Insurance – Business interruption policy – Interpretation – Appellant authority and intervening policyholder action group appealing against decision of Commercial Court making declarations about meaning and effect of wording of business interruption insurance policies – Respondent insurers appealing – Whether court erring in law – Appellants’ appeal allowed in part – Respondents’ appeals dismissed
In March 2020, the UK government began to take a series of measures to combat the transmission of Covid-19. These included informal announcements and instructions from the prime minister as well as the passage of primary and secondary legislation through the UK parliament and devolved administrations.
An issue arose concerning the impact of those actions and measures on 28 clauses in the 21 lead policies written by the respondent insurers and obtained by a range of businesses and organisations, which purported to provide coverage in the event of business interruption. The appellant Financial Conduct Authority and the respondents agreed to submit those policy wordings for consideration with the aim of addressing issues arising from similar policies prevalent in the insurance industry.
The case was heard by the Divisional Court under the financial markets test case scheme. The court considered the construction of each policy wording: [2020] EWCA Comm 2448. The appellants and the respondents appealed.
The Supreme Court was asked to determine certain matters of construction relating to: (i) “disease clauses” (triggered by the occurrence of severe acute respiratory syndrome coronavirus 2 (Covid-19), typically within a specified distance of the insured’s premises); (ii) “prevention of access clauses” (triggered by restrictions imposed by a public authority preventing access to, or use of, premises as a result of Covid-19); (iii) the causal link to be shown between business interruption losses and the occurrence of a notifiable disease (or other insured peril specified in the relevant policy wording); (iv) the effect of “trends clauses” (which prescribed a standard method of quantifying business interruption losses by comparing the performance of a business to an earlier period of trading); (v) the significance in quantifying business interruption losses of effects of the pandemic on the business which occurred before the cover was triggered (pre-trigger losses); and (vi) in relation to causation and the interpretation of trends clauses, the status of the decision of the Commercial Court in Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm); [2010] PLSCS 158.
Held: The appellants’ appeal was allowed in part. The respondents’ appeals were dismissed.
(1) The word “occurrence” in the disease clauses would be understood as something which had happened at a particular time, at a particular place, in a particular way. The interpretation which made best sense of the clauses was to regard each case of illness sustained by an individual as a separate occurrence. There was no difficulty in principle, and unlikely in most instances to be difficulty in practice, in determining whether a particular occurrence was within or outside the specified geographical area.
The disease clauses were properly interpreted as providing cover for business interruption that had been caused by any cases of illness resulting from Covid-19 that had occurred at or within the specified radius of the insured business premises. However, the disease clauses did not cover interruption caused by such cases that had occurred outside that geographical area.
(2) The words “restrictions imposed” were general and unqualified. In most cases, the relevant restrictions would be directed at the insured premises or the use of the premises by the policyholder, but they were not required to be so. Restrictions imposed by a public authority would be understood as ordinarily meaning mandatory measures imposed by the authority pursuant to its statutory or other legal powers. “Imposed” connoted compulsion and a public authority exercised compulsion through the use of such powers. However, “restrictions imposed” need not have the force of law. A mandatory instruction might be given by a public authority in the anticipation that legally binding measures would follow, or would do so if compliance was not obtained; that was capable of being a restriction imposed.
The statement made by the prime minister instructing named businesses to close had been a clear, mandatory instruction on behalf of the government. It was an instruction which both the named businesses and the public would have reasonably understood had to be complied with, without inquiring into the legal basis or anticipated legal basis for it. Therefore, such an instruction was capable of being a “restriction imposed”, regardless of whether it was legally capable of being enforced.
An “inability of use” had to be established; not an impairment or hindrance in use. On the other hand, the inability did not have to be an inability to use any part of the premises for any business purpose. The reference to “the business premises” was naturally read as including a discrete part of those premises which was capable of being used separately from other parts. Such an interpretation also made commercial sense, as there might be little difference from a business point of view between the ability to use a small part of the premises for a limited purpose and closure of the whole premises.
Furthermore, the language of the clause did not require a complete inability to use the premises for all purposes. The “inability to use” requirement was satisfied either if the policyholder had been unable to use the premises for a discrete part of its business activities, or if it was unable to use a discrete part of its premises for its business activities. In both situations there was a complete inability of use.
Depending on the facts, the wording of the policy might cover prevention of access to a discrete part of the premises and/or for the purpose of carrying on a discrete part of the policyholder’s business activities. It was unlikely that a business which was permitted to remain open would be able to show a qualifying inability to use or prevention of access.
(3) It could not be said that any individual case of illness resulting from Covid-19 had, on its own, caused the UK government to introduce the restrictions which had led directly to business interruption. The government measures were taken in response to information about all the cases of Covid-19 in the country as a whole and it was realistic to analyse the situation as one in which all the cases were equal causes of the imposition of national measures.
On the proper interpretation of the disease clauses, in order to show that losses from interruption of the insured business had been proximately caused by one or more occurrences of illness resulting from Covid-19, it was sufficient to prove that the interruption had been a result of government action taken in response to cases of Covid-19, which included at least one case of Covid-19 within specified radius of the insured premises covered by the clause. The basis for that conclusion was that each of the individual cases of illness resulting from Covid-19 which had occurred by the date of any government action was a separate and equally effective cause of that action, and of the response of the public to it; and it was unnecessary to establish “but for” causation which was neither always necessary nor always sufficient for proximate causation. In this case, it was not necessary. Each case of Covid-19 was a proximate cause of any interruption caused by the government’s nationwide response to the pandemic.
That analysis also applied to the hybrid clauses which contained, as one element, an occurrence of an infectious disease within a specified distance of the insured premises. In order to show that business interruption losses had been covered by those clauses, it was sufficient to prove that the interruption had been the result of closure or restrictions placed on the premises in response to cases of Covid-19, which included at least one case manifesting itself within the specified radius of the insured premises.
Prevention of access and hybrid clauses contained a series of elements which had to be satisfied to trigger the insurer’s obligation to indemnify the policyholder against the loss. Such public authority clauses indemnified the policyholder against the risk (and only against the risk) of all the elements of the insured peril acting in causal combination, and in the required causal sequence, to have caused business interruption loss; but it did so regardless of whether the loss was concurrently caused by other (uninsured but non-excluded) consequences of the Covid-19 pandemic which was the underlying or originating cause of the insured peril.
(4) Unless the insurance policy wording otherwise required, trends clauses were not to be construed so as to take away the cover for losses prima facie covered by the insuring clauses on the basis of concurrent causes of those losses which did not prevent them from being covered by the insuring clauses. The aim of trends clauses was to arrive at the results that would have been achieved but for the insured peril and circumstances arising out of the same underlying or originating cause. Insurers could not adjust claims down by relying on trends clauses which were intended to address losses entirely outside the insured peril.
Therefore, the trends clauses in issue should be construed so that the standard turnover or gross profit derived from previous trading was adjusted only to reflect circumstances which were unconnected with the insured peril and not circumstances which were inextricably linked with the insured peril in the sense that they had the same underlying or originating cause. Such an approach ensured that the trends clause was construed consistently with the insuring clause. Such an approach ensured that trends clauses were construed consistently with the insuring clauses. Accordingly, trends clauses did 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 pandemic.
(5) The court below was wrong to hold that the indemnity for business interruption loss sustained after cover was triggered should be reduced to reflect a downturn in the turnover of the business due to Covid-19 which would have continued even if cover had not been triggered by the insured peril. The court had correctly concluded that losses should be assessed on the assumption that there was no Covid-19 pandemic. Consistently with that conclusion, the court should have held that, in calculating loss, the assumption should be made that pre-trigger losses caused by the pandemic would not have continued during the operation of the insured peril. Pre-trigger downturns in revenue caused by the source of the insured peril would not reduce insured’s claims.
(6) The respondents had relied on the decision in Orient-Express Hotels Ltd v Assicurazioni Generali SpA to support their arguments on causation of loss and the effect of the trends clauses in the present case. In Orient-Express, the Commercial Court accepted the insurer’s case in relation to a trends clause that the business interruption losses arising from hurricane damage to a hotel was limited to the business interruption arising directly from the damage to the hotel; and did not extend to business interruption resulting from the hurricane damage to the wider surrounding area.
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. On mature and considered reflection, the Supreme Court also considered that it was wrongly decided and should be overruled. If the policy holder’s losses had two concurrent causes (one insured and one uninsured) which arose from the same underlying fortuity, loss resulting from both causes operating concurrently was covered.
In Orient-Express, the tribunal and the court were wrong to hold that the business interruption loss was not covered by the insuring clause to the extent that it did not satisfy the “but for” test. If the tribunal or the court had held that the loss concurrently caused by both the damage to the hotel and the damage to other parts of the city was covered by the insuring clause, that would have fundamentally affected the approach to the interpretation of the trends clause.
Colin Edelman QC, Peter Radcliffe, Adam Kramer and Max Evans (instructed by Herbert Smith Freehills LLP) appeared for the appellant; John Lockey QC and Jeremy Brier (instructed by Clyde & Co LLP) appeared for the first respondent; Simon Salzedo QC and Michael Bolding (instructed by Simmons & Simmons LLP) appeared for the second respondent; Gavin Kealey QC, Andrew Wales QC, Sushma Ananda and Henry Moore (instructed by DAC Beachcroft LLP) appeared for the third and fifth respondents; Jonathan Gaisman QC, Adam Fenton QC, Douglas Grant and Miles Harris (instructed by Allen & Overy LLP) appeared for the fourth respondent; Michael Crane QC, Rachel Ansell QC, Martyn Naylor and Sarah Bousfield (instructed by Clyde & Co LLP) appeared for the sixth respondent; David Turner QC, Clare Dixon, Shail Patel and Anthony Jones (instructed by DWF Law LLP, of Manchester) appeared for the seventh respondent; Andrew Rigney QC, Craig Orr QC, Caroline McColgan and Michelle Menashy (instructed by Clyde & Co LLP) appeared for the eighth respondent; Ben Lynch QC, Simon Paul and Nathalie Koh (instructed by Mishcon de Reya LLP) appeared for the intervener.
Eileen O’Grady, barrister
Click here to read a transcript of Financial Conduct Authority v Arch Insurance Ltd and others
