Supreme Court judgment: FCA’s business interruption insurance test case
The Supreme Court handed down its judgment on the FCA’s business interruption insurance test case on Friday 15 January 2021 in an appeal from the Commercial Court.
The FCA was substantially successful on the majority of the points of appeal in issue. The judgment should be welcomed by policy holders as it establishes a higher degree of clarity as to how certain key policy terms and conditions should be interpreted both by insurance companies and by the lower courts. A considerable number of the more esoteric points raised and won by the insurers in the Commercial Court have been overruled. Many contentious points have been simplified by the Supreme Court and put into black and white relief.
It is beyond the scope of this briefing note to consider each and every decision made by the Supreme Court. However, a sample of the decisions made which are helpful to policy holders are set out below.
Partial closure of businesses
Previously policy terms which were interpreted as requiring the complete closure of a business before cover could be triggered have now been opened up. For example, when looking at the terms of policies which stated that in order to obtain cover there had to be “a complete inability to use the premises for the purposes of the business” or words to this effect, the Supreme Court disagreed with the judgment of the Commercial Court and stated as follows:
“We consider that the requirement is satisfied either if the policyholder is unable to use the premises for a discrete part of its business activities or if it is unable to use a discrete part of its premises for its business activities. In both those situations there is a complete inability of use. In the first situation, there is a complete inability to carry on a discrete business activity. In the second situation, there is a complete inability to use a discrete part of the business premises. To that extent the question is indeed binary.
Whilst all cases will be fact dependent, the FCA’s bookshop example would potentially be a case of inability to use the premises for the discrete business activity of selling books to walk-in customers. A department store which had to close all parts of the store except its pharmacy would potentially be a case of inability to use a discrete part of its business premises.
An example which potentially covers both cases would be a golf course which is allowed to remain open but with its clubhouse closed so that there is an inability to use a discrete part of the golf club for a discrete but important part of its business, namely the provision of food and drink and the hosting of functions.
We should add that the FCA accepts that there is only cover for that part of the business for which the premises cannot be used. If, for example, a restaurant which also offers a takeaway service decides to close down the whole business it could only claim in relation to the restaurant part of the business. Equally, if there was a travel agent whose business was 50% walk-in customers, 25% internet sales and 25% telephone sales, it could only claim in relation to the loss of walk-in business, even though all parts of the business may have been depressed by the effects of COVID-19 and the governmental measures taken.”
This decision alone has opened up cover for many policy holders who carried on trading discretely and lawfully through the pandemic within the provisions of COVID-19 legislation whilst closing the main element or separate elements of their businesses as required by law.
Commencement of cover
Where a policy refers to cover commencing upon the imposition of restrictions preventing it from trading, the Supreme Court has taken a broader approach than the Commercial Court. It views restrictions as being not the imposition of a legal restriction in the form of a law but also includes governmental recommendations which do not strictly have legal force, including the Prime Minister’s recommendations made on 16, 20 and 23 March 2020. This extends the duration of cover for businesses which closed without waiting for the government recommendations to become law.
The value of claims
Positive decisions in favour of policy holders were also made by the Supreme Court in relation to the effect of trends clauses for the calculation of business losses.
The Supreme Court also overruled the judgment in Orient-Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm) which all of the insurers had relied upon in the Commercial Court as a final line of defence on the causation of loss.
The interpretation of policy terms and conditions
The judgment runs to 114 pages and is therefore somewhat shorter than the judgment handed down by the Commercial Court on 15 September 2020. It is also arguably an easier read from a lawyer’s perspective as much of the heavy lifting had been done by the Commercial Court over the summer. Although the content of the judgment may still be considered by many policy holders to be relatively impenetrable, the reference point of the judgment is clear when assessing the relevant policy terms and conditions:
“The overriding question is how the words of the contract would be understood by a reasonable person. In the case of an insurance policy of the present kind, sold principally to SMEs, the person to whom the document should be taken to be addressed is not a pedantic lawyer who will subject the entire policy wording to a minute textual analysis… It is an ordinary policyholder who, on entering into the contract, is taken to have read through the policy conscientiously in order to understand what cover they were getting.”
The judgment succeeds in this from a lawyer’s perspective. However, the Supreme Court could have taken matters a step further and distilled its conclusions concerning all of the policy terms and conditions examined into a user friendly table as an annex to the judgment. This was a missed opportunity.
The impact of the judgment
The purpose of the ruling was set out at paragraph 43 of the lead judgment of Lord Hamblen and Lord Leggatt:
“It is hoped that this determination will facilitate prompt settlement of many of the claims and achieve very considerable savings in the time and cost of resolving individual claims.”
Let us hope that this is the case.
However, notwithstanding all of the above positive points, the Supreme Court’s judgment will not necessarily act as a universal reference point for deciding the outcome of business interruption insurance claims for the following reasons.
The FCA was selective in the policy wordings that it originally chose to put before the Commercial Court. The policy wordings were all from larger insurers. None of them was a classic property damage only wording. Several large insurers (such as AXA and Aviva) and a very significant number of smaller insurers were not included in the test case. The FCA has estimated that there are in fact over 700 different types of business interruption policies in existence in the UK from around 60 different insurers. It would be impossible for any court to hand down a judgment concerning such a multiplicity of policy types either in good time or indeed at all. However, UK insurers will now have much less room for manoeuvre following on from the Supreme Court judgment in situations where cover should apply.
Despite this, many policy holders will remain disappointed. The suggestion via the mainstream media, a number of legal commentators and indeed law firms, that there will be a general boon for policy holders is mistaken. As we have said in previous posts, many policy terms and conditions were never going to provide cover regardless of the judgments made by either the Commercial Court or the Supreme Court. We have already taken a number of calls from policy holders who hold property damage only policies asking us to re-review their positions. Sadly the Supreme Court judgment provides them with little joy. Other policy holders have benefitted and we will now be in a position to advance their claims further.
However, a successful claim requires success on not only liability but also success on quantum. As the FCA stated itself when the appeal from the Commercial Court was announced, even if the Supreme Court judgment provided clarity in relation to the policy wordings in question, the assessment of damages “provides a huge element of uncertainty that is likely to delay the adjustment and payment of claims even where cover has been accepted or found”. Even though insurers have come off badly at the hands of the Supreme Court, they are still likely to raise a second line of “defence” over the actual value of individual claims. The good news is that their scope for mischief in this regard has been reduced.