The United Kingdom’s Supreme Court has upheld the decision of the High Court which largely found in favour of policyholders in respect of business interruption coverage for COVID-19 claims. The Court also determined that the Orient Express Hotels Ltd1 (Orient Express) case, which related to causation, was wrongly decided and should be overruled.
The decision is likely to be important in the Australian market, particularly given the recent Supreme Court of Appeal decision on the Quarantine Act 1908 (Cth) exclusion which also favoured policyholders. However, the United Kingdom approach may not necessarily be followed in the Australian market because the decision is not binding in Australia, and there are important differences between the Australian and United Kingdom coverage wordings.
The Supreme Court Appeal
On 15 September 2020, the United Kingdom’s High Court handed down judgment in the test case of the Financial Conduct Authority v Arch and Others  EWHC 2448 (Comm) (the test case). This judgment was appealed and the Supreme Court hearing took place between 16 and 19 November 2020. The appeal judgment was then delivered on 15 January 2021. Our previous summary of the High Court decision may be found here.
While each party appealed on multiple different issues, the relevant issues on appeal can be broadly categorised as:
- The interpretation of “disease clauses” which provide cover for business interruption losses resulting from the occurrence of diseases like COVID-19, at or within a specified distance of the business premises;
- The interpretation of “prevention of access clauses” which provide cover for business interruption losses resulting from public authority intervention preventing or hindering access to, or use of, the business premises;
- The interpretation of “hybrid clauses” which combine the main elements of disease and prevention of access clauses;
- Causation – insurers argued that policyholders would have suffered the same or similar business interruption losses even if the insured risk or peril had not occurred. The insurers relied heavily on the decision of Orient Express which had already been criticised by the High Court in the test case; and
- The interpretation of “trends clauses” which provide cover for business interruption losses to be quantified by reference to what the performance of the business would have been had the insured peril not occurred.
The Supreme Court considered the wording of a typical disease clause taken from an RSA policy. This clause provided cover for “any…occurrence of a Notifiable Disease within a radius of 25 miles of the Premises”.
The insurer’s position was that this clause only provided cover for the business interruption consequences of Notifiable Disease cases within 25 miles of the insured’s premises. This interpretation did not benefit the policyholders in most cases, as it was extremely difficult to establish that their business losses resulted from a localised occurrence of COVID-19 rather than the pandemic and associated government response generally. The Supreme Court found that the words “occurrence of a Notifiable Disease” provided cover for business interruption losses caused by any cases of COVID-19 that occurred within a 25-mile radius of the insured’s premises. The Supreme Court went on to agree with the High Court that the scope of cover was not confined to business interruption losses that resulted only from cases within a 25-mile radius as opposed to elsewhere.
Other policy wordings were also considered, the most notable being the wording of two QBE policies that covered:
- business interruption losses in consequence of an “event” which included the occurrence of a Notifiable Disease; provided that
- the insurer shall only be liable for loss arising at those premises which are directly subject to the “incident”.
The Supreme Court held that the words “event” and “incident” did not change the meaning of these particular disease clauses and (like the RSA wording) they covered losses caused by any case of COVID-19 that occurred within a 25-mile radius of the insured’s premises. Noting that cases within a 25-mile radius did not need to be the only cause of the losses.
Prevention of Access and Hybrid Clauses
With respect to these clauses, the Supreme Court appeal concerned two main issues:
- The nature of “public authority intervention” required to trigger the clauses;
The High Court previously held that the public authority intervention required to trigger the clause constituted mandatory restrictions imposed by order and supported by statute (i.e. the Regulations introduced on 21 and 23 March 2020). However, the Supreme Court expanded this definition and made it clear that the restrictions imposed did not need to refer to any specific statute to trigger the policy and only needed to be in mandatory terms.
The insureds argued on appeal that cover should also be triggered by Government intervention like the Prime Minister’s instructions to ‘stay at home’ and for certain businesses to close on 16 March 2020. While the Supreme Court did not rule on the Prime Minister’s 16 March statement, it held that any statement that constituted a “mandatory instruction given on behalf of the UK Government” would trigger the relevant policies. This included a statement by the Prime Minister on 20 March 2020 which gave specific instructions for certain businesses (nightclubs, theatres, cinemas, gyms, and leisure centres) to close. Whether the remainder of each of the government announcements constituted the requisite public authority intervention was left for agreement or further argument between the parties.
- The nature of “prevention or the hindrance of access/use” required to trigger the clauses.
As part of the Court’s analysis of this issue, the terms “inability to use”, “prevention of access” and “interruption” were considered as they appeared in a number of different policy wordings.
The Supreme Court found that the term “inability to use” is satisfied if the policyholder is unable to use the premises for a discrete part of its business activities or if it is unable to use a discrete part of its premises for its business activities.
For example, if a bookshop is required to close thereby losing all of its walk-in customer business (80% of its income) but is still allowed to use the premises for telephone orders (20% of its income). Then the bookshop will have an ‘inability to use’ its premises for a discrete part of its business activities (walk-in customers) and will meet the definition of “inability to use” if it claims for a loss of 80% of its income as a result of the closure.
The term “prevention of access” was found to be consistent with the definition of an “inability to use” such that policies that refer to this term may also cover prevention of access to a discrete part of a policyholder’s premises and/or prevention of access to the premises for a discrete purpose. Importantly, this term was distinguished from a mere “hindrance”. The example used by the Court was that an announcement by the Government to stay at home unless you have a reasonable excuse was not a prevention of access, as people were still allowed to visit shops for the purposes of buying essential supplies or transacting business that could not be carried out remotely. Rather, this was merely a hindrance in the use of a shop’s premises.
“Interruption” was interpreted broadly as the Court held this term was able to encompass an interference or disruption that does not necessarily cause a complete cessation of business or activities.
Ultimately, the Supreme Court interpreted the wording of certain Prevention of Access and Hybrid clauses more broadly than the High Court. Government directions needed only be of a mandatory (and not necessarily legal) nature to trigger coverage and the insured business did not need to sustain a complete cessation of activity to successfully claim for losses to a discrete part of its business activities (for example, walk-in sales).
On this issue, the Supreme Court accepted that each case of COVID-19 in the UK could be considered an equal cause of the Government response that ensued. Although, insurers went on to argue that it was necessary for policyholders to establish that their business interruption loss would not have been sustained but for the occurrence of the insured peril. This argument was centred on the contention that (because the COVID-19 pandemic was so widespread) policyholders would have suffered the same or similar business interruption losses even if the insured risk or peril (being the occurrence of COVID-19 within a 25-mile radius, or a public authority action causing a prevention of access) had not occurred, and therefore the policies did not respond.
The Court rejected this argument on the basis that the “but for” test was not conclusive in determining whether causation had been established under the policies. Instead, the Court confirmed that the standard position is that causation is established provided the causal link between the insured peril and loss is one of proximate causation. This default position of proximate causation can be displaced if the policy provides for some other kind of causal connection.
There were arguably two proximate causes of loss, namely:
- the occurrence of COVID-19 within the prescribed radius of the insured’s premises/the public authority action preventing access; or
- the widespread nature of the pandemic.
The Court found that, where there are two proximate causes of loss:
- of which neither are excluded but only one is insured, then the insurers are liable for the loss (as per the case of Miss Jay Jay2);
- of which one is an insured peril but the other is expressly excluded, the exclusion will generally prevail (as per decision of Wayne Tank3).
Using this reasoning, they agreed with the earlier High Court decision and found that no individual case of COVID-19 could be said to have caused the UK Government to introduce restrictions. Instead, measures were taken in response to COVID-19 cases all across the UK as a whole, such that each case was an equal cause of the restrictions.
The Court concluded that the concept of causation did not preclude an insured peril, in combination with many other similar uninsured events, from being regarded as a proximate cause of a loss that had a sufficient degree of inevitability even if the insured peril would not be sufficient to cause the loss by itself.
In the context of the different policies, the Court held:
- Disease clauses
No reasonable person would have intended for cases of COVID-19 outside the 25-mile radius to be a countervailing cause that displaces the causal impact of COVID-19 cases inside the radius. Therefore, the policyholders merely needed to prove that their business interruption losses were a result of Government action taken in response to all COVID-19 cases (including at least one case within the 25-mile radius or other geographical area prescribed by the policy).
- Prevention of Access and Hybrid Clauses
The wordings of these policies indemnified the policyholders against the risk of all the elements of the insured peril (UK Government directions to close/restrict walk-in customers from attending certain businesses) acting in combination to cause business interruption loss. Even if the loss was concurrently caused by other uninsured but non-excluded factors arising from the COVID-19 pandemic.
However, this indemnity will not extend where the COVID-19 pandemic generally is the sole proximate cause of the loss. For example, if a travel agency lost most of its business due to overseas travel restrictions imposed as a result of COVID-19 (an uninsured but non-excluded factor) and people were also unable to enter the agency due to the restrictions on walk-in customers attending certain businesses (the insured peril). The loss will not be covered if the sole proximate cause of the loss was the travel restrictions and not the walk-in restrictions.
These clauses provide cover for business interruption losses that are quantified by reference to what the performance of the business would have been had the insured peril not occurred.
An example of such a clause (taken from the Hiscox 3 wording) is as follows:
“The amount we pay for loss of gross profit will be amended to reflect any special circumstances or business trends affecting your business, either before or after the loss, in order that the amount paid reflects as near as possible, the result that would have been achieved if the damage had not occurred.”
Insurers argued that these clauses operated as an exclusion such that they were not liable to indemnify policyholders for losses which would have occurred irrespective of the insured peril because of the wider effect of the COVID-19 pandemic.
The Court disagreed with the insurers’ arguments and held, consistent with their interpretation of causation, insurers could not reduce the indemnity provided on the basis that the losses were caused equally by other uninsured perils resulting from the COVID-19 pandemic.
A secondary issue concerned the High Court’s interpretation of “pre-trigger losses”. The High Court had previously found that the trends clauses operated such that any measurable downturn in a businesses’ turnover prior to the insured peril being triggered ought to be taken into account as a trend and operate to reduce the indemnity payable by the insurers.
The Supreme Court disagreed with this reasoning, finding that the indemnity should be calculated by reference to what the business would have earned had there been no COVID-19, disregarding any demonstrable revenue downturn prior to the policy being triggered that resulted from the COVID-19 pandemic generally.
Insurers relied heavily on the decision in Orient Express when advancing their arguments regarding causation and the trends clauses.
In Orient Express, an insured hotel was claiming for business interruption losses caused by Hurricanes Katrina and Rita which devastated large parts of New Orleans in 2005. Insurers argued there was no cover because, even if the hotel itself had not been damaged, the damage to the surrounding area meant that the hotel would have suffered the same business interruption losses. Therefore, the Court found in Orient Express that the required test for causation could not be met as the insured peril was the physical damage to the hotel alone, and the surrounding damage to New Orleans and the specific damage to the insured hotel were competing causes of the business interruption.
The High Court at first instance distinguished the Orient Express case from the present circumstances and simply declined to follow it. However, the Supreme Court held that the Orient Express case itself should be overturned finding that:
- In cases where both an insured peril and an uninsured peril arise from the same underlying source (i.e. Hurricanes); and
- Provided the damage caused by the uninsured peril is (i.e. the surrounding damage to New Orleans) is not excluded; then
- The loss resulting from both causes operating concurrently is covered; and
- In this instance, the “but for” test is not determinative of cover for business interruption losses.
Policyholders’ arguments for business interruption coverage for COVID-19 losses have been persuasive with the United Kingdom’s High Court and Supreme Court appeal. However, the Australian position may not necessarily follow the United Kingdom because:
- The Australian courts are not bound by the United Kingdom Supreme Court decision, but an appeal decision of a High Court judgment is likely to be given substantial weight by policyholders, and may be persuasive in Australia.
- The common disease and prevention of access cover wordings differ.
- The government mandates and restrictions imposed differ.
- The exclusions in respect of diseases have not been considered (i.e. the meaning of references to ‘listed human diseases’ under the Biosecurity Act 2015 (Cth) and or Quarantine Act 1908 (Cth), or ‘disease’ generally).
In Australia, the New South Wales Supreme Court of Appeal also found in favour of policyholders on a business interruption test case relating to COVID-19 claims (our update can be found here). In that case, the Court found that the outdated reference in an exclusion to diseases listed under the Quarantine Act 1908 (Cth) could not be read as excluding diseases under the Biosecurity Act 2015 (Cth). As COVID-19 is not listed under the Quarantine Act 1908 (Cth), that policy reference does not exclude COVID-19 claims. An application for special leave to appeal to the High Court of Australia was made on 16 December 2020. The outcome will be important for the Australian market as many policies contain the outdated Quarantine Act (worth $10 billion in claims estimated by the Insurance Council of Australia).
Given the wide scale business interruption losses arising from COVID-19 and the United Kingdom and Australian decisions having found in favour of policyholders, a number of business interruption class actions are being considered in Australia. This is likely to lead to the Australian market seeking clarification from the courts on COVID-19 coverage claims.
1 v Assicurazioni General SpA  EWHC 1186.
2 J. J. Lloyd Instruments Ltd. v Northern Star Insurance Co. Ltd.  1 Lloyd’s Rep. 264.
3 Wayne Tank & Pump Co Ltd v The Employers’ Liability Assurance Corporation Ltd  QB 57