The Supreme Court decision in the FCA Business Interruption insurance test case


The Supreme Court has handed down a lengthy judgment in the business interruption ("BI") test case brought by the FCA. While this draws the legal process for the policy wording featured to a close, and is certainly welcome news for many with ongoing or potential BI claims, the insurance industry and legal practitioners will continue to consider the likely wider impact. This note summarises the backdrop to the Supreme Court decision and considers key takeaways for businesses with potential BI claims. 

The FCA test case

While many insurance policies focus on property damage, some policies cover BI from other causes, in particular infectious or notifiable diseases and prevention of access and public authority restrictions.  Many policyholders whose businesses were affected by the Covid-19 pandemic suffered significant losses, resulting in large numbers of claims under BI policies.

In response to a lack of consistency in the industry's approach to these claims, and the contractual uncertainty this posed for policyholders, the FCA commenced a test case which sought to provide legal clarity to BI policy wording in the context of Covid-19. It did this by selecting a representative sample of 21 types of policy issued by eight insurers. The FCA’s role was to put forward policyholders’ arguments to their best advantage in the public interest. 

First Instance 

One of the key questions for the High Court was whether the specific clauses in question were triggered by the circumstances of Covid-19.  The High Court categorised the cover being considered into three classes:

  1. Infectious or notifiable disease clauses that provide BI cover triggered by an occurrence of a notifiable disease within the vicinity, or a within a specified radius, of the insured premises.
  2. Prevention or denial of access clauses that provide cover for a prevention or denial of access to or use of insured premises as a consequence of action by authorities.
  3. Hybrid clauses which are effectively a combination of disease clauses and prevention of access clauses.

The key questions for the High Court were whether the clauses in question were triggered by the circumstances of Covid-19, whether the losses were caused by the insured peril (or trigger), and how the claims should be adjusted to reflect trends and circumstances in light of trends clauses included in most of the policy wordings.

At first instance the High Court found in favour of the FCA on many of the key issues.  The Court considered that most (although not all) of the disease clauses and certain prevention of access clauses considered did provide cover.  The judgment also confirmed that the pandemic, and the Government and public response to it, caused the BI losses and that they were to be viewed together as one indivisible cause of loss. 

The Supreme Court 

As many expected, following the High Court's decision, the Supreme Court was asked to determine several issues in 'leapfrog' appeals brought by the FCA and the defendant insurers involved.  The Supreme Court's judgment unanimously dismissed all of insurers’ appeals and allowed the FCA’s four grounds of appeal (with qualifications attached to two of the four). 

The following key issues were considered:

  • Disease clauses

The Supreme Court took a narrower approach to disease clauses than the High Court, accepting that an individual case of illness sustained by a person as a result of Covid-19 is a separate “occurrence” and that the clause only covers BI losses resulting from cases of disease which occur within the specified radius focusing on individual occurrences.  However, as a result of the conclusions the Supreme Court reached in respect of causation, the conclusion that there was cover under the disease clauses was confirmed.

  • Prevention of access and hybrid clauses

The Supreme Court considered that an instruction by a public authority to restrict access to premises may fall under the policy wordings if there is an imminent threat of “legal compulsion”, or where it is expressed in mandatory and clear terms. It was also held that losing access for the purposes of a discreet part of a business or access to a discreet part of premises could be sufficient.   

  • Causation

The Supreme Court rejected insurers’ contention that the “but for” test of causation should be applied in the context of business interruption losses.

  • Trends clauses

The Supreme Court found that trends clauses are intended to address losses wholly outside the insured peril.  In this case the insurers wanted to take the trends and circumstances in the context of the effects of Covid-19 into account. The Supreme Court asserted that matters inextricably linked to the insured peril are not trends and should not be taken into account.

  • Pre-trigger losses

The Supreme Court found that those trend principles also apply to a pre-trigger downturn in revenue. Only circumstances unconnected with Covid-19 should be considered.

Impact of the decision

The Supreme Court's decision means that a large number of policyholders with BI claims under policy wordings specifically considered in the test case will now recover losses arising from the Covid-19 pandemic.  

Inevitably the impact will be felt more widely and insurers and policyholders will be reviewing their policy wordings in light of the judgment.  It is likely that the conclusions reached by the Supreme Court will lend assistance to many policyholders of policies not specifically considered. Indeed it is estimated by the FCA that the judgment may potentially affect claims under 700 other types of policies issued by 60 UK insurers.

However, and while the decision is far from what insurers will have hoped for, and will have certainly have an impact on BI policies and wider insurance law beyond the current pandemic, it is unlikely to represent an opening of the flood gates for Covid-19 related BI claims.  It remains the case that the success, or otherwise, of such claims will depend upon the precise wording of the policy in question, and even in the case of policy wordings considered by the Supreme Court, the type of business and the circumstances surrounding the losses suffered.  

Further, and while the test case provides clarity on certain principles to be applied in BI claims, the focus on specific policy wordings and the particular issues raised by those wordings, leaves it open for other as yet untested issues to be litigated between insurers and policyholders. 

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