The decision involved an assessment of 21 exemplar insurance policy wordings from eight insurers in the UK market. The Court considered afresh whether the policies could respond to certain types of business interruption loss that affected insureds during the Novel Coronavirus SARS-CoV-2 (COVID-19) pandemic. In brief, the UK Supreme Court dismissed the insurers' appeal and held in favour of the Financial Conduct Authority (FCA). The insuring clauses in dispute will cover business interruption caused by COVID-19.

The Court re-examined three specific categories of policy wording arising from the 21 exemplar policies assessed:

• 'Disease clauses'
• Prevention of access / public authority clauses
• Hybrid disease & prevention clauses

The UK Supreme Court also considered causation (whether the insureds would have suffered the same or similar losses even if the insured peril had not occurred), and the 'Trends Clauses' (whether the loss is to be quantified by reference to what the business performance would have been in the absence of the occurrence of the insured peril).

The background facts to the earlier case are now well-known, and reflect similar facts to the state of affairs in Australia. They are set out in more detail in our article on the original test case determination.

Disease Clause findings

The 'Disease Clauses' appeared in policies written by four insurers in the market (RSA, Argenta, MS Amlin and QBE). Each policy contained its own variation of the wording, but in general the clauses provided cover for loss which was the result of:

'interruption or interference with the business… following / arising from / as a result of any notifiable disease / occurrence of a notifiable diseases / arising from any human infectious or human contagious disease manifested by any person…within 25 miles / 1 mile / the “vicinity” of the premises / insured location'.

That wording was primarily featured in the RSA policy, and the UK Supreme Court examined that first. It determined that:

• the words 'any … occurrence of a notifiable disease within a radius of 25 miles' could not reasonably include the occurrence of a notifiable disease outside the 25 mile radius.
• the clause does not say that there is cover for an occurrence some part of which is within the 25 mile radius, but that there is cover for clause 'any … occurrence of a notifiable disease within' the 25 mile radius. Therefore, the insured peril is only an occurrence within the specified area and not anything occurring outside that area.
• the word 'occurrence' is widely accepted as meaning 'something which happens at a particular time, at a particular place, in a particular way'. The application of this meaning to the policy wording was supported by the policy definition of Indemnity Period, which itself also implied such an occurrence happens on a particular date, and therefore, that each case of illness sustained by an individual should be considered a separate occurrence.
• ultimately, 'occurrence of a notifiable disease' refers to an occurrence of illness sustained by a person at a particular time and place, and that the clause could not apply to causes of illness from COVID-19 occurring more than 25 miles away.
• General Exclusion L in the RSA policy did not operate to exclude the cover afforded by the extension. A reasonable reader would have assumed that a substantive limit on the risk of business interruption insured by the extension for infectious diseases would have been set out transparently in the wording of the extension itself.

The Court reached a similar conclusion in relation to the other permeations of the wording, though in relation to QBE's policies it added that the words 'event' and 'incident' did not have particular significance and that the insured peril being an occurrence within the 25 mile radius made clear that the clause only provides cover for losses caused by any cases of illness resulting from COVID-19 occurring within the 25 mile radius.

The practical effect across each would remain that insureds under the particular wordings would only be able to recover if they could show that disease cases in that local area (but not elsewhere) were the cause of the business interruption.

The Prevention of Access / Hybrid Clauses

Prevention of Access clauses are those which afforded cover for business interruption loss consequent upon a public authority preventing access or use in respect of the insured premises. The Hybrid Clauses are a combination of that element but with a requirement for there to be a disease outbreak or occurrence.

The Prevention of Access Clauses appeared in policies written by six insurers in the market (Arch, Ecclesiastical, Hiscox, MS Amlin, RSA and Zurich). Again, each policy contained its own variation of the wording, but in general the clauses provided cover for loss which was the result of:

'Prevention / denial / hindrance of access to the Premises… Due to actions / advice / restrictions of / imposed by order of… A government /local authority /police / other body… Due to an emergency likely to endanger life / neighbouring property/incident within a specified area.'

The Hybrid Disease & Prevention of Access Clauses appeared in policies written by Hiscox and RSA. The policies contained their own variations of the wording, but in general the clauses provided cover for loss which was the result of:

'An interruption to the business…Due to an inability to use the premises…Due to restrictions imposed by a public authority…Following an occurrence of disease.'

The UK Supreme Court was largely in agreement with the original High Court decision in relation to both the Prevention of Access Clauses and the Hybrid Disease Clauses. However, it was specifically asked to consider the following matters:

• What sort of intervention was required to trigger the clause, and did the intervention require 'force of law'?
• What sort of prevention or hindrance of access / or use was required to trigger the clause?

No Force of Law required

At risk of oversimplifying the Court's analysis, the Supreme Court largely agreed with the High Court that 'restrictions imposed' could mean mandatory measures pursuant to statutory or legal power, although did not accept that a restriction must always have the force of law before falling within this description. A mandatory instruction may be given by an authority in anticipation of legally binding measures to follow shortly afterwards, or will do so if compliance is not achieved and that this reasonably within the meaning of a 'restriction imposed'. Furthermore, the 'restriction imposed' did not necessarily have to be directed at the particular policyholder. The words themselves are general and unqualified and that the words should not be read down to be limited to an order made directly against that insured (that is, broader restrictions would fall within the meaning of the term).

Nature of the Inability to Use/Prevention of Access

In relation to policies which referred to an 'inability to use', the Supreme Court upheld the finding of the High Court that an inability of use has to be established. A mere impairment or hindrance of use would not qualify as 'inability'. However, the Supreme Court said that the inability did not have to be an inability to use any part of the premises for any business purpose. In circumstances where the insured was unable to use the premises for a discrete part of its business activities or if it is unable to use a discrete part of its premises for its business activities, then those could qualify as a complete inability to use. However, the Supreme Court agreed that such circumstances were likely to be rare.

As to the prevention of access, the Supreme Court said, for essentially the same reasons as given in relation to 'inability to use' wordings above, that the prevention of access to a discrete part of the premises and/or for the purpose of carrying on a discrete part of the business activities would fall within the meaning of 'prevention'.

Legally (and, it would seem practically), the word 'prevention' means stopping something from happening or making an intended act impossible, which is different from a mere hindrance.

The Supreme Court agreed with the High Court that the Prime Minister's statement of 16 March 2020 did not cause prevention of access to an insured's business premises.

Causation

As to causation, there were several issues raised. The main argument from insurers was that insureds needed to establish that the loss would not have occurred 'but for' the occurrence of the insured peril. This would import a fundamental element of the law of negligence into the assessment of policy coverage (the 'but for' test). The UK Supreme Court did not agree with that hypothesis.

The starting point to determine whether there is a causal link between the occurrence and the loss is to presume that the occurrence was a proximate cause of the loss. That is, the cause must be sufficiently proximate to the loss, but is not so strict as to require a 'but for' test. That presumption could be displaced by the policy wording itself – if it called for a different casual connection (ie. using words such as 'directly caused by' that specific peril), then the policy would take precedence. Insurers and insureds would therefore need to look to the actual wording of the policy.

The next question was where there might be two or more causes of the loss. In those circumstances, the Supreme Court confirmed that where there are two causes of the loss near to or equal in their efficiency, but where one falls within the scope of the insurance and the other does not (and it is not an excluded peril), a loss proximately caused by an insured peril is covered. On the off chance there are two proximate causes of loss – one insured and one excluded, it is a question of interpretation and generally the exclusion prevails.

However, in none of the cases before the Court did one cause on its own render the loss inevitable in the ordinary course of events. It was always the combination of the two causes making the loss inevitable (such as the intervention of government, and the lack of customers appearing at a café as a result). Therefore, the Supreme Court agreed with the High Court that it is realistic to analyse the situation as one in which all cases were equal causes of the imposition of restrictions. Doing so then leads to consideration of the policy wording and what risks the insurers had agreed to cover.

Depending on the policy in question, the causal question may be answered in favour of the insurer or insured.

Trends Clauses

Each of the policy wordings considered by the Supreme Court contained trends clauses. These clauses are considered part of the standard method used in business interruption policies to quantify the policyholder's financial loss. They delineate between losses that would only arise due to an insured peril and those other losses (such as day-to-day trading losses) which would have occurred in the ordinary course of things. The insurers argued that, due to the trends clauses, they were not liable to indemnify policyholders for losses which would have arisen regardless of the operation of the insured perils by reason of the wider consequences of the COVID-19 pandemic.

In interpreting trends clauses, the Supreme Court emphasised several points. First, the trends clauses are part of the machinery for quantifying loss and do not address or delineate the scope of indemnity like an insuring clause. Second, the trends clause should be construed consistently with the insuring clause. Third, this means that they should be construed as to not take away cover provided by an insuring clause.

The Supreme Court said that trends clauses should be construed so that the standard turnover or gross profit derived from previous trading is only adjusted to reflect circumstances unconnected with the insured peril and not circumstances inextricably linked with the insured peril such that they have the same underlying or originating cause. The trends clauses do not require losses to be adjusted on the basis that, if the insured peril had not occurred, the results of the business would still have been affected by other consequences of the COVID-19 pandemic.

In the same vein, the Court said that a downturn in turnover is not a 'trend or circumstance' for which an adjustment is permitted let alone required. Instead, it accepted a downwards adjustment to reflect the effects on the business of COVID-19 before cover was triggered does involve assuming that those effects would have continued after the occurrence of the insured peril. In addition, it involves assuming that, even if there had been no prevention of access, turnover during the indemnity period would have been reduced as a result of other effects of the emergency. The fact that those effects were being felt before cover was triggered would (in the Court's view) make no difference in that regard.

Orient Express

A final matter that merits attention in the UK (but less so in Australia at this point in time) goes to whether a decision relied on by the High Court was properly decided in 2010. Ultimately the Supreme Court decided that it had not been. Contact us to find out more about this matter.