Business interruption insurance test case: Supreme Court decision

The Supreme Court judgment today confirms that a wide range of business interruption wordings selected in the case should respond to claims for indemnity relating to the first lockdown which began in late March 2020. In remotely delivering the summary, Lord Hamblen confirmed that the FCA’s and policyholder groups’ appeals were ”substantially allowed”.

The inevitably complex judgment runs to over 100 pages and what is intended here is no more than to give a flavour of the key areas. Lord Briggs provided this pithy summary of the outcome: “all of the insuring clauses which are in issue on the appeal to this court (not including those clauses where the issues appealed by the FCA are academic) 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.”

The background here is, of course, claims for non-property damage business interruption cover made by mainly SME business in respect of losses sustained in the course of the first lockdown last year because of the coronavirus pandemic. It is said that some 370,000 businesses are affected by the case. We looked at the first instance decision in the Commercial Court in this earlier blog last September.

The Supreme Court adopts different analyses from those of the Commercial Court to the operation of disease clauses, prevention of access clauses and hybrid clauses used in the representative sample of policies under consideration. Because of the Supreme Court’s approach to causation, however, it reached the same outcome in holding that the policies at issue should respond.

It is in the area of causation that there is real complexity and nuance. The Commercial Court had not examined the issue in great detail on the basis that its approach to interpretation of the three types of clauses largely dealt with it. The Supreme Court, however, examined causation closely. In one particular passage, it set out the shortcomings in certain circumstances of the conventional ‘but for’ test of causation: It has, however, long been recognised that in law as indeed in other areas of life the “but for” test is inadequate, not only because it is over-inclusive, but also because it excludes some cases where one event could or would be regarded as a cause of another event … [an] example, adapted from the facts of the decision of the Supreme Court of Canada in Cook v Lewis [1951] SCR 830, is a case where two hunters simultaneously shoot a hiker who is behind some bushes and medical evidence shows that either bullet would have killed the hiker instantly even if the other bullet had not been fired. Applying the “but for” test would produce the result that neither hunter’s shot caused the hiker’s death – a result which is manifestly not consistent with common-sense principles.

The hunters and hiker example echoes very similar shooting examples aired by the House of Lords when relaxing the ‘but for’ test of causation in mesothelioma claims in Fairchild. That is unlikely to have been coincidental and it therefore points to the potential significance of the present case in types of claim in which applying the ‘but for’ test might give rise to anomalies.

The extract above from Lord Briggs summarises how trends clauses were held to operate. On the question of pre-trigger losses – ie where the insured’s turnover is falling because of obvious concerns which have yet to materialise in an occurrence of the disease or in a denial of access – the Supreme took a different view from that of the court below. The key question is whether trends clauses allow for claims to be adjusted downwards because of the trading reduction in the period before the insured circumstance (the peril, being either an incidence of the disease or the restriction on access) happened? The answer is no, as explained by Lord Hamblen: “the court below was wrong to hold that the indemnity for business interruption loss sustained after cover was triggered should be reduced to reflect a downturn in the turnover of the business due to COVID-19 which would have continued even if cover had not been triggered by the insured peril … the assumption should be made that pre-trigger losses caused by the pandemic would not have continued during the operation of the insured peril.

The final main element of the decision was the reversal of the decision in the Orient Express Hotels case. Here, the issue in abstract is how to deal with wider effects of the same thing that caused the particular business interruption? In Orient Express, a hurricane had caused severe damage and hence business interruption to the hotel and had also caused wider effect across the city of New Orleans. The decision was that OEH “could only recover loss that it would not have suffered but for the physical damage to the hotel and not loss of business which the hotel would have suffered even if it had not been damaged at all (because of the effects of the hurricanes on the city)”.

That decision has now been expressly overruled by the Supreme Court, going further than the Commercial Court which had side-stepped OEH because of its approach to policy interpretation and causation. The Supreme Court’s reasoning is clear despite, as with causation, it being expressed in less than immediately accessible terms. We have therefore added additional words to the relevant passage below: “when both the insured peril [for present purposes ie an occurrence of the disease or a restriction of access] and the uninsured peril [ie the wider effects of the national lockdown] which operates concurrently with it arise from the same underlying fortuity (the hurricanes) [ie, the COVID pandemic], then provided that damage proximately caused by the uninsured peril … is not excluded, loss resulting from both causes operating concurrently is covered. In the Orient-Express case the tribunal and the court were therefore wrong to hold that the business interruption loss was not covered by the insuring clause”.

As noted already, this is no more than a flavour of the judgment. But where next and so what? The immediate next step will be to reduce the findings in principle to practical declarations which give effect to the decision. At the same time, insurers will be looking to process those claims subject to the decision as quickly as possible, as indicated in ABI press release issued earlier today. On the FCA side, its press release says the decision “removes many of the roadblocks” to resolution of these claims and is very clear about expecting the industry to act quickly in getting relevant claims paid. The press release – worth reading in full here – also explains that the regulator 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.

A hugely factually complex and document-heavy piece of test litigation has been taken from inception to a Supreme Court decision in a matter of months, with every single hearing taking place remotely because of the very pandemic at the heart of the claim. Regardless of any take on the outcome, the test case has been a mammoth effort by all concerned. The parties, the legal teams and the judiciary should be commended for getting this over the line as ably as they did, but whether any of them would chose to go through it again is a different point entirely.


Alistair Kinley – Director of Policy and Government Affairs, BLM
alistair.kinley@blmlaw.com

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