However, insurers claim that there ‘is no justification for engineering contractual wording to accommodate unique circumstances which have occurred subsequently’

For the first time in its short history last week, the Supreme Court considered the details of business interruption (BI) insurance.

The trigger for the four-day virtual hearing was the swathe of appeals mounted against the High Court’s ruling in September on the landmark BI test case brought by the FCA.

The regulator had brought the action in a bid to obtain clarity for around 370,000 firms, which it estimated found themselves out of pocket earlier this year when their insurers didn’t pay out on BI policies that the latter said had not been designed for a pandemic.

“Probably the most important insurance decision of the last decade and a decision of substantial importance to many thousands of businesses” is how the FCA billed the High Court’s judgement in the documents outlining its case for last week’s hearing.

The Hiscox Action Group (HAG) claimed in its submission that the 384 disgruntled businesses that hold policies with Hiscox, which it represents, have suffered “devastating losses” as a result of Covid-19 and the subsequent lockdown and therefore “desperately need” the financial support that an indemnity from Hiscox would provide.

“This litigation is a matter of commercial ‘life or death’ for the majority of the HAG claimants, all with businesses and many with families, to support,” it said.

New challenges

In a sample of 21 policies, the High Court found largely in favour of the regulator in September, concluding that certain ‘non-damage’ clauses covering disease and denial of access to premises should trigger payouts.

However, the majority of the eight insurers at the receiving end of September’s judgment were back in court last week to appeal.

While both Ecclesiastical and Zurich didn’t dispute the High Court’s verdict, Arch, Argenta, Hiscox, MS Amlin, QBE and RSA were involved in the action.

The High Court’s finding that the cover provided in two of the sample QBE policies did not extend to the consequences of a national pandemic provided the insurers with a foothold to mount a fresh challenge.

QBE sought to build on this partial success by arguing that the trigger for a payout on its other policies should be based on whether there had been an outbreak of Covid-19 within a radius of the insured premises - in its case, 25 miles.

This would be in line with the verdict in the Orient Express case, which had set the precedent for how such cases had been determined prior to September’s judgment.

The court’s error, according to QBE’s written case, was removing the necessity for a causal connection between interference to the insured’s business and the appearance or manifestation of a notifiable disease at, or within the specified radius of, the insured premises.

In addition, QBE said, the BI policies should be interpreted on the basis of knowledge “reasonably available” at the time the contract was entered into rather than “unprecedented circumstances that occur subsequently”, like those created by the Covid-19 pandemic.

“This is no justification for engineering contractual wording to accommodate unique circumstances which have occurred subsequently,” it said.

Other insurers backed this stance, with Hiscox arguing that the government’s response to the pandemic had been what former US defence secretary Donald Rumsfeld would have described as an “unexpected, unexpected” event.

Previous pandemics, like the Hong Kong flu outbreak in 1968, which resulted in 80,000 deaths across the UK, had not prompted “anything remotely approaching such a response”, the insurer said.

Regulator’s perspective

However, the FCA argued last week that the insurers were rehearsing arguments they had already made, ultimately without success, in the High Court.

The regulator also sought to reinforce its successes in September’s ruling by challenging the High Court’s conclusion that QBE’s disease wordings were only intended to cover local outbreaks.

The FCA additionally looked to tighten up the High Court judgment in a number of other areas.

These include the scope of whether prevention of access wordings can be triggered by government instructions or advice, which fall short of legislation, such as a business being told to close, or whose customers were told to avoid it by prime minister Boris Johnson in his now famous 16 March address to the nation.

Colin Edelman, the QC who represented the FCA at last week’s hearing, told the court that a significant proportion of the population had been infected by Covid-19 when the pandemic broke out in March, whether they had been diagnosed or not.

The reason why the BI policies were being triggered was the government’s decision to limit the spread of disease by telling businesses to shut.

He said: “The context was the spread of disease in the country.

“When you have a serious outbreak, the government will act nationally. Places like the Scilly Isles get caught up in it, even though they had no cases, because [the government] are trying to prevent spread to areas where it isn’t yet.”

He also dismissed the insurers’ argument that composite peril policies should not be triggered if each of their ingredients “clearly are satisfied”.

“What insurers are still trying to do is cherry pick elements of that composite peril. That’s insurance: sometimes, bad things happen.

“That’s the risk insurers take,” Edelman said, adding that insurers are seeking to “escape” from the consequences of the risk they took on when they accepted the premium for the insurance.

Edelman described the examples the insurers had come up with in an attempt to undermine the court’s prior judgment as “far−fetched”.

The FCA also mounted a challenge on the grounds that BI wordings requiring ‘prevention of access’ or ‘inability to use’ are satisfied by the partial closure of a business or premises, so that a restaurant prohibited from feeding customers on its premises can claim even if it delivers takeaways.

Inconsistencies and errors in how such policies are worded may reduce the commercial utility of such wordings “almost to vanishing point for many insured”, stated the FCA.

The court also heard HAG argue that the low-value BI policies taken out by “many thousands of small businesses” are “simple, low-value covers”.

“The correct answers to the issues in the present case should be, and are, clear, simple and readily applicable in the real world,” said HAG’s written case.

Ben Lynch, HAG’s barrister, said: “These are meant to be commercially realistic policies capable of straightforward application.”

The hearing has now concluded and the court has signalled that judgment is due to handed down by the end of January.