Policyholders win resounding victory over insurers in BI test case

Insurers face a large bill for Covid-19-related business interruption (BI) claims after the UK's Supreme Court resoundingly ruled in favour of policyholders and the Financial Conduct Authority (FCA). All six insurers lost their appeals, while the Supreme Court supported the FCA’s appeals of certain unfavourable rulings delivered by the lower court. The Supreme Court, the UK’s highest, considered appeals against the High Court judgment in a test case brought by the FCA and heard in the summer. The lower court had largely agreed with the FCA that the policies did cover coronavirus-related losses, although six insurers – Hiscox, RSA, QBE, Argenta, Arch and MS Amlin – appealed certain rulings on some policy wordings. The FCA and the Hiscox Action Group appealed a number of points they had lost. Handed down on Friday, the Supreme Court’s decision went further than the High Court in supporting the FCA’s argument that the BI policies respond to Covid-19-related losses. In a statement, the Supreme Court said: “Lord Hamblen and Lord Leggatt give the main judgment with which Lord Reed agrees. This substantially allows the FCA’s appeal and dismisses the insurers’ appeals.” The Supreme Court judgment will mean thousands of businesses should now see their claims processed, although they will be subject to adjusting. The test case ruling is thought to affect 370,000 policyholders, 60 insurers and billions of pounds in claims, because many policies not included in the case have similar wordings. The rulings will also have international ramifications as similar cases in other jurisdictions have referred to the earlier High Court ruling. According to Naz Gauri, principal associate at law firm Eversheds Sutherland, the ruling is a “comprehensive” victory for policyholders. “The Supreme Court has today substantially allowed the appeal from the FCA and dismissed insurers’ appeals, representing a comprehensive victory for policyholders who suffered lost business following the government lockdown measures.” Clive O’Connell, partner and head of insurance and reinsurance at McCarthy Denning, said the ruling represented a “good day” for policyholders, insurers and regulators. “After ten months of uncertainty, both insurers and those they insure now have clarity on what their policies mean and what they are due to pay. The judgment answers, once and for all, the question of the impact that a pandemic, whose nature and effect were not known to those that drafted policies or those that sold or bought them, has had on those policies,” he said. According to the FCA, the Supreme Court ruling completes the legal process and means that many thousands of policyholders will now have their claims for coronavirus-related business interruption losses paid. “Today’s judgment decisively removes many of the roadblocks to claims by policyholders,” it said. Sheldon Mills, executive director for consumers and competition at the FCA, said: “We will be working with insurers to ensure that they now move quickly to pay claims that the judgment says should be paid, making interim payments wherever possible. Insurers should also communicate directly and quickly with policyholders who have made claims affected by the judgment, to explain next steps.” The Supreme Court examined 14 non-damage insurance policy clauses related to Covid-19 losses, in particular the application of disease clauses and the issue of causation. On the issue of disease clauses, the Supreme Court accepted insurers’ arguments that “each case of illness sustained by a person as a result of Covid-19 is a separate occurrence and the clause only covers business interruption losses resulting from cases of disease which occur within the radius”, set out in a policy. “Other disease clause wordings should be interpreted in a similar way,” the Supreme Court said. On causation, the Supreme Court rejected insurers’ arguments and agreed with the High Court that all individual cases of Covid-19 that had occurred by the date of any government measure were equally effective “proximate” causes of that measure. “It is therefore sufficient for a policyholder to show that at the time of any relevant government measure there was at least one case of Covid-19 within the geographical area covered by the clause. In reaching this conclusion, the Supreme Court rejects the insurers’ arguments: that one event cannot in law be a cause of another unless it can be said that the second event would not have occurred in the absence of (‘but for’) the first; and that cases of disease occurring inside and outside the specified radius should be viewed in aggregate,” the Supreme Court said. The Supreme Court also revisited the case of Orient-Express vs Generali, which concerned a claim for BI losses arising from hurricane damage to a hotel in New Orleans. The policy contained a ‘trends clause’ with a similar wording to those in the FCA test case. On appeal, the Commercial Court accepted the insurer’s argument that the cover did not extend to BI losses that would have been sustained anyway as a result of damage to the city of New Orleans even if the hotel itself had not been damaged. But this has now been overruled. “The Supreme Court concludes that the Orient-Express case was wrongly decided and should be overruled,” the court said in a statement.

Policyholders win resounding victory over insurers in BI test case

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