policy, this Supreme Court judgement may have validated your coverage for Covid-19 related losses.

Our Dispute Resolution department at Lupton Fawcett will be able to guide you through the process of bringing a claim for your losses under your policy and help to resolve any on-going disputes over coverage you may have with your insurer. If you would like assistance with such a matter or require more information about how we can help, please do not hesitate to contact us.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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