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COVID-19: Victory for businesses as Supreme Court rule in their favour in insurance policy battle

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By Shanice Golder

On 15 January 2021, the Supreme Court handed down judgment in the appeal case Financial Conduct Authority (FCA) v Arch Insurance (UK) Ltd and others [2021], substantially allowing the FCA’s appeal in ruling that the insurance companies should pay out on the relevant coronavirus business interruption claims, altogether worth an estimated £1.2 billion.

This decision is positive news for those businesses which were previously denied coverage under their business interruption insurance for losses arising, as a result of the restrictions imposed throughout the COVID-19 pandemic.

The Supreme Court appeal

The appeal followed last year’s decision by the High Court in The Financial Conduct Authority v Arch and Others [2020]. Despite the High Court ruling predominately in favour of claimants seeking a pay out under their respective business interruption insurance policies, at least two of the policies reviewed in the High Court were decided in favour of the insurers, meaning that no pay out was required.

Due to the importance of the issues raised in the High Court case, and the requirement for clarity in times of monumental business uncertainty, the Court of Appeal was bypassed and the appeal, instigated by six of the eight insurers, the FCA and Claim Action Groups, was fast-tracked to the Supreme Court, who rejected the arguments put forward by the six insurers, and substantially allowed the appeal bought by the FCA and Claim Action Groups.

The Supreme Court ruling

The Supreme Court sought to clarify the interpretation of specific clauses and causation issues which had been discussed in the High Court case, and, while predominantly reaching a similar decision on the understanding and application of the relevant clauses, the Supreme Court considered the High Court’s interpretation of certain clauses as too narrow.

In relation to prevention of access and hybrid clauses, in widening the interpretation, the Supreme Court considered that any instruction given by a public authority, including instructions from the Prime Minister, is sufficient to be deemed as a “restriction imposed” if it carries threat of legal compulsion and is in clear terms and therefore satisfies the policy requirement to make an insurer liable to pay out.

Additionally, in order to provide clarity when reviewing, in particular, the Arch policy trends clause, which considers whether losses should be adjusted if there are other trends or circumstances affecting the business, the Supreme Court referred to a hypothetical example of a fashionwear business impacted by the COVID-19 restrictions.

The example provided that, where this business’ shop premises had been forced to close, as a result of a national lockdown, but which continued to trade online, in calculating the amount the insurer would have to pay out for interruption losses, they considered the applicable policy would cover losses arising from prevention of access to the premises, but not any effect or loss caused by restrictions on sales transacted via the website.

Significantly, in considering the Orient-Express Hotels v Generali [2010] decision relied upon by the insurers in the appeal, the Supreme Court rejected the insurers’ argument and held that the “counter-intuitive” decision in Orient Express had been wrongly decided and held that it should be overruled.

What does this mean for your business?

The Supreme Court’s ruling is a welcome one as it comes during the third national lockdown in England; at a time when many businesses have been forced to close or operate at a reduced level and which may need to rely on their business interruption insurance. The decision has been heralded as a “massive boost” for UK businesses by the Hiscox Action Group, representing 400 of the claimants, as it provides clarity on the interpretation and application of the disputed clauses, which should assist policyholders in making a claim.

However, the decision does not encompass all possible business interruption insurance policies and successful pay-outs will still depend on the wording of the relevant insurance policy and the circumstances of each case.

What will happen next?

If you believe your business has been affected, or your business insurer has previously refused your claim, you should consider seeking advice to determine whether you are now eligible to make a claim, or have a previous claim reconsidered in line with the decision.

The Association of British Insurers has acknowledged that all valid claims should be settled as soon as possible, and that those policyholders affected will be contacted by their insurer to discuss what the judgment means for their claim. It should, however, be noted that there is likely to be an influx of claims from policyholders and it may take time for insurers to implement the judgment and settle claims.

For further information and details about the judgment, please visit: https://www.supremecourt.uk/cases/uksc-2020-0177.html. If you have any questions or require assistance, please contact David Hitchcock, Head of Dispute Resolution or Jamie Berry, Head of Business Law.

At TWM, we are continuing to advise clients on the many legal implications arising both from the pandemic itself and its inevitable consequential impact on the very many aspects of business and personal life. We have collected insights here to help you manage the impact of COVID-19 across your business.

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