The judgment of the Supreme Court
- "Disease clauses" providing cover for losses arising from cases of a "notifiable disease" (or alternatively, any one of a pre-selected list, or category of diseases) at an insured premises, or within a specified geographic area, may be triggered by a single person falling ill with COVID-19 within that area. Furthermore, once cover is established, it is irrelevant whether or not some of the policyholder's losses may be attributable to the existence of COVID-19 outside that area.
- Public authority instructions to close insured premises need not have the full force of law to trigger cover under a "prevention of access" or "hybrid" clause. The Supreme Court held that restrictions imposed by a public authority do not have to be backed by the force of law to be a mandatory instructions. Instead, it may be sufficient if the restriction imposed provided reasonable certainty to the policyholder that compliance was required, or that the restriction was expected to have the force of law in the near future (for example, if the instruction was given in anticipation of a change in law). Consequently, the Prime Minister's statement on 20 March 2020 "telling" certain business to close, is potentially capable of triggering cover.
- Most "prevention of access" clauses will not extend cover where access to premises is merely "hindered." However, an "inability to use" or a "prevention of access" need not affect the whole of an insured premises in order to attract cover. The inability of the policyholder to use either: (i) its premises for a discrete part of its business (for example, a retailer instructed to close its shops, but is able to maintain its online sales); or (ii) a discrete part of its premises to run its business (for example, a hotel compelled to close its restaurant and bar), may each attract cover.
- "Trends clauses" should not take into account any circumstances arising from the same "underlying or originating cause as the insured peril" (i.e., COVID-19).
Often incorporated to "smooth-out" temporary factors that might otherwise inflate or deflate the quantum of cover around the time of a particular claim (such as a sudden rise or fall in profits immediately preceding a claim), trends clauses often tie a policy's indemnity to the policyholder's business performance over a period of time (for example, by reference to revenues over the preceding financial year).
The Supreme Court examined whether trends clauses should take into account the general effect of the COVID-19 pandemic, which may have impacted policyholders' business performance prior to any claim being triggered. The Supreme Court concluded that trends clauses ought to be construed consistently with, and not act to remove cover established in, a policy's insuring clauses. Consequently, absent any clear wording in the policy to the contrary, trends clauses should omit from any adjustment circumstances arising from the same underlying or originating cause as the insured peril. In effect, in a claim for COVID-19 related BI losses, trends clauses should not, on their face, take into account any downturn in revenue arising from the COVID-19 pandemic.
The Supreme Court's decision marks a clear departure from previous interpretations of trends clauses and overrules the prevailing case of Orient-Express2, wherein it was held that the downturn in tourism experienced by New Orleans in the aftermath of Hurricane Katrina should be factored into BI claims. This overruling will have wider implications for the insurance industry, particularly around wide-area-damage policies, providing cover for environmental events such as earthquakes, fires, storms and floods, but potentially also for policies providing cover for political events such as war, terrorism and other forms of civil unrest.
The position in which policyholders now find themselves will be clearer for some than for others, and for general guidance, please see our previous Q&A for BI policyholders.3 First and foremost however, policyholders should examine their own policies, each of which will require careful review against the Supreme Court's detailed analysis.
In total, the FCA anticipates that a further 700 types of policies, across 60 insurers and held by 370,000 policyholders, may be impacted by the Supreme Court's judgment, and that "more policyholders will have valid claims and some pay-outs will be higher."
The FCA has published a table4 for policyholders setting out the outcome of the test case and key paragraphs of the judgments according to policy type, as well as a policy checker5 and set of FAQs to help policyholders find out if their insurance policy may cover BI losses caused by COVID-19 as a result of the test case. The FCA has also published draft guidance6 for policyholders on how to prove the presence of COVID-19, which is a condition in certain types of policy.
For insurers, the FCA has set out its expectations in a "Dear CEO" letter7 on handling BI claims in light of the test case, including that insurers will "take a pragmatic, transparent and consistent approach to their interactions with policyholders" and conclude their claims processes "as quickly as possible". The regulator expects that insurers will promptly reassess all claims, including those previously rejected which may now be valid. For affected claims where full and final settlements have been agreed, insurers are expected to review the information provided to customers on the offer of settlement to ensure that it contained details on the implications of the test case and was clear, fair and not misleading; where this was not the case, further action and residual payments may be necessary.
Insurers should also have regard to the FCA's draft guidance for policyholders; key points in the draft guidance include:
- insurers delegating claims or complaints handling to a third party must ensure the third party is aware of the guidance and applies it as appropriate to relevant non-damage BI policies on behalf of the insurer;
- insurers should accept the evidence held for one policyholder proving presence of disease as sufficient for the others and tell the others that they do not have to prove the presence of the disease as early as possible in the claims process; and
- insurers and intermediaries are encouraged to adopt approaches that streamline and expedite claims handling for their clients, for example by proposing a suitable and reasonably assessed date that COVID-19 will be deemed to have been established in a relevant policy area or zone, and/or by publishing on their websites records of the relevant policy areas or specific zones in which cases of COVID-19 have been proved by their clients.
Looking beyond BI policy claims, the Supreme Court and High Court judgments may provide helpful guidance for interpreting other types of policies and their response to perils outside the scope of the test case, including in particular the interpretation of terms such as "event", "occurrence" and "incident", and the meaning of "competent local authority". Insurers should also consider the extent to which the Supreme Court's overruling of Orient-Express affects their interpretation of the scope of their current policies in respect of other perils. The FCA will engage with insurers in the coming months to seek their views and interpretation of the impact the test case had had on the insurance industry more widely.
1 The Financial Conduct Authority v. Arch Insurance and Ors  UKSC 1.
2 Orient-Express Hotels Ltd v. Assicurazioni Generali SpA  EWHC 1186 (Comm).
3 Insight Plus — COVID-19: Insurance and Risks Q&A.
4 FCA table summarising the outcome of the test case by policy type (22 January 2021).
5 FCA BI insurance policy checker and FAQs (29 January 2021).
6 FCA draft guidance consultation: Business interruption insurance test case – proving the presence of coronavirus (COVID-19) (11 December 2020).
7 FCA "Dear CEO" letter: Business Interruption Insurance (22 January 2021).