What did the Supreme Court decide?
The result of the Supreme Court ruling is that all insuring clauses in issue before the Supreme Court will provide cover for COVID-19 business interruption losses and trends clauses cannot be deployed to cut down that cover in the calculation of amounts payable.
However, for those wordings not appealed to the Supreme Court, the High Court's ruling still stands.
The key elements of the Supreme Court's decision are as follows.
Disease clauses
The Supreme Court took a narrower approach to identifying the insured peril/trigger than the High Court, but when coupled with their findings on causation, this results in the same practical result as in the High Court ruling.
Consequently, providing a policyholder can prove a case of COVID-19 within the relevant radius, they can access cover under the disease clauses (including under QBE2 and QBE3).
Prevention of access / hybrid clauses
These clauses will now be more readily triggered than at first instance because:
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An instruction given by a public authority may amount to a "restriction imposed" if it carries the imminent threat of legal compulsion or is in mandatory and clear terms and indicates that compliance is required without recourse to legal powers. This is a significant element of the ruling, since it is likely to greatly increase the number of covered claims for certain wordings.
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"Inability to use" premises may be satisfied where a policyholder is unable to use the premises for a discrete business activity or is unable to use a discrete part of the premises for its business activities. "Prevention of use" clauses were similarly construed.
Causation
The Supreme Court found that all the individual cases of COVID-19 were equally effective proximate causes of the Government measures and that this was therefore a case concerning concurrent causes of loss.
As a result, the court declined to apply the "but for" test of causation.
For disease clauses, cover will be available where a policyholder can prove that the interruption to their business was the result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the relevant radius in the clause.
For prevention of access/hybrid clauses, cover will be available where the loss was caused by all the elements of the insured peril acting in combination, regardless of whether the loss was concurrently caused by other (non-insured but not excluded) consequences of the COVID-19 pandemic.
Trends clauses & Orient Express
The court found that the purpose of trends clauses is to arrive at the results that would have been achieved but for the insured peril and circumstances arising out of the same underlying or originating cause (i.e. the wider effects of the pandemic). Therefore, the trends clauses should measure COVID-19 trading losses against a non-COVID-19 world.
This is of course a highly significant element of the decision as regards insurers' financial exposure to covered losses.
Adjustment of claims for pre-trigger trading losses is not permitted.
Consistent with its findings as regards causation, treatment of concurrent causes and trends clauses, the Supreme Court found that Orient Express had been wrongly decided and should be overruled.
Practical considerations for the insurance market
With the publication of the Supreme Court ruling, insurers can expect attention to turn immediately to the resolution of claims previously on hold.
Declarations, distilling the outcome of the judgment, are being agreed between the court and the parties and will be published shortly.
The FCA is also planning to publish a set of Q&As for policyholders and their advisers to assist them in understanding the case. These Q&As should also assist insurers in communicating with policyholders regarding claims.
Of course, the results of the test case apply more widely than the 21 policy types originally before the court and so the FCA intends to publish a list of BI policy types that potentially respond to COVID-19 losses. It is estimated that policies held by 370,000 policyholders across 60 different insurers are potentially affected by the new ruling.
Finally, the guidance published by the FCA on how policyholders might prove the presence of COVID-19 within a relevant radius is likely to be a key tool in the resolution of claims. This guidance remains in draft form and subject to consultation for the time-being (the deadline for comments has been extended to 22 January 2021). However, the FCA has said it will finalise the guidance as soon as possible after 22 January 2021.
Wider considerations for the market
With the conclusion of the test case, many issues which have cast doubt on the meaning and effect of certain non-damage business interruption policy wordings have been resolved.
However, there do remain some question marks, which may prove significant.
The response of the market to the need for policyholders to establish the presence of COVID-19 is likely to remain a key topic in the immediate term, since (FCA guidance notwithstanding) the basis on which policyholders can satisfy this requirement was not a matter specifically before either court.
On the question of "restrictions imposed" the Supreme Court found that a restriction need not always have force of law, to trigger cover. However, the court declined to specify precisely which actions of the Government would and would not amount to a "restriction imposed". Having set out certain "general" and "specific" Government measures, the court said that whether such measures met the test for a "restriction imposed" should be "left over for agreement or further argument". These are material issues in the context of the claims volumes facing insurers. Therefore, resolution of this issue (whether by agreement between the parties in the Declarations or, potentially, further argument before the court) is one to watch closely.
The finding of the court that each case of COVID-19 constitutes an "occurrence" for the purposes of the disease clauses is another issue likely to receive significant further scrutiny and consideration by insurers and their advisers, given the potential impact on aggregation of claims.
Lastly, the decision of the Supreme Court as regards trends clauses, the treatment of concurrent causes, and the overturning of the Orient Express case are all likely to have implications for business interruption insurance beyond the effects of the COVID-19 pandemic.
Please get in touch with Lydia Savill or any of us in the global insurance team at Hogan Lovells, if you require assistance or advice in connection with any of the above.
Authored by Lydia Savill
