The Court differed in some respects from the English High Court judgment in the same case, and also overturned a controversial decision on causation, which has application to insurance policies more generally.
In this update, we give a brief overview of the Supreme Court's decision, and consider the implications for the New Zealand insurance market.
The English Financial Conduct Authority (FCA) brought a test case last year on behalf of insureds against a number of insurers in relation to the cover provided by business interruption (BI) policies following the COVID-19 pandemic.1 The FCA largely succeeded in the High Court, after which the FCA and insurers made a “leapfrog" appeal to the UK Supreme Court. The Supreme Court has now also decided the case in favour of the FCA.2
The Supreme Court considered the following issues.
Is there cover under a standard BI insuring clause?
The standard insuring clause in a BI policy only covers interruption to a business that is caused by material damage, such as damage to buildings or other assets. In the case of a disease like COVID-19, there is no material damage. This typically means that interruption caused by COVID-19 will not be covered under standard policy wording, and an insured will need to look to extensions under the policy.
Both the Supreme Court and High Court confirmed the usual position, and turned to consider policies which contained specific extensions to cover. Accordingly, insureds in New Zealand will need to carefully review their BI extensions in order to assess whether they may have cover.
Does an extension apply to provide cover?
Some BI policies in New Zealand cover interruption that is caused by actions of a public authority that lead to the closure of a business or an inability to access business premises. By way of illustration, one of the clauses considered in the FCA case indemnified the insured for losses resulting from:
Prevention of access to The Premises due to the actions or advice of a government or local authority due to an emergency which is likely to endanger life or property.
Less commonly, policies may also contain an extension for interruption caused by the insured's inability to access its business premises as a result of disease (or, in special cases, interruption due to the disease itself). Again, the FCA case provides an example specific cover resulting from:
any human infectious or human contagious disease … an outbreak of which the local authority has stipulated shall be notified to them manifested by any person whilst in the premises or within a twenty five (25) mile radius of it.
Specific disease cover was not common in New Zealand. However, if an insured had such cover prior to the outbreak, they may potentially have cover for interruptions caused by COVID-19 or a lockdown.
Whether there is cover under a prevention of access or disease extension will depend on the particular terms of the clause at issue. The English High Court and UK Supreme Court provided guidance as to the meaning of terms that are commonly used in such clauses, including “manifest", “occurrence", “prevention", “restrictions imposed", and “inability to use".
The High Court and Supreme Court generally held that there was cover for COVID-19 under the relevant extensions.
If an extension applies, is cover nevertheless excluded?
In New Zealand, many BI policies contain exclusions for pandemics and human disease notifiable under the Health Act 1956 (such as COVID-19). Where there is an extension providing cover, and an exclusion excluding cover, it will be necessary to see whether the two clauses can be reconciled.
In many cases, the policy will expressly provide that the exclusion prevails in the event of a conflict. In a number of policies we have reviewed, the Health Act exclusion has taken precedence over extensions that would otherwise potentially provide cover.
In some cases, however, the policy may be less clear. Once again, we can take an illustrative clause from the FCA case, in this instance from a policy that provided cover under an extension for interruption caused by the occurrence of a notifiable disease within 25 miles of the premises. There was a general exclusion that provided:
The insurance by this Policy does not cover any loss or Damage due to … epidemic and disease or due to any limitation or prevention of the use of objects because of hazards to health. … All other terms and conditions of this Policy shall be unaltered and especially the exclusions shall not be superseded by this clause.
The Supreme Court held that this general exclusion for epidemics and disease could not be interpreted to cut down more specific cover for disease that had been provided by an extension. It ruled that an ordinary policyholder would naturally assume that a general exclusion at the end of a lengthy policy document would not limit the cover provided by the extension.
What loss was caused by the insured risk?
BI policies typically only cover business interruption that is caused by material damage to property. In a controversial previous case known as the Orient-Express, the English High Court considered whether a hotel's decreased patronage had been caused by material damage resulting from Hurricane Katrina. The High Court held that the critical question was whether those BI losses would not have been suffered “but for" the physical damage to the hotel.
The Court had ruled that the losses were not covered because Hurricane Katrina had caused widespread damage to the surrounding area, which led to that area being closed to the public. It therefore concluded that there would have been decreased patronage even if the hotel had not been damaged, and so there was no causative link between the material damage to the hotel and the decreased patronage.
In the FCA case, however, the Supreme Court decided that the Orient-Express was wrong. It rejected the “but for" analysis, and ruled that if a loss is caused by both an insured risk and a non-insured risk, that loss will be recoverable unless the non-insured risk is expressly excluded from cover. This is a significant ruling, and applies to all insurance policies, not only BI policies. We expect the UK Supreme Court decision to be highly persuasive to a New Zealand court considering the same issue.
If there is cover, how should the loss be quantified?
BI policies commonly include “trends clauses", which require loss to be assessed by reference to the difference between (for example) the revenue earned by the business in the real world (that is, taking account of losses caused by the insured risk) and how the insured's business would have performed in a hypothetical, “counterfactual" world in which the insured risk did not occur, while also taking account of business trends occurring prior to the occurrence of the insured risk.
This can sometimes be easier said than done. For example, under a policy providing cover for loss of access due to actions of the government following COVID-19, should the counterfactual be:
- a world in which the government never imposed a lockdown, but COVID-19 was still present in the country and causing lower demand and having other, wider impacts (leading to a lower recovery), or
- a world in which there was no outbreak of COVID-19 at all (leading to a higher recovery)?
The High Court tended to view that, on the policy wordings it considered, the insured risk was a composite of the elements leading to the interruption, not only (for example) the relevant government action. This meant that the Court generally considered the appropriate counterfactual to be one in which there was no COVID-19 at all.
The Supreme Court agreed with that result, but on a different basis. It held that the purpose of trends clauses is to arrive at the results that would be achieved but for the insured risk and any circumstances arising out of the same underlying cause. The counterfactual therefore had to exclude all effects connected to COVID-19.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.