Why the Supreme Court's ruling may not be the end for COVID-19 business interruption disputes

The fact that uncertainty remains is highlighted by ongoing arguments about the content of the declarations (published in draft by the FCA on 15 February 2021) which are intended to summarise the Court's findings into a user-friendly format.

Even though interpretation of the declarations will necessarily remain subject to the judgment itself, recognising that many policyholders, insurers and loss adjusters will look to the declarations over the lengthy and very detailed judgment in the first instance, their wording remains hotly contested. We envisage that ongoing disputes which may need to be resolved through further proceedings including (but are not limited to) the following:

1. What Government advice, instructions, publications and statements will constitute “restrictions imposed”, a “closure or restriction placed”, or an “enforced closure” of, or on, Premises for the purposes of the various policy wordings. Certain insurers are arguing that the declaration should relate to specific instructions from the government, and should not encompass broader directions e.g. the 2-metre social distancing rule. On the other hand, the FCA is arguing for broader interpretation of these terms, which would include the 2-metre rule as an example of such restrictions.
2. The Supreme Court held that, in order for there to be cover, a “restriction imposed” does not have to have the force of law. There is therefore a disagreement between the FCA and Hiscox as to what test (or tests) must be satisfied for a particular government measure without the force of law to be viewed as a “restriction imposed”.
3. The precise wording for the summary of the ‘counterfactual’ (i.e. the matters to either be excluded or taken into account when assessing a policyholder’s loss).
4. Whether a person “merely passing through” a particular area within the relevant radius of the premises required under the policy will be sufficient for there to have been an “occurrence” or a “manifestation” of COVID-19 in that particular area. Insurers' position is that a transitory journey should not be sufficient for the purposes of triggering cover; whereas, the FCA resists such a declaration due to concerns about its effect on the Court’s findings on the meaning of “occurrence” and causation.

The Supreme Court adopted different reasoning on causation to that of the lower Court. Whilst that reasoning ultimately reached the same conclusion, the Supreme Court found that each case of the disease was in principle a separate occurrence, namely a separate but equal proximate cause of the regulations and therefore the business interruption and the loss.

For businesses with multiple premises there is uncertainty as to whether, in consequence of the Supreme Court's findings, they have suffered one loss or multiple losses. Whilst this point will be subject to any express wording on aggregation in policyholders' policies, the Supreme Court has ruled that each case of the disease is a separate occurrence. This makes it more likely that multiple insured events have occurred, and they should therefore be treated separately, allowing multiple claims (giving rise to greater recoveries for policyholders).

A point of contention remains as to whether the financial help provided by the Government should be regarded as part of the business income for the purposes of quantifying claim values. At least some Insurers appear to be taking into account various Government support provided to businesses, along with the 80% staff salary payments for furloughed employees, as part of the income of a business and calculating their losses under business interruption clauses on that basis, i.e. if such payments are taken into account the effect is to reduce the policyholders' recoveries from insurers.

The ABI asserted that businesses would be “double compensated” if such financial support provided by the government was not included as income when claims fell to be assessed.

This is contrary to the Government's view, stated in their letter to the ABI of 25 September 2020, that:

"It is the Government’s firm expectation that grant funds intended to provide emergency support to businesses at this time of crisis are not to be deducted from business interruption insurance claims. The principle of these grants is to provide emergency support and help businesses survive. The practice of making these deductions would mean that taxpayer funds are being channelled into savings for insurers, rather than supporting businesses to ride out the disruption brought on by this pandemic."

The Government therefore requested that insurers did not make such deductions when assessing loss.

The FCA also addressed the point in their "Dear CEO" letter of 22 January 2021, which referred back to the Government's 25 September letter and also confirmed that "insurers need to consider the appropriateness of such deductions on a case by case basis in the context of their policy, and treat their customers fairly in accordance with Principle 6 [of the FCA Handbook]"; and that the FCA "expect[s] insurers to have considered the treatment of government support at Board level and for this consideration and the conclusions reached to be appropriately documented".

It therefore remains to be seen whether insurers will comply with the government and FCA's wishes.

Section 13A of the Insurance Act 2015 makes it an implied term of every insurance policy that an insurer should pay a claim within a reasonable period of time. In the event that the payment is delayed unreasonably, the policyholder would be entitled to damages for the late payment of their claim.

It is likely that some insureds will seek to recover such damages from insurers. Examples of losses caused by the late payment of insurance claims could include the cost of any loans taken out to cover the shortfall in income that arose due to a lack of payment from insurers or redundancy costs as a result of letting go of staff that may have been retained if a timely insurance payment had been made.

IIt is likely insurers will dispute any such claims for damages, presumably based upon arguments that it was reasonable for them to dispute the insurance claims. Whilst it is true that the correct interpretation of the policies ultimately required the Supreme Court's ruling, on many policies, insurers lost the arguments. It is telling that the Supreme Court rejected the overarching causation arguments at the heart of insurers' positon, and expressly held that the case on which those argument were largely based – Orient-Express Hotels Ltd v Assicurazioni Generali SpA (trading as Generali Global Risk) [2010] EWHC 1186 (Comm); [2010] Lloyd’s Rep IR 531 – was wrongly decided and should be overruled.

The outcome of such claims and the interpretation of the "reasonableness" of any delays in payment will most likely need to be resolved by the Courts, which could lead to interesting new law on the application of s13A of the Insurance Act.

A lacuna appears to have arisen between the High Court and Supreme Court judgments in respect of certain Denial / Prevention of Access clauses, a number of which refer to losses due to Government actions as a result of disease outbreaks in the vicinity of the policyholder's premises.

Pursuant to the High Court judgment, such outbreaks are deemed to be localised events; and, on the High Court's reasoning in respect of causation, would need to be causative of the loss for there to be cover. Due to the fact that the losses were in fact caused by the nationwide government restrictions, rather than restrictions imposed due to the specific outbreak within the relevant vicinity (other than in the case of local lockdowns, which were not specifically considered by the Court), there was in reality no responsive cover under these types of clauses. This point was not appealed and so was not before the Supreme Court.

Subsequently, the Supreme Court reached a different conclusion on causation, where it deemed that each case of the disease amounted in principle to a separate occurrence, but an equal proximate or effective cause of the regulations. Had the matter been before the Supreme Court, this reasoning may have had an impact on the conclusion reached in relation to the "vicinity" clauses referred to above. This means that, subject to any further litigation on this issue, "vicinity" policyholders are left in a position where the High Court's conclusion on vicinity cover remains binding, such that there is no cover under their policy wordings for pandemic losses resulting from COVID-19 and the Government's responses to it.

The Supreme Court made various rulings on policy wordings that had certain radius requirements. Neither the Supreme Court nor the High Court were asked to determine the legal position on disease clauses which cover loss for an outbreak of COVID-19 "at the premises".

There are various arguments that these clauses should effectively be treated in the same way as the disease clauses on which the Supreme Court did provide a ruling. Such treatment, however, would still raise questions of proof and issues relating to prevalence of the disease. This would seemingly place a more difficult burden on the policyholders to prove an occurrence of the disease at the premises (especially when there was very limited testing initially) than on e.g. a policyholder with a 25-mile radius requirement, who would just, in principle, need to show one outbreak of the disease within an almost 2000 mile2 area which caused a person to sustain illness from COVID-19. Additionally, insurers are already adopting the position that "at the premises" clauses are akin to "vicinity" clauses, providing narrow cover, where the outbreak at the premises would need to be causative of the restriction, rather than there being cover resulting from a nationwide government restriction. Again, these arguments currently remain untested before a Court.

Real Estate policies were expressly carved out of the FCA test case. The wordings in a number of property "loss of rent" cover clauses mirrors the non-damage wordings considered by both the High Court and the Supreme Court. It is therefore arguable that the reasoning of those Courts' judgments should be applied in the same way to Real Estate policies for business interruption losses sustained as a result of the pandemic.

There are a number of factors which may complicate such claims. These include insured risk / rent cesser issues, agreements to defer / agree waivers of rent. For example, in relation to the latter, insurers may seek to argue that these contractual variations mean that no loss has been suffered by the policyholder. Policyholders will most likely seek to counter such an argument by saying that the deferral / waiver of rent mitigated the overall loss (e.g. eviction, risk of empty property, inability to find tenants etc.). At this time, these points remain untested, and it is yet to be determined how they will be treated by the insurers; the result could well be further litigation in due course.

The Supreme Court Judgment has been extremely positive for a number of further policyholders, who have now had their cover confirmed following an initial denial of their claims by insurers following the lower Court's decision. The ABI has also confirmed that billions of pounds will be paid out for business interruption cover.

Unfortunately, however, unsurprisingly, this will not bring an end to all COVID-19 related insurance issues, and there are many financially significant points which may still need to be litigated in due course. It remains to be seen how the Courts will deal with these issues, and whether it will result in further payments to policyholders who continue to argue that they bought insurance cover to indemnify them in such instances of business interruption.