Supreme Courts rules insurers MUST pay small firms for Covid lockdown losses

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Byline: Luke Patel

During lockdown last year, many small businesses made claims through business interruption insurance policies for loss of earnings when they had to close.

But they faced damning ramifications when many insurers refused to pay, arguing only the most specialist policies had cover for such unprecedented restrictions.

On 15th January 2021, the Supreme Court handed down its judgment in the FCA Business Interruption Insurance (BII) case, which in short, means the Supreme Court largely agreed with the decision of the High Court and found in favour of the FCA and BII policy holders.

Now tens of thousands of small businesses will receive insurance payouts covering losses from the first national lockdown, following the Supreme Court, which found largely in favour of small firms receiving payments from business interruption insurance policies.

For some businesses it could provide a lifeline, allowing them to trade beyond the coronavirus crisis.

The complex ruling which covered issues such as disease clauses, whether business were denied access to the properties, and the timing of lost earnings, could cost the insurance sector hundreds of millions of pounds.

Andrew Morgan, Commercial Dispute Resolution lawyer at Blacks Solicitors said: “The judgment of the Supreme Court will be a relief to many policy holders who are now likely to be entitled to payment under BII policies.

“This has provided much needed clarity on an area which had already caused countless disputes between policy holders and insurers.

“The wording of each policy will still need to be carefully considered to establish that cover is provided, but in the event it is, it is hoped that the judgment will compel insurers to make payments as a matter or urgency to avoid the need for litigation from policy holders.”

The court considered the following key areas

Disease clauses
Disease clauses are those which typically cover business interruption losses incurred as a result of an occurrence of a notifiable disease (Covid-19) within a specified radius of the business premises. The Supreme Court found that, in disagreement with the High Court, each case of Covid-19 was a separate occurrence and that the clauses would only cover losses due to a case of the disease within the specified radius. However, due to the issues considered in respect of causation (which are outlined below), the ultimate outcome was that the same scope of cover would be provided as that given under the High Court judgment.

Prevention of access and hybrid clauses
Prevention of access and hybrid clauses are those which specify a series of requirements before cover is provided (typically, either where restrictions are imposed by a public authority denying/preventing access to a business, possibly as a result of a notifiable disease within a certain radius). The Supreme Court allowed a more generous interpretation in respect of these clauses, such that a mere instruction from a public authority could be considered an imposed restriction, in addition to those clear mandatory requirements. Further, the exact manner of prevention/inability to use a premises was considered and it was found that an inability, as opposed to a mere hindrance, was required but that this could apply to either a discrete business activity or a discrete part of the premises.

Causation
In respect of causation, the Supreme Court found (in agreement with the High Court) that all individual cases of Covid-19 which had been established by the date of any public authority measures were equally effective proximate causes. As such, any policy holder is only required to show that there was at least one case within the geographical area covered by the clause.

Trends clauses
Nearly all the policies considered contained a ‘trends clause’, which allowed for the losses calculated to be adjusted to take into account trends or other circumstances affecting the business, in order to estimate the losses suffered if Covid-19 had not occurred. The legal representatives for the insurers had used these arguments to try and argue that some of the effects of Covid-19 (for example, a reduction in footfall for retail businesses) were separate from the insured peril itself and thus could be used to reduce the sums calculated. The Supreme Court disagreed and found that trends and circumstances arising out of the same underlying cause, i.e. Covid-19, should not be considered to reduce the calculated losses.

Pre-Trigger Losses
The High Court, subject to some caveats, did allow adjustments to be made under trends clauses when calculating losses to reflect if there had been a downturn in business due to Covid-19 prior to the actual triggering of the insurance policy. The Supreme Court rejected this entirely and stated that adjustments must only be made to factors entirely unlinked to Covid-19.