What happens next following the Supreme Court's judgment on Business Interruption Clauses?

The long-awaited decision from the Supreme Court regarding Financial Conduct Authority’s (FCA) test case for the business interruption clauses in commercial insurance policies has been announced, with the Court deciding in favour of businesses; which largely supports the decision of the High Court in 2020, including the view that the Orient-Express Hotels Ltd. –v- Assicurazioni Generali S.p.A case was wrongly decided. The judgment-supporting businesses will offer a life-line to the hardest hit industry sectors, hospitality, retail and aviation. The FCA’s desire to reach an "authoritative declaratory judgment" has been fulfilled.

Thousands of small businesses that were looking business failure in the face can now look forward to the prospect of survival. The background to the case concerns the initial rejection of policyholders claims by insurers when businesses attempted to rely on the business interruption clauses in their commercial insurance policies. The FCA issued guidance to insurers but swiftly recognised that there were considerable areas of contention and the insurers were not likely to pay out unless there was clarity on the validity of the claims which would compel the insurers to honour the policies. 

The FCA decided that the best way forward was to embark on a test case in the High Court which would result in a conclusive decision. The High Court heard the case and delivered a complex judgement that largely rejected the insurers' reasons for not paying out against the business interruption clauses. A number of insurers appealed the decision and now we finally have a judgment from the Supreme Court.

The Supreme Court considered the following issues:

• Disease clauses – those that may be triggered by coronavirus in relation to the proximity of cases to the insured business’s premises
• Prevention of Access clauses – those triggered by public authority intervention preventing the use of or access to the business premises
• Hybrid clauses – the combination of both the disease and prevention of access clauses
• Trends clauses – whether the previous court was correct to apply counterfactual scenarios in policies where loss adjustments may be made
• Whether the previous court was correct in its analysis of the Orient-Express Hotels Ltd. –v- Assicurazioni Generali S.p.A case that the insurance industry referenced

Sheldon Mills, Executive Director, Consumers and Competition at the FCA, commented “coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. This test case involved complex legal issues. Our aim throughout this test case has been to get clarity for as wide a range of parties as possible, as quickly as possible, and today’s judgment decisively removes many of the roadblocks to claims by policyholders.” He further commented “we will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible. Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain the next steps.” He went on to point out that the FCA recognised from the start that the number of jobs relying on the case amounted to hundreds of thousands.

Vincenzo Senatore, a partner, pointed out “the FCA’s decision to bring the test case avoided the need for businesses to attempt to negotiate individually with their insurers which would have been highly unlikely to have resulted in the insurers paying out against the clauses in the insurance policies” he further commented “it remains to be seen how quickly the hundreds of claims are processed. For many businesses speed of action is vital after months of lockdown. It is possible that for many businesses the decision may be too late”

The complex judgment amounts to 112 pages and amongst other things, the ruling has clarified that in addition to full closure, partial closure and mandatory closure order even if they have no weight in law are, indeed, covered. Also, just because the loss would have resulted anyway from the pandemic claims should not be reduced or rejected.

Huw Evans, the Director-General of the Association of British Insurers commented “Insurers have supported this fast-track legal process every step of the way and we welcome the clarity that the judgment will bring to a number of complex issues. Today’s judgment represents the final step in the appeal process… we recognise this has been a particularly difficult time for many small businesses and naturally regret the Covid-19 restrictions have led to disputes with some customers.”

Vincenzo further commented “whilst the Supreme Court’s judgment is very welcome and brings much needed clarity to the wording of the business interruption clauses contained in commercial insurance policies, a large number of questions still remain, such as whether certain financial support provided the Government should be counted as turnover.” Vincenzo continued “initially insurers regarded all such support as turnover. The FCA wrote to the insurers pointing out that the government business grant payments should not be considered part of a policy holder’s turnover when calculating lost income under a business interruption policy. However, the judgment stopped short of clarifying the status of other forms of government support introduced at the start of the pandemic, like business rates relief, furlough payments to staff.”

The lawyers in Giambrone’s insurance litigation team believe there are still a number of issues between insurers and policyholders that may result in legal battles; for example, are businesses with multiple branches regarded as suffering single loss or multiple separate losses for each branch? In such circumstances there is a vast difference in the size of the payout, this was not addressed by the Supreme Court decision. 

Many policyholders have complex losses that will not be easy to resolve. The FCA may offer guidance and businesses with a turnover up to £6.5 million can complain about insurers to the Financial Ombudsman Service (FOS). 

The Supreme Court judgment has delivered a significant victory in the battle businesses have with their insurers but whether the war will ultimately be won remains to be seen.

The FCA is providing guidance on how to prove the presence of coronavirus, which will be applicable to certain policies, as well as a set of declarations to explain the judgment and also a Q&A to assist policyholders.

For further information about how to bring a business interruption claim please click here.