Using a ground-breaking expedited procedure and leapfrog appeal, the FCA, representing the interests of policyholders generally, succeeded in obtaining much-needed clarification from the Supreme Court on particular wordings for business interruption following disease and non-damage denial of access against a number of insurers.

This has resulted in the insurers involved in the FCA proceedings and others having to review their previous decisions to deny coverage.

Our commercial dispute resolution partner Jane Harte-Lovelace, who specialises in maximising insurance recoveries for policyholders, discusses the wider ramifications of the ruling and the impact on policyholders with business interruption insurance.

Wider ramifications of ruling

The Supreme Court and earlier High Court decisions are not only good news for those policyholders which had the relevant disease or non-damage denial of access wording in their business interruption policies, but there are also wider ramifications for the future which are likely to be beneficial to policyholders more generally. The Supreme Court has developed the law of causation in the context of insurance.

It is important to note that the decision in the Supreme Court does not affect those policies which required there to have been damage at the insured premises to trigger cover – as the existence of coronavirus of itself does not amount to damage for these purposes. The case potentially benefits those who have so-called disease or non-damage denial of access cover.

Orient Express

As part of its judgment the Supreme Court overruled the Orient Express case, a 2010 decision on which insurers have relied for many years to deny coverage or reduce the quantum of claims for business interruption when there was potentially more than one cause of the damage, one or more of which was not covered by the insurance policy (an insured peril). In the Orient Express case the insurers had successfully argued, in the context of Hurricane Katrina, that the hotel concerned would have suffered consequential business interruption losses due to lost bookings as a result of New Orleans being devastated (which was not an insured peril) and not just because of the damage to the hotel caused by the hurricane. That was sufficient to enable insurers to argue successfully that because the consequence of the wider damage to New Orleans would have impacted the hotel’s revenue, irrespective of the physical damage to the hotel itself, the losses recoverable under the policy were limited. This decision has been used for the last decade to enable insurers to deny or significantly reduce claims where there is more than one cause of damage.

Causation and loss

The Supreme Court has clarified the law of causation as it relates to insurance and made it difficult (in the absence of clear wording in the policy) for insurers to deny cover or reduce the amount of the indemnity, when an insured peril has occurred, by arguing that another concurrent peril which was not insured would also have caused the damage. This is important not only in the business interruption context but also in relation to many other policy types.

The Supreme Court also found against the insurers on methods of assessing the loss using so-called trends clauses. These are clauses which provide a mechanism for quantifying loss by comparing turnover during an earlier unaffected period of trading with that during the indemnity period and providing an adjustment if the business’s turnover would have been impacted in any event without the occurrence of the insured peril.

Although the FCA case related to a number of sample wordings only, the FCA has made it clear that it expects the decisions made in the litigation to be “persuasive guidance” in the interpretation of similar wordings and claims and has written to the CEOs of the insurers encouraging quick and expeditious claims handling.

It remains to be seen whether insurers with wordings not specifically dealt with in the FCA case will change their position and review coverage decisions against the background of the clear change of approach in relation to causation. There are still many arguments open to insurers on coverage and quantum which may well be deployed and where the policyholder will need advice. The claims process will not necessarily be straightforward.

What happens next?

Overall, the result obtained by the FCA on behalf of policyholders is beneficial, although perhaps more limited in direct application than some of the headlines might suggest.

Insurers are reacting to the decision of the Supreme Court and already changing policy wordings.

It is likely that most insurers will in future expressly exclude cover for pandemic-related losses. For those prepared to provide business interruption insurance in relation to the effects on business of widespread diseases such as coronavirus, insurers will require increased premiums and the wording offered will need to be closely scrutinised.

Wordings in relation to the quantification of loss in the event of a claim are also likely to be amended by insurers.

Great care needs to be taken when buying insurance to understand the wordings; an apparently small alteration can have an enormous impact and price should not be the only factor in the decision-making process.

As ever with insurance, it is vital to be clear what coverage a business wants and needs and to realise that the wordings of policies vary – but are potentially negotiable. Businesses should be aware that the courts will construe insurance policies as if they are commercially negotiated contracts with the parties having the ability to negotiate like any other commercial contract.

Brokers should be made to comment not only on price but also the suitability of cover for a particular company’s needs.

Although the Supreme Court decision is to be welcomed, it is in some ways limited. It does not change a few fundamentals where, in our experience, policyholders often go wrong. It is vital to remember, in the event of a potential loss arising – whether in the context of business interruption or anything else – to give notice promptly and strictly in accordance with the provisions of the policy, to reduce the opportunity for insurers to find a reason to deny coverage or reduce the quantum of the claim.

If you have an existing claim under your BI policy which is still being denied or quantum is disputed, Keystone has a number of lawyers specialising in advising policyholders on the impact of the Supreme Court decision and on a wide range of insurance policies and assisting with the claims procedure. For more information, please contact Jane Harte-Lovelace.