Today, the UK Supreme Court handed down its judgment in the COVID-19 business interruption insurance test case of The Financial Conduct Authority v Arch and Others. This judgment was the result of a “leap frog” appeal whereby the FCA and certain insurers appealed directly from the High Court. The Supreme Court judgment left the High Court decision largely intact, and even expanded one category of coverage.
The judgment concerns the following topics:
- The disease clauses;
- The prevention of access and hybrid clauses;
- The trends clauses; and
- Pre-trigger losses.
Generally, disease clauses provide coverage for business interruption loss caused by the occurrence of a notifiable disease within a specified proximity (i.e. 25 km). The High Court essentially stated that an insured only needed to demonstrate at least one occurrence of the disease in the specified radius, and then coverage would be owed for business interruption caused by the entire pandemic.
The Supreme Court differed, and found that the disease clause only provides cover for business interruption caused by any cases of illness within the radius. The Supreme Court held that such a clause does not cover interruption caused only by cases of illness outside that area. While this may sound like a narrowing of the High Court ruling, the Supreme Court’s position on causation, discussed below, essentially maintains the broad coverage afforded by the High Court, albeit pursuant to a different rationale.
Prevention of Access and Hybrid Clauses
These clauses provide coverage for business interruption resulting from a restriction imposed by a public authority that causes an inability to use, or access, an insured’s premises. The hybrid clause ties the restriction to a notifiable disease. The High Court ruled that the government restrictions must carry the effect of law. It also stated that the inability to use or access must be complete for business purposes (allowing for access or use unrelated to business purposes). Further, the High Court held that the business interruption must be a total interruption as opposed to an interference.
Nature of Restrictions
The Supreme Court expanded the nature of the restrictions that will trigger coverage. It held that the government restrictions need not carry the force of law and be mandatory, but rather the restrictions can include instructions given by a public authority in the anticipation that legally binding requirements will be imposed if there is no compliance with voluntary measures. Further, the restrictions need not be specifically targeted at the insured or its class of business, though that will often be the case. The Supreme Court stated that early instructions from Prime Minister Boris Johnson regarding closures, while not binding law, would satisfy the requirement under the Policy.
Nature of Prevention
The Supreme Court refined the circumstances that will constitute an “inability to use.” It held that an insured is unable to use its premises if it cannot use a discrete part of the premises, or if the insured is unable to use its premises for a discrete component of its business. The Court gave a helpful example of a golf course with a clubhouse where the course was allowed to remain open, but the clubhouse was ordered closed. In that scenario, the owner was unable to use the discrete part of the premises (the clubhouse) and unable to perform a discrete component of its business (restaurant and bar sales within the clubhouse). Both circumstances would constitute an inability to use.
In our opinion, the Supreme Court’s construal of the prevention of access wording expands the available coverage recognized by the High Court.
The High Court judgment did not address causation at length, instead opining that questions of causation were subsumed within its other opinions regarding the subject insurance terms.
The Supreme Court focused more directly on causation. Insurers advocated for a “but for” standard, arguing that the pandemic was so pervasive that it would have caused the alleged business interruption regardless of whether there was a local case of the disease or a government restriction. The Court held that this “but for” test was not appropriate in this case, going so far as to say the following:
“…there is nothing in principle or in the concept of causation which precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause – indeed as a proximate cause – of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself.”
With respect to the disease clauses, the Court concluded that it is sufficient to prove that the interruption was a result of government action taken in response to multiple cases of the disease, as long as one case occurred within the specified radius, because, in essence, each case was an equal cause, combined inextricably with all other cases.
As for the prevention of access clauses, the Court held that the government restrictions were an insured peril and they were a link in the causal chain, the first link being the pandemic. Essentially, the Court reasoned that an insurer cannot deny coverage on the grounds that the loss would have occurred regardless of the occurrence of the insured peril when the alternate cause (the pandemic itself) brought about the insured peril (the restriction).
The Supreme Court noted that trends causes are not insuring agreements and are only pertinent to quantification. Most importantly, the Court ruled that, generally, the adjustment trends encompassed in the clause should not be related in any way to the insured peril. The Supreme Court departed from the High Court in holding that the pandemic and related economic impact, even if incurred prior to the occurrence of the insured peril, could not be factored into a trends clause analysis because it was too closely related to the insured peril.
The Supreme Court judgment is a lengthy exploration of coronavirus-related business interruption coverage under policies that do not require damage or impairment to property. These types of policies, and indeed, these exact wordings, are widely offered in Canada, and this decision, while not technically binding, is likely to have an influence on Canadian coverage litigation.