Business interruption insurance test case – both sides to appeal to the Supreme Court

Posted: 05/11/2020

On 2 November 2020, the Supreme Court granted permission to the FCA, six defendant insurers and one intervening policyholder action group to appeal the recent High Court decision which largely ruled in favour of policyholders hit by the pandemic.

The High Court’s decision on 15 September 2020 found that the majority of the 21 policy wordings should be interpreted in favour of policyholders. This potentially paved the way for payouts to an estimated 370,000 small businesses forced to close during lockdown.

However, following that decision, six of the eight insurers whose policy wordings were considered applied for permission to appeal as did the FCA. Permission has now been granted and the appeal will be heard by the Supreme Court on 16 November 2020 and is expected to run for four days.

The FCA’s appeal is focused on the so-called trends clauses, aspects of the prevention of access wordings, and certain disease wordings where, exceptionally, the High Court limited cover under some policies to local-only outbreaks of Covid-19. The insurers’ appeal is also concerned with the disease and prevention of access clauses found in the business interruption sections of policies.

While the grounds of appeal are extensive and complex, the five core areas of appeal are summarised below.

1. The FCA is appealing the High Court’s ruling on trends clauses which appear to allow an insurer to reduce the indemnity payable by taking into account as a trend, a reduction in revenue caused by one element of what the court referred to as a “composite” peril occurring before the policy is triggered by another element of the composite peril.
   In addition, the FCA is appealing the High Court’s ruling on Hybrid and Prevention of Access Clauses, specifically its assessment that references to “restrictions imposed”, “closure or restrictions” and “enforced closure” require government actions to have mandatory legal force and would not be satisfied by the instructions or advice of a competent authority. In the FCA’s view, the High Court’s analysis gave “an uncommercially and over-formalistically narrow scope to these clauses”.
   The FCA is also challenging further declarations about Hybrid and Prevention of Access Clauses, under which the court found that terms such as “prevention”, “denial of access”, “interruption” or “inability to use” required total closure of premises or an almost total inability to use and would not be satisfied by partial closure.
2. Four insurers, Argenta, MS Amlin, QBE and RSA, have filed applications for permission to appeal the High Court’s ruling that occurrences of Covid-19 within the relevant policy area formed “part of one indivisible cause” that was indistinguishable from the national outbreak as a whole.
3. Argenta, MS Amlin, Hiscox and RSA also sought permission to appeal the court’s finding that the decision in leading case Orient Express Hotels Ltd –v- Assicurazioni General SpA [2010] Lloyd’s Rep I.R. 531 should not be followed (discussed further below).
4. The same insurers sought permission to appeal the interpretation of so-called counterfactuals. These are hypothetical models used to assess the extent to which a business may or may not have been affected.
5. In addition to the above, certain insurers have also sought permission to appeal against the High Court’s findings in relation to their specific policy wordings. These include so-called hybrid clauses which refer to both restrictions relating to premises and the presence of a notifiable diseases within the vicinity of the insured premises.

Much of the High Court analysis - and presumably the Supreme Court’s in due course - hinges on the Orient Express Hotels Ltd case referred to above. In that case, the Orient Express Hotel in New Orleans claimed against its business interruption policy following storm damage arising from Hurricane Katrina, which resulted in the closure of the hotel for two months in 2005.

The High Court and Court of Appeal concluded that the hotel would have suffered business losses even if it had not been damaged as the city in which it was based was forced to shut down following the hurricane. As a result, the hotel was treated as if it had been an undamaged hotel in a damaged city. On that basis, the hotel recovered only a limited amount under its policy, rather than the $2.15m indemnity it sought.

Lawyers for the insurers in the FCA test case have argued in favour of a similar analysis for policyholders whose businesses were hit by Covid-19. However, in the FCA test case, the judges, Lord Justice Flaux and Mr Justice Butcher concluded that the Orient Express analysis was of no relevance to the test case, adding that they would have ruled that it was “wrongly decided” if they had been forced to consider it.

Such a construction is more sympathetic to policyholders and paves the way for more generous payouts under so-called trends clauses which assess the extent to which a business has been financially affected by an event by reference to its trade during that period.

In legal terms, this process has moved at record speed, going from issue of the claim at the High Court to Supreme Court appeal within six months. Insurers and policyholders alike have much at stake and will be awaiting the Supreme Court’s decision with trepidation.

While the decision will bring some certainty, there will inevitably be many whose claims and policies fall between the cracks and who will require specialist legal advice to protect their position. The test case considered 21 sample policy wordings out of an estimated 700 types of business interruption insurance. Inevitably, the Supreme Court decision will not resolve all issues between policyholders and insurers.

Penningtons Manches Cooper’s specialist insurance law and group action team is acting for a number of prospective claimants and can advise on the most cost-effective route to securing a recovery – please contact Biclaims@penningtonslaw.com if you would like advice or to become part of the group.

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