ANALYSIS / Legal
‘TESTING’ FOR COVID-19: A FINAL DETERMINATION
The UK Supreme Court’s delivery of judgment on 15 January 2021 in the test case instigated by the Financial Conduct Authority (FCA) marks the end of a process which commenced in June 2020, when proceedings were commenced before the High Court of Justice in London.
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n November 2020, the Supreme Court granted leave for six of the eight insurers involved in the test case, as well as the FCA, to appeal aspects of the High Court’s judgment. The Supreme Court substantially allowed the appeals brought by the FCA on behalf of policyholders and dismissed those brought by the insurers. Whilst acknowledging the risk of oversimplifying the scope and variety of the issues considered, the test case primarily concerned three types of insuring provisions, referred to generally as: • “Disease Clauses”, which provide cover for business interruption resulting from the occurrence of disease within the vicinity, or a specified radius, of insured premises; • “Prevention of Access Clauses”, which provide cover for business interruption resulting from access to, or use of, insured premises being prevented due to restrictions imposed by, or the action, advice or order(s) of an authority; and • “Hybrid Clauses”, which broadly reflect a blend of the above two types of clauses and respond to business interruption resulting from closure of insured premises due to the occurrence of disease within a vicinity, or a particular radius, of insured premises. The Supreme Court took a different view of the construction of Disease Clauses to the High Court, however, the effect of the decision remains essentially the same. That is, in order to qualify for cover under a Disease Clause (and the corresponding elements of Hybrid Clauses), policyholders need to
demonstrate, firstly, that they suffered business interruption as a result of the pandemic and, secondly, that at least one case of COVID-19 occurred within the vicinity, or the relevant radius, of the insured premises. The Supreme Court also took a different view of the phrase “restrictions imposed” to the High Court, determining that it is not necessarily limited only to legally binding measures and may also include governmental instructions which did not carry the force of law, but which businesses and members of the public would reasonably understand had to be complied with. The Supreme Court largely agreed with the High Court in relation to issues of causation, resolving them in favour of policyholders. The Court determined that the availability of cover under Disease Clauses was not impacted by the fact that there may have also been cases of COVID-19 outside of the vicinity, or relevant radius, which may have also played a causative role in the interruption of a policyholder’s business. Similarly, the Court determined that the availability of cover under Prevention of Access or Hybrid Clauses was not diminished, even if business interruption loss would have been caused by the pandemic in any event, regardless of whether the insured premises were closed or inaccessible. The Supreme Court applied a similar line of reasoning in its consideration of trends clauses. The Court held that, when calculating a policyholder’s loss, no adjustment should be made to account for interruption to the policyholder’s
BY CLANCY O’DONOVAN
Senior Associate, DLA Piper Australia
business that would have occurred due to the pandemic in any event, regardless of the insured premises being closed or inaccessible. Rather the Court determined that, when developing the counterfactual standard turnover or gross profit, the pandemic and its associated consequences should be stripped out of the calculation. The delivery of a non-appealable judgment in the UK raises the question: where to from here? The FCA wasted little time in issuing a “Dear CEO” letter, directing insurers to promptly reassess all business interruption claims affected by the judgment, inform policyholders of the outcomes of such reassessments and pay valid claims as soon as possible. The FCA foreshadowed a period of further close regulatory oversight, indicating it would be making on-going, regular requests for information from insurers regarding the progression of policyholders’ claims. It noted the key role that brokers and other intermediaries play in working with insurers to ensure that policyholders’ claims are resolved quickly. The UK Supreme Court’s decision is not binding authority in Australia and the extent to which it may be regarded as persuasive by Australian courts remains to be seen. The Insurance Council of Australia recently announced that a second test case (further to the initial test case concerning exclusions referring to the Quarantine Act 1908 (Cth)) will be filed in mid-February 2021, for the purpose of determining the availability of cover under a range of policy wordings – no doubt, a space to be watched closely in the months to come.
NIBA.COM.AU / 21
