High Court gives guidance on UK business interruption insurance

The court found that some, but not all, of the 'disease' and 'denial of access' clauses in 21 sample non-damage BI insurance extensions provided cover, depending on the detailed wording in each case and the effect on the insured business. It also ruled that the Covid-19 pandemic and the government and public response to it were a single cause of covered loss, required in order for claims for which the policy provides cover to be paid.

However, the case may yet be appealed, with the parties having already agreed that they will explore the possibility and appropriateness of a  'leapfrog' appeal directly to the Supreme Court rather than having to go through the Court of Appeal, said insurance law expert Rebecca Carrera of Pinsent Masons, the law firm behind Out-Law.

Carrera said: "The court's decision addresses points of policy interpretation in relation to the representative wordings put before them. It has analysed each policy based on the explicit words used, and so the result will give rise to different outcomes for different insurers".

"The court has invited the parties to make submissions as to what declarations the court should now make and a further hearing will take place before the High Court, likely to take place in October. The FCA guidance sets out what insurers should do once the test case is resolved, but it will not be 'resolved' until any appeals are exhausted" she said.

Christopher Woolard, interim chief executive of the FCA, said: "Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today's judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful".

"Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid. They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps," he said.

BI insurance policies traditionally cover loss of revenue or profit experienced by a business following damage to property, and the cost of mitigating that disruption. Usually, property damage, for example due to a storm or fire, acts as the trigger for the coverage. However, businesses can take out specific extensions to BI cover for non-physical damage, such as closure of premises or denial of access, or cover which is explicitly related to infectious or contagious diseases. It was the cover under these non-damage BI wordings that was the focus of the test case.

In April, the FCA wrote to insurers explaining its belief that most BI policies do not provide cover for losses related to the Covid-19 pandemic. However, in June, it began a test case on behalf of predominantly small and medium sized enterprise (SME) policyholders, citing "genuine doubts over the appropriate interpretation of the wording" of some extensions and seeking to provide clarity. The High Court was asked to consider 21 sample wordings from policies issued by eight different insurers as part of the proceedings, but the FCA has said that the outcome could affect around 370,000 policyholders under 700 policies issued by 60 different insurers.

The court first considered a group of provisions which purported to provide cover for BI in the context of a notifiable disease occurring within a specified radius, or within "the vicinity", of the insured premises. Insurers argued that the cover provided was for a local occurrence of a notifiable disease rather than for a wider disease spread, as in the case of Covid-19. The FCA disagreed. The High Court agreed with the FCA's analysis, concluding that the proximate cause of the BI was the notifiable disease of which individual local-level outbreaks formed indivisible parts.

The court said that its conclusion avoided an otherwise "anomalous" result, where "there would be no effective cover if the local occurrence were a part of a wider outbreak and where, precisely because of the wider outbreak, it would be difficult or impossible to show that the local occurrence(s) made a difference to the response of the authorities and/or public".

On the key issue of causation, Carrera said: "Insurers relied on a leading previous case, which the court opted not to follow on the basis they considered it distinguishable. The FCA argued that the causation test should be applied in a 'sensible and realistic way'. The court's finding which will be particularly helpful to policyholders will be the broad definition of what the policy insures - the 'insured peril' - and a correspondingly broad definition of what needs to be disregarded for the purpose of calculating loss – the 'counterfactual'," she said.

"For policyholders who have cover for notifiable diseases within a 25-mile radius, the key issue for the court to determine was whether they would be required to show that the occurrence of the disease within that specified area was the cause of the government restrictions and resultant losses. The court's view was that the occurrence of the disease locally should be regarded as part of, rather than separate to, its occurrence elsewhere in the country. It found therefore that the disease in the UK is one indivisible cause. This may be one of the areas where an appeal might be considered by the insurers," she said.

"However, for the notifiable disease clauses, where the disease needs to be in the 'vicinity' of the insured's premises to be covered, the court found that this could either mean any occurrence in England and Wales or a more limited area, depending on the specific wording used. The court also found a distinction in whether the disease needed to be diagnosed or asymptomatic depending on whether the policy specifies that an 'occurrence' of the disease or a 'manifestation' is required. Again, this illustrates that the decision will impact differently for different insurers, depending on the wordings they have used," she said.

The court then went on to consider a group of provisions providing cover where government or other authority action or restrictions prevented or hindered access to or use of the insured premises. Again, it focused on the specific wordings used, but its conclusions were more mixed. It found that, generally speaking, these clauses should be construed more restrictively than the majority of the disease clauses, albeit providing cover for some insured businesses under some wordings.

"The court concluded that, where policies require that 'restrictions are imposed' on businesses, that can only mean restrictions imposed by statutory instrument – therefore guidance, exhortation and advice given by the government, including by the prime minister and including as to social distancing, will not suffice as a trigger for cover," Carrera said.

"Similarly, 'enforced closure' can only be made out if caught by the relevant Regulations. The court also found that an 'inability to use' business premises means something different from 'hindered in using'. Policyholders and insurers alike will need to carefully consider which Regulations apply to their businesses and the documented reasons for closure," she said.

"It is likely that some insurers will welcome the court's findings here, given that the words used in the insuring clauses clearly define the scope of the cover insurers were willing to take on. However, the court also found that denial of access cover would be rendered 'illusory' if, as had been suggested, the insured was required to prove why customers had not come to their premises when they had not in fact come in order to demonstrate that their losses had been caused by government restrictions and nothing else," she said.

The FCA has said that each policy now needs to be considered against the detailed judgment to work out what it means for that policy. Throughout the progress of the test case, it has been keen to provide clarity to SME policyholders as soon as practicable. In line with that, the FCA has set out its expectation that insurers should write to policyholders within seven days to explain next steps.