In this e-zine, we take a deeper dive into the judgment handed down on 15 September 2020 in the test case brought before the UK High Court by the UK Financial Conduct Authority (“FCA”) on behalf of the business interruption policy holders of eight specified insurers.

In the business interruption test case judgment the Court analysed various types of clauses found in each of the 21 policies, which were assessed. We look at the conclusions that were reached and their significance.

1. Prevention of access clauses

• Cover is usually triggered under this type of clause when an incident or emergency within a prescribed radius of an insured’s premises causes a competent authority to take action which affects access to premises.

• The sample wording which the Court considered defined the causative “incident” in a number of ways, including “emergency in the vicinity” and “injury in the vicinity”. The Court held that these wordings were intended to provide localised cover. Restrictions imposed by a relevant authority would have to be in direct response to a local occurrence of the disease, as opposed to general action taken in response to the pandemic.

• It was held that any authority capable of imposing restrictions, including national governments, would fall under the definition of competent authority for the purposes of these clauses.

• Distinction was drawn between sample policy wordings as far as “taking action” was concerned. The UK Government announcements of restrictions on 16, 20 and 23 March 2020 were held to be “advice” but could amount to an “action” in a clause covering hindrance of use. It was held that both an “action” and “order” with a legal basis which prevents access and mandatory restrictions arising from various Regulations could be sufficient to trigger cover.

• The Court held that generally, physical prevention of access to a premise is not required to trigger cover under these types of clauses. However, there must be a closure for the purposes of carrying on a business or a fundamental change to the use of the premises.

• The Court considered that ‘business interruption’ can cover general interference with the business and does not necessarily require a complete cessation of business, although in relation to one of the policies written by MS Amlin 2 policy, interruption was interpreted as cessation.

• The specific wording of the prevention of access clause and the extent to which the government advice and regulations impacted on the insured business need to be closely examined to determine if coverage is triggered. The regulations introduced by the UK government on 26 March 2020 required the closure of restaurants, but takeaway services were allowed to stay open. Restaurants that offered takeaway services prior to the introduction of the regulations would have been “prevented access” under the general definition if the business was effectively closed. However, the closure of the “sit in” aspect of a restaurant that also offered takeaway services would only have resulted in that business being partially affected by the Regulations and it may not fall under the “prevention of access” definition.

2. Disease Clauses

• The sample policy wordings in this category varied, but all provided cover for business interruption or interference resulting from the occurrence of a notifiable disease within a prescribed proximity such as “within 25 miles”, “within 1 mile”, “in the vicinity of the premises” or in the “insured location”.

• Insurers argued that only local outbreaks of COVID-19 which could be distinguished from the wider general effect of the virus would be covered. The Court disagreed and held that, in general, coverage is triggered where the outbreak falls within the geographical radius of cover prescribed in the policy.

3. Hybrid Clauses

• Again, the sample clauses varied but in general, they provided cover for losses arising from business interruption or the inability to use a business premises due to restrictions arising from the occurrence of a notifiable disease. These clauses are essentially a “disease” / “prevention of access” wording hybrid.

• The Court interpreted the disease aspect of these clauses in line with the “disease clauses” discussed above and rejected the insurers’ arguments that the outbreak had to be local. However, they again interpreted the prevention of access wordings narrowly.

4. Trends Clauses

• Trends clauses were a central issue in the judgment. Insurers argued that the insured peril – i.e. the local occurrence of a disease and resulting restrictions – led to losses that would have been incurred regardless of that occurrence due to the overall economic/national effects of the virus.

• Insurers relied on the decision in Orient Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 where a business interruption claim arose from both physical and business losses incurred by a hotel as a result of Hurricanes Katrina and Rita. The hotel held an all risks policy with a Trends Clause incorporating a “but for” causation test.

• In that case, while no dispute arose as to cover for the physical damage to the hotel, insurers had refused business interruption cover. They argued that the business losses would have been incurred regardless of whether the hotel had been physically damaged or not, due to the general state of the local economy caused by the damage to the area. They said that the causal test had not been met as the business loss would not have been suffered “but for” the insured peril. The Court found in favour of the insurer in that case.

• The Court distinguished the present case from the Orient Express case due to the all risks nature of the policy considered in that case and the fact that the insured perils differed to those in the various standard wordings being assessed. The Court in the present case ultimately found that the Orient Express case had been incorrectly decided. The Court also commented that it essentially meant that the more serious the incident, the less cover that was available.

While prevention of access clauses were held to be subject to a more restrictive interpretation than disease clauses, some of the policy wording considered did allow coverage under those clauses. Holders of UK policies with disease or hybrid clauses similar to the samples assessed by the Court will certainly welcome the decision. Six insurers had issued a fast tracked appeal of the judgment to the Supreme Court, which was due to be heard before the end of the year. However, those appeals were withdrawn last week.

The position in Ireland remains undetermined as yet, pending the hearing of the FBD test case. Counsel for the various plaintiffs in the four cases being heard will certainly be asking the Irish court to take into account the FCA judgment.

FBD recently changed the wording of its commercial policies to specifically exclude COVID-19 which is perhaps reflective of the effect the FCA judgment has already had in this jurisdiction.

You can read our previous coverage of the UK case here: “A Victory for Business Interruption Policyholders: Landmark UK Test Case Judgment Handed Down”.