INSURANCE LAW
Landmark UK decision on COVID-19 business interruption claims: What does it mean for Australian insurers? NATHAN DAY, SPECIAL COUNSEL, ILES SELLEY LAWYERS
OVERVIEW
A
landmark decision of the highest court in the United Kingdom – the Supreme Court – has shed light on whether, and to what extent, a business can recover losses related to the COVID-19 pandemic. The decision will have widespread ramifications as it places a heavy burden on insurers to cover policyholders for COVID-19 related losses. Indeed, it is estimated that it will force UK insurers to pay out claims totalling at least £1.2 billion. This article examines the decision and assesses its implications for Australia.
BACKGROUND A standard business interruption policy will cover a policyholder against loss arising from damage caused to its premises due to various causes (for example, a natural disaster). Such a policy will typically include “extensions” that provide coverage in the absence of physical damage. In the context of the COVID-19 pandemic, the relevant extensions are categorised as follows: 1. disease extensions: generally covering business interruption losses caused by an infectious disease at or within a specified radius of the policyholder’s premises; 2. prevention of access extensions: generally covering business interruption losses caused by public authority intervention preventing access to the policyholder’s premises; and 3. hybrid extensions: generally covering business interruption losses caused by (i) government restrictions imposed by reason of (ii) an infectious disease
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at or within a specified radius of the policyholder’s premises. The UK Financial Conduct Authority (FCA) brought a test case against eight UK insurers to clarify how these extensions should be interpreted in relation to COVID-19 related claims. At first instance, the UK High Court of Justice largely found in the FCA’s favour. All but two insurers appealed.
FINANCIAL CONDUCT AUTHORITY V ARCH INSURANCE (UK) LTD [2021] UKSC 1 The Supreme Court unanimously dismissed the insurers’ appeals. Lord Hamblen and Lord Leggatt (with whom Lord Reed agreed) delivered the majority judgment. Lord Briggs (with whom Lord Hodge agreed) concurred with the majority judgment save for one “major” point (referred to in footnote 2 below) and “one minor point” of no immediate relevance. Disease Extensions The Supreme Court considered, as an exemplar, a disease extension covering business interruption losses “following” any occurrence of a “Notifiable Disease”1 at or within a 25-mile radius of the policyholder’s premises (“prescribed radius”). Whilst the Court below found that this extension covers the consequences of all COVID-19 cases provided that at least one COVID-19 case occurred within the prescribed radius, the Supreme Court rejected this view and instead found that it is limited to covering business interruption losses caused only by COVID-19 cases occurring within the prescribed radius.2 In interpreting the disease extension in this way, the critical issue becomes
causation. That is, did the COVID-19 cases occurring within the prescribed radius cause the UK Government to introduce measures which interrupted the policyholder’s business. For example, assume that a policyholder had one COVID-19 case within a 25-mile radius of its premises before the UK Government required it to close. Did that one COVID-19 case within the prescribed radius cause the UK Government to close the policyholder’s premises so as to trigger coverage under the disease extension? The Supreme Court considered a hypothetical case of 20 individuals working together to push a bus over a cliff. If one were to assume that only 14 individuals were needed to push the bus over the cliff, it could not then be said that the participation of any one individual was necessary to destroy the bus. And yet, it would be appropriate to regard each individual’s involvement as a cause of the loss. The Supreme Court acknowledged the difficulty in applying that hypothetical case to a scenario where the number of events required to bring about the loss is multiplied many times over so that, instead of there being 20 events, there are, say, 200,000 events. In the context of an insurance policy, whether one out of 200,000 events which, combined, bring about loss should be regarded as a cause of the loss so as to trigger coverage was found to depend upon the risks that the insurer agreed to cover. In undertaking that analysis, the Supreme Court had regard to the parties’ presumed background knowledge when entering into the policy that: 1. an infectious disease can spread rapidly
