16 February 2021
Business interruption insurance: what the UKSC say
With many businesses affected by the Covid pandemic holding insurance, designed to cover interrupting events and losses, some ask: why the fuss? The answer, of course, is coverage. Against the backdrop of large numbers of claims being made under a range of business interruption policies following the Covid-related lockdown, for clarity the Financial Conduct Authority decided to take a test case on behalf of policyholders, selecting 21 different policy types from 8 different insurers, firstly to the High Court and then on to the UKSC.
Although each policy differs, the starting point is that most (for SMEs at least) provide some basic cover for business interruption, often resulting from property damage. Some also cover loss arising from business interruption if it iscaused by other issues, such as infectious or notifiable diseases, or when access is prevented. The need for clarity arose because some insurers accepted liability, and others did not. It was argued by the FCA that these sorts of clauses should provide cover in light of the Covid-19 pandemic.
The 150-page High Court decision on 15 September 2020 concluded that 12 of the sample policy types provided cover. Although the conclusions go far beyond a short summary, two key points were (a) that a substantial degree of cover under ‘disease clauses’ was upheld, with the view that what mattered was incidents of infection rather than formal diagnosis; and (b) ‘prevention of access clauses’, dealing with cases where use of premises were prevented, were also potentially valid but may be construed more restrictively and consideration given to questions like whether business closure was actually mandated, or otherwise impacted by ‘stay at home’ guidance.
The insurers tried to appeal, but lost. The 100-page UKSC judgment, handed down on 15 January 2021 and addressing appeals on both sides, found unanimously in favour of the FCA on the issues it appealed. The result is that all the clause types raised before the UKSC should provide cover for business interruption attributable to Covid-19. Again, two key points are that: (a) taking a slightly narrower view, the UKSC suggest that ‘disease clauses’ may, to a degree, be impacted by a radius from which a notifiable disease occurred; and that (b) ‘prevention of access clauses’ might apply where the restriction did not have the force of law, referencing, in particular, the instructions given by the Prime Minister in March 2020.
Referring to the decision, the FCA’s summary (in full, here) concluded as follows: “[C]over may be available for partial closure of premises (as well as full closure) and for mandatory closure orders that were not legally binding; that valid claims should not be reduced because the loss would have resulted in any event from the pandemic; and that two additional policy types from insurer QBE provide cover.”
Although long and detailed, the UKSC’s judgment provides useful guidance which should be well-received by policyholders. Clearly, however, many policies will differ. It would have been impossible to test each one. Care and interpretation will be needed, and if you – whether as a policyholder or otherwise – have questions on the decision or over coverage, our dispute resolution group can help.