(Article from Insurance Law Alert, January 2021)
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The United Kingdom’s top court ruled that insurers were required to pay business interruption losses incurred by companies that were forced to shut down during the mandated lockdown. Financial Conduct Authority v. Arch Ins. (UK) Ltd., No. UKSC 2020/0177 (U.K.).
The case was brought by the Financial Conduct Authority under the Financial Markets Test Case Scheme, which allows a claim “raising issues of general importance to financial markets to be determined in a test case without the need for a specific dispute between the parties where immediately relevant and authoritative English law guidance is needed.” Importantly, the policies in this test case included specific English “disease clause” extensions, which eliminated the standard “physical damage” requirement of all-risk property policies.
The court ruled that such policies provide coverage if the “occurrence” of COVID-19 was within the geographic vicinity of the insured property and caused business interruption losses. The court rejected a more stringent causation requirement, under which the policyholder would need to establish that a particular case of COVID-19 caused the specific business to shut down.
In addition, the court held that a government-mandated lockdown was not necessarily a prerequisite to coverage under “Prevention of Access Clauses,” and that businesses that shut down prior to such legislative action could potentially recover. The court explained that instructions given by public authority, such as warnings by government officials, could constitute a “restriction imposed” if they carry “the imminent threat of legal compulsion.”
The court also ruled that a policyholder can satisfy a “denial of access” clause even where its business remains partially open, so long as the policyholder is unable to use the premises for a “discrete business activity” or is unable to use “a discrete part of the premises for its business activities.” This ruling directly affects business such as restaurants, which were able to remain open for take-out business, but were required to cease in-house dining services.
Finally, the court addressed the extent to which business interruption coverage may be limited if a business would have experienced financial loss due to other circumstances beyond the scope of the policy (i.e., the pandemic in general, rather than the particular policyholder’s business closure). The insurers argued that under the policies’ “Trends Clauses,” recovery is unavailable (or significantly limited) because the policyholders would have suffered the same or similar business interruption losses even if the insured risk had not occurred, because such losses would have arisen regardless of the operation of the insured perils based on the wider consequences of the COVID-19 pandemic. The court rejected this contention, stating that “the aim of such clauses is 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.” (Emphasis added). As such, the court held:
[T]he 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.
In so ruling, the court expressly overturned precedent which held that business interruption coverage may be limited if the policyholder would have incurred losses even if the particular insured risk had not occurred. See Orient-Express Hotels Ltd v. Assicurazioni Generali SpA, [2010] EWHC 1186 (Comm); [2010] Lloyd’s Rep IR 531.
The decision was based on a representative sample of standard form business interruption policies that contained the disease clause extension in light of agreed and assumed facts. The court estimated that, in addition to the particular policies chosen for the test case, approximately 700 types of policies issued by more than 60 different insurers and 370,000 policyholders could potentially be affected by the ruling.