UK Supreme Court decision on business interruption wordings

Introduction

On 15 January 2021 the UK Supreme Court handed down its much anticipated decision on the test case brought by the UK’s Financial Services Authority (‘FCA’) on behalf of UK policyholders.  The Supreme Court dismissed the insurers’ appeals and largely found in favour of the issues on which the FCA chose to appeal.

The result will have an immediate and wide-ranging effect, not only on insurers and policyholders in the UK, but also on insurers and policyholders elsewhere in the world whose policies contain business interruption wordings the same as, or relevantly similar to, those considered by the Supreme Court.

In the coming weeks, the Supreme Court’s judgment is expected to be distilled into a set of declarations. These declarations are intended to provide further guidance to insurers and policyholders so as to assist them in determining whether business interruption claims due to COVID-19 are or are likely to be covered under the policies considered by the Supreme Court.

Policy issues considered

The issue considered by the Supreme Court was the proper interpretation of four types of business interruption clauses. For the sake of convenience, the clauses were referred to as:

1. the disease clauses ( Disease Clause);
2. the prevention of access clauses (Prevention of Access Clause);
3. the hybrid clauses (Hybrid Clause); and
4. the trends clauses ( Trends Clause).

The Supreme Court provided a detailed analysis of each of these clauses. A summary of its reasoning follows.

Disease Clauses

The general nature of the Disease Clause provides insurance cover for business interruption loss caused by the occurrence of a notifiable disease at, or within, a specified distance of the policyholder’s business premises.

While the Court considered a number of variations among the wordings of the Disease Clause, it found none of these variations to be sufficiently material to merit a different interpretation from the one it gave. The Disease Clause considered by the Court provided:

“We shall indemnify You in respect of interruption or interference with the Business during the Indemnity Period following:

1. any
   1. occurrence of a Notifiable Disease (as defined below) at the Premises or attributable to food or drink supplied from the Premises;
   2. discovery of an organism at the Premises likely to result in the occurrence of a Notifiable Disease;
   3. occurrence of a Notifiable Disease within a radius of 25 miles of the Premises;
2. …”.

The term “Notifiable Disease” was defined as “illness sustained by any person resulting from:

1. …
2. any human infectious or human contagious disease excluding Acquired Immune Deficiency Syndrome (AIDS) or an AIDS related condition an outbreak of which the competent local authority has stipulated shall be notified to them”.

Insurers had argued at first instance and on appeal that the Disease Clause covered business interruption losses due to a “Notifiable Disease” only to the extent that the losses resulted from the occurrence of the disease within a 25 mile radius of the insured premises. Losses that resulted from the occurrence of the disease outside of this radius would not be covered.

Both the High Court and the Supreme Court rejected this interpretation of the Disease Clause, albeit for slightly different reasons.

The Supreme Court considered that the “insured peril” under the Disease Clause is the occurrence of illness of a “Notifiable Disease” within the relevant radius of the insured premises. The “insured peril” was not considered to be an occurrence of such illness outside of that radius. At the same time, this did not mean that the Disease Clause confined cover only to business interruption which resulted from cases of a “Notifiable Disease” within the 25 mile radius of the insured premises. The reason for this is that the test for legal causation of an insured loss can still be satisfied where the insured peril brings about that loss with a sufficient degree of inevitability even if the occurrence of the insured peril is neither necessary nor sufficient to bring that loss about by itself.  As the Court noted at [160]:

“[I]f the insured peril is COVID-19 (from the date when a case of the disease occurs within the specified distance of the insured premises), it follows that, from the date when such a case occurs, the policy covers all effects of COVID-19 on the policyholder’s business”.

Prevention of Access and Hybrid Clauses

The Prevention of Access Clause provided cover for business interruption losses resulting from the intervention of a public authority where that intervention prevents access to, or the use of, the insured premises. The Hybrid Clause combined the main elements of the Disease and Prevention of Access clauses. The variations of the Clauses that that the Court considered were:

“[L]oss… resulting from… Prevention of access to the Premises due to the actions or advice of a government or local authority due to an emergency which is likely to endanger life or property…”.

“[L]oss as a result of closure or restrictions placed on the Premises as a result of a notifiable human disease manifesting itself at the Premises or within a radius of 25 miles of the Premises…”

“[L]osses resulting solely and directly from an interruption to your activities caused by your inability to use the insured premises due to restrictions imposed by a public authority during the period of insurance following an occurrence of any human infectious or human contagious disease, an outbreak of which must be notified to the local authority…”

What the Court referred to as the “disease element” of the Hybrid Clauses, i.e. where the peril insured against was the occurrence of a notifiable disease, it considered that the Clauses that included this element were to be interpreted in the same way as the Disease Clause.

With respect to the Prevention of Access and Hybrid Clauses that could not be interpreted in this way, the Court considered the nature of the public authority intervention that was required to trigger the relevant Clause. In issue was whether the intervention of the public authority had to first have the force of law. The Court’s consideration of this issue was largely specific to the actions taken by UK authorities in response to COVID-19. Relevant to the UAE, and to the GCC more generally, however, it is relevant to note that the Court considered that a directive or an instruction given by a government authority would be sufficient to fall within the relevant Prevention of Access and Hybrid Clauses.

In relation to the nature of the prevention or the hindrance of access or of use required to trigger the Clauses, the Court considered terms like “inability to use”, “prevention of access” and “interruption” and noted the following:

• “Inability to Use”: The Court considered that an “inability to use” was satisfied where the policyholder was unable to use the premises for a discrete part of its business activities or, alternatively, where it was unable to use a discrete part of the premises for its business activities. In both cases, there would be a complete inability of use, although there would only be cover for that part of the business for which the premises could not be so used).
• “Prevention of Access”: The Court considered that “prevention” denoted stopping something from happening or making an intended act impossible as distinct from posing a “mere hindrance”. At the same time, the Court also considered that the wording of the Clause may cover prevention of access to a discrete part of the premises and/or prevention of access for the purpose of carrying on a discrete part of the policyholder’s business activities.
• “Interruption”: The Court did not accept insurers’ arguments that “interruption” implied a stop or a break to the business as distinct from an interference. Rather, the Court held that the ordinary meaning of “interruption” can encompass interference or disruption which does not bring about a complete cessation of a business or activities, and which may even be slight.

The Supreme Court’s interpretation of the Prevention of Access and Hybrid Clauses was wider than the interpretation given to these Clauses by the High Court. Also, as it did in relation to the Disease Clause, the Court rejected a “but-for” test of causation for determining cover for a loss under these Clauses. The fact that the cause of loss may have been brought about by two or more occurrences did not mean that any non-excluded occurrences restricted the scope of the indemnity otherwise available to the insured.

Trends Clauses

At first instance and on appeal, the insurers argued that, because of the nature of the COVID-19 pandemic, they were not liable to indemnify policyholders for losses which would have arisen irrespective of the occurrence of the perils insured against under the policy.

In dealing with this argument, the Supreme Court noted that:

1. a Trends Clause is part of the machinery contained in a business interruption policy for quantifying loss. It does not address or seek to delineate the scope of the indemnity which is the function of the insuring clause;
2. a Trends Clause should, if possible, be construed consistently with the insuring clauses in the policy;
3. to construe a Trends Clause consistently with the insuring clause means that, if possible, they should be construed so as not to take away the cover provided by the insuring clause. To do so would effectively transform quantification machinery into a form of exclusion.

On the basis of these principles, the Court considered that, absent clear wording to the contrary, a Trends Clause should be construed by recognising that the aim of such clauses is to arrive at the results that would have been achieved “but for” the occurrence of the insured peril and all the circumstances that arose out of the same underlying or originating cause.

By contrast, it was not permissible for an insurer to “reduce the indemnity to reflect a downturn caused by other effects of the pandemic, whenever they began”, since that would be to “refuse to indemnify the policyholder for loss proximately caused by the insured peril on the basis that the loss was also proximately caused by uninsured (but non-excluded) perils with the same originating cause”: at [295].

On that basis, the Court considered that the Trends Clause in issue should be construed so that the standard turnover or gross profit derived from previous trading was adjusted only to reflect circumstances which were unconnected with the insured peril and not circumstances which were inextricably linked with the insured peril in the sense that they had the same underlying or originating cause.

Potential impact of decision locally

Because of the widespread use of the business interruption wordings considered by the Supreme Court, the effect of this decision will extend well beyond the UK. The Supreme Court itself estimates that some 700 types of policies across more than 60 different insurers and 370,000 policyholders will potentially be affected by the outcome of this litigation.

Many of the wordings considered by the Supreme Court are used in the UAE. While UAE courts are not bound in any way to follow the interpretation given by the UK Supreme Court to the policy wordings in issue in  this case, the Supreme Court’s decision is likely to have considerable persuasive value locally, given that many of the arguments raised by local insurers to date to deny cover under these wordings have now been expressly rejected.

At the same time, should claims based on any of the clauses considered by the Supreme Court come before local GCC courts, local law differences relating to legal causation are likely to meaningfully restrict the extent of the cover and the quantum that local courts are prepared to allow under such policies for COVID-19 related business interruption losses. In particular, we expect local courts, contrary to the approach taken by the UK Supreme Court, to prefer a “but-for” test to determining the losses recoverable under the insuring clauses of business interruption policies and to allow only direct losses when applying trends clauses.