Supreme Court hands down judgment in Covid business interruption test case.
On Friday 15th January, the Supreme Court gave its judgment in the case on whether insurers are obliged to pay claims in relation to loss of profit caused by Covid-19 brought under business insurance policies.
The test case – which was the first under the courts’ Financial Markets Test Case scheme – was brought on policyholders’ behalf by the insurers’ regulator, the Financial Conduct Authority (FCA). It followed widespread concern over lack of clarity and certainty for businesses seeking to recover losses incurred as a result of the pandemic.
Judgment was given in the original case in September last year, largely in policyholders’ favour, but both the FCA and certain of the insurers appealed that decision. Unusually, as a result of the importance and urgency of the issues involved, those appeals were ‘leapfrogged’ to the Supreme Court, bypassing the Court of Appeal.
In its judgment, the Supreme Court substantially allowed the FCA’s appeal and dismissed the insurers’ appeals. This paves the way for thousands of affected businesses struggling to survive through the pandemic to have their claims paid.
Inevitably, the court’s judgment is complex and runs to more than 100 pages. However, Lord Briggs – one of the Supreme Court justices who heard the case – provided this succinct summary of the outcome:
“all of the insuring clauses which are in issue on the appeal to this court…. will provide cover for business interruption caused by the Covid-19 pandemic, and that the trends clauses will not cut it down in the calculation of the amounts payable.”
In the judgment, the court determined how four types of clauses commonly found in business interruption policies should properly be interpreted. These are:
- ‘Disease clauses’ – clauses which generally provide cover for business interruption losses resulting from the occurrence of a notifiable disease, or at a specified distance of the business premises;
- ‘Prevention of access clauses’ – clauses which generally provide cover resulting from public authority intervention preventing or hindering access to or use of the business premises;
- ‘Hybrid clauses’ – clauses which combine both of the above clauses; and
- ‘Trends clauses’ – clauses which generally provide for business interruption loss to be quantified by reference to how the business would have performed had the insured risk not occurred.
The Supreme Court’s judgment on how widely these clauses should be interpreted in relation to Covid-19 is favourable to policyholders, meaning that the range of circumstances in which insurers must pay claims will be considerably wider than insurers had previously maintained.
It should be noted that business interruption claims still require the policyholder to show that it has suffered a reduction in profits as a consequence of Covid-19. If profit levels have been maintained, there will be no loss that can be recovered.
The FCA has said that it will produce a Q&A document for policyholders and will move to confirm its draft guidance on these claims before the end of the month.
It is also reasonable to assume that, given the general tenor of the Supreme Court’s decision, the starting point in any complaint made by a policyholder about non-payment under a business interruption policy will be that it is for the insurer to show why the claim should not be paid and that the onus is very firmly on it to justify its refusal to do so.
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