Trinity Insurance Barrister Examines Impact of Landmark COVID 19 Business Interruption Insurance Case

Specialist Insurance and Business barrister, Graham Bartlett explores the recently published judgment in the Supreme Court case of The Financial Conduct Authority v Arch Insurance (UK) Ltd and Ors [2021] UKSC 1

The Supreme Court has come down firmly on the side of policyholders in the test case on whether business interruption insurance covers losses caused by the Covid-19 pandemic.

The High Court had examined a wide variety of policies and found that nearly all should provide cover where the business was either closed or had its activities restricted by the Covid-19 regulations. It also found in favour of policyholders on two issues that were common to all policies: causation and the application of the trends clause. The Supreme Court dismissed the insurers’ appeals and allowed the FCA’s appeals (on behalf of policyholders) on four of the policy wordings where the High Court had ruled in favour of the insurers.

The outcome of the Supreme Court decision means that nearly all business interruption policies will cover claims for loss of profits resulting from business interruption in compliance with Covid-19 regulations. 

The decisions on the issues of causation and the application of the trends clause are of particular interest.

The insurers’ case on causation was that the ‘but for’ test required that the policyholder had to prove that the loss would not have occurred but for the closure of the business, but because of the restrictions on individual movement which meant that customers and clients would have been unable to use the business even if it were open, the business would still have suffered the loss. The Supreme Court rejected this argument and ruled that the ‘but for’ test is not always the most appropriate test because in there can be circumstances where it can lead to injustice. They illustrated the point with an interesting example of two hunters who simultaneously shot a hiker hidden behind a hedge. Medical evidence showed that either bullet on its own would have been fatal. The strict application of the ‘but for’ test would have meant that neither shot would have caused the hiker’s death, which would be contrary to common sense.

The insurers also argued that the trends clause permitted them to take account of the national effect of the lockdown in calculating any loss. The calculation of the loss in business interruption insurance compares the turnover during the period of interruption with the same period in the previous year, with adjustments made to reflect other factors unrelated to the cause of the interruption. Thus if a business has grown and expanded in the year prior to the interruption, then this trend will be incorporated into the calculation of the loss (and similarly of the trend is negative). The insurers argument was that the trends clause entitled them to take account of the suspension of most economic activity under lockdown. The Supreme Court rejected this argument, and found that the trends clause should only operate to reflect those effects and changes in circumstances that are unrelated to the cause of the insured interruption.

Significantly, the Supreme Court found that the Orient-Express Hotels v Generali case, on which the insurers relied was wrongly decided. This was a particularly interesting decision as one of the arbitrators whose decision was appealed was George Leggatt QC, now Lord Leggatt, and the judge who upheld his decision was Hamblen J, now Lord Hamblen. Both were on the Supreme Court committee hearing the appeal. The Orient-Express Hotels case arose out of the New Orleans hurricane and the hotel was unable to recover for the period in which it was closed undergoing repairs because the surrounding area was in lockdown, and so if it had remained open the hotel would have had no or very little custom. The Supreme Court found that application of the ‘but for’ test and the trends clause should exclude circumstances which have the same or underlying or originating cause as the cause of the interruption. Lord Leggatt and Lord Hamblen ‘gracefully and good naturedly’ surrendered their “former views to a better considered position”, although not before pointing out that their earlier decisions had been framed by the arguments made by counsel before them on those occasions, that those decisions were in arbitration proceedings and Hamblin J had granted permission to appeal but in the event the case settled before that appeal was heard.  

The effect of the Supreme Court judgment should be that insurers will now respond promptly to claims made on business interruption policies, with interim payments being made as and when required. There remains, however, considerable scope for dispute in the calculation of the sum due, particularly given the level of uncertainty in the economy generally the months leading up to the emergence of Covid-19 and lockdown. Insurers will also be looking closely at the level of cover and whether there was full disclosure of the risk at proposal.

Ahead of the publication of the judgment, Specialist Civil Judge of the Property and Business Court (BPC) in Newcastle, His Honour Judge Kramer has circulated an update for the attention of all Newcastle BPC practitioners in relation to Covid 19 related business interruption insurance claims. The update can be downloaded here.

Graham, a former practising Chartered Loss Adjuster, advises policyholders, brokers and insurers on disputed claims and all aspects relating to the interpretation and application of insurance contracts. Graham has an insurance blog and regularly writes articles in The Journal, the official magazine of the Chartered Insurance Institute. He has given educational webinars for student members of the CILA and is a member of the British Insurance Lawyers Association.

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