Supreme Court rejects insurers' appeals in BI test case judgment

Supreme Court

The court also concluded that the Orient Express case, which insurers relied on during the hearing, was wrongly decided and should be overruled.

The Supreme Court has ruled largely on the side of the Financial Conduct Authority (FCA) and policyholders, according to the judgment in the business interruption test case appeal published today (15 January).

The dispute between policyholders and insurers over the non-payment of Coronavirus BI claims was heard in the Supreme Court in November 2020, after the original High Court judgment found in favour of policyholders with regard to the majority of points made in the case, but the results differed by policy wording.

Both policyholders and insurers lodged appeals on certain aspects of the original judgment.

The Supreme Court said in the judgment: “Although we have accepted some of the insurers’ arguments on their appeals, in no case has that affected the outcome of the appeal. It follows that the insurers’ appeals are dismissed.”

It continued: “The parties are encouraged to agree appropriate declarations and orders to be made in the light of the judgment.”

Orient Express
Insurers relied heavily on the Orient Express case, which concerned a claim for BI loss arising from hurricane damage to a hotel in New Orleans in 2005, during the proceedings in November 2020.

However, the Supreme Court concluded today that the Orient Express case was wrongly decided and should be overruled.

In that case, the hotel’s policy contained a trends clause with similar wording to those in the present case, and a panel of three arbitrators, including Mr George Leggatt QC, accepted the insurer’s argument that the cover did not extend to BI losses which would have been sustained anyway as a result of damage to the city of New Orleans.

This was upheld in the Commercial Court, which found that ‘but for’ reasoning meant the hotel was entitled to significantly less of a pay out under its BI policy due to a trends clause in the policy.

In the BI test case judgment, justices stated that they have had “the benefit of far more detailed and wide-ranging argument that at the arbitration hearing or on the one-day arbitration appeal in the Orient Express case”.

The judgment continued: “In the present case the court below considered that the Orient-Express decision was distinguishable but, if necessary, would have reached the conclusion that it was wrongly decided and would have declined to follow it.”

Justices argued that the main error in the Orient Express case occurred at the first stage of the analysis when considering causation under the insuring clause and that in such a case when both the insured peril and the uninsured peril operate concurrently then loss resulting from both causes is covered.

“We consider that the correct approach in the Orient-Express case would have been to construe the trends clause so as to exclude from the assessment of what would have happened if the damage had not occurred circumstances which had the same underlying or originating cause as the damage, namely the hurricanes,” they continued.

The Orient Express case was heard in the Commercial Court by Mr Justice Hamblen, now Supreme Court justice Lord Hamblen, who was part of the group of judges overseeing the Supreme Court appeal in the BI test case along with Lord Leggatt.

Disease clauses
The court also provided judgment around how to interpret disease clauses, prevention of access and hybrid clauses, causation, trends clauses and pre-trigger losses.

Disease clauses cover BI losses resulting from any occurrence of a notifiable disease within a specified geographical radius of the insured premises.

The court said in a statement that it interpreted the clause as covering BI losses resulting from Covid-19, which was made a notifiable disease on 5 March 2020, provided there had been at least one case of the disease within the specified radius.

Lord Hamblen and Lord Leggatt did however accept the insurers’ arguments that each case of illness sustained by a person as a result of Covid-19 is a separate occurrence and the clause only covers BI losses resulting from cases of disease within the radius.

The FCA’s lawyer, Colin Edelman QC, had argued that diseases were not expected to “spread in” or be “confined into a particular neat circle”, as per insurers’ specified one-mile or 25-mile radius clauses. 

“If they had wanted cases in a policy area to be the real cause [of gov action] then one might have expected they would specify that,” he said during the hearing.

The conclusion in today’s judgment was: “For the reasons given, we consider that the court below correctly analysed the meaning of the disease clauses in QBE 2 and QBE 3 and was wrong not to interpret the other disease clauses in a similar way.

“On the correct interpretation of all the relevant clauses, they cover only relevant effects of cases of Covid-19 that occur at or within a specified radius of the insured premises. They do not cover effects of cases of Covid-19 that occur outside that geographical area.”

Prevention of access
Prevention of access and hybrid clauses specify a series of requirements which must all be met before the insurer is liable to pay.

Here the Supreme Court rejected the High Court’s interpretation as “too narrow” and held that as instruction given by a public authority may amount to a “restriction imposed” if it “carries the imminent threat of legal compulsion or is in mandatory and clear terms and indicates that compliance is required without recourse to legal powers”.

The High Court had originally said that this requirement was only satisfied if the measure was expressed in mandatory terms and had the force of law.

The Supreme Court further detailed that Hiscox wordings provide cover only where BI loss is caused by the policyholder’s complete inability to use the insured premises, rather than hindrance of use.

It noted that this can be satisfied where a policyholder is unable to use the premises for a discrete business activity or is unable to use a discrete part of the premises for business activities.

Causation
Looking at causation, the court stated that a key question is whether BI losses consequent on public health measures taken in response to the pandemic were, in law, caused by cases of the disease that occurred within the specified radius of the insured premises.

It said in the statement: “The Court found that the relevant measures were taken in response to information about all the cases of Covid-19 in the country as a whole; and the Supreme Court holds, in agreement with the Court, that all the individual cases of Covid-19 which had occurred by the date of any Government measure were equally effective ‘proximate’ causes of that measure (and of the public response to it).

“It is therefore sufficient for a policyholder to show that at the time of any relevant Government measure there was at least one case of Covid-19 within the geographical area covered by the clause.”

The Supreme Court explained that it had rejected the insurers’ arguments. It detailed that the “but for” test of causation is “sometimes inadequate” and there can be situations, such as the present one, where a series of events all cause a result although none of them was individually either necessary or sufficient to cause the result by itself.

It continued: “The Supreme Court rejects the ‘weighing’ approach as unworkable and unreasonable.

“In relation to the prevention of access and hybrid clauses, the Supreme Court holds that business interruption losses are covered only if they result from all the elements of the risk covered by the clause operating in the required causal sequence. However, the fact that such losses were also caused by other (uninsured) effects of the Covid-19 pandemic does not exclude them from cover under such clauses.”

Trends clauses
The majority of the policies that were examined as part of the case contain trends clauses which provide for BI losses to be calculated by adjusting the results of the business in the previous year to estimate as nearly as possible what results would have been achieved if the insured peril had not occurred.

The Supreme Court judgment stated: “We consider that the trends clauses in issue on these appeals should be construed so that the standard turnover or gross profit derived from previous trading is adjusted only to reflect circumstances which are unconnected with the insured peril and not circumstances which are inextricably linked with the insured peril in the sense that they have the same underlying or originating cause.

“Such an approach ensures that the trends clause is construed consistently with the insuring clause, and not so as to take away cover prima facie provided by that clause.”

Under pre-trigger losses, the High Court permitted adjustments to be made under the trends clauses to reflect a measurable downturn in the turnover of a business due to Covid-19 before the insured peril was triggered.

The Supreme Court rejected this approach and stated that adjustments should only be made to reflect circumstances affecting the business which are unconnected with Covid-19.

Lord Hamblen and Lord Leggatt gave the main judgment today, with which Lord Reed agrees. The court detailed that Lord Briggs gives a separate concurring judgment with which Lord Hodge agrees.

Insurer parties to the case are Arch, Argenta, Hiscox, MS Amlin, QBE and RSA. The FCA was also appealing on some grounds, as was intervener the Hiscox Action Group

Ecclesiastical and Zurich were both named as defendants in the original High Court action, but were not involved in the Supreme Court appeal.

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