While the High Court’s judgment is highly significant, it treats the issues as primarily ones of contractual construction rather than points of law.

When Covid-19 began to spread across the UK, there was uncertainty as to whether non-damage business interruption insurance wordings actually provided cover for the effects of the pandemic. The Financial Conduct Authority (FCA) thus sought to obtain court declarations in respect of coverage and causation issues under such policies, as part of a test case under the new Financial Markets Test Case Scheme. The test case was heard in July and judgment was handed down on September 15. 

During the High Court hearing, Lord Justice Flaux and Justice Butcher heard arguments from the FCA (representing the interests of policyholders) and insurers in respect of how clauses in 21 lead policies should be interpreted. These sample policy wordings are considered representative of some 700 varieties of policy underwritten by more than 60 different insurers, potentially affecting around 370,000 policyholders. 

Overall, the judgment is good news for most policyholders; business interruption cover is available under most of the policies considered. 

Three categories of clause were considered: 

  • Disease clauses, where cover is triggered by the occurrence of a notifiable disease within a defined area; 
  • Prevention of access clauses, which cover prevention of use/access because of government/relevant authority action; and 
  • Hybrid clauses, which are a blend of the first two types.

Approach to construction

At the core of the judgment was an approach that focused on construing the relevant insuring clause in each policy to determine what conditions needed to be satisfied to trigger cover and what causal link they needed to have to each other or to the loss. 

The judges rejected arguments from the insurers it was necessary to consider questions of causation separately by holding that upon proper construction of the wordings, the nature of the exact peril that was intended to be insured can be established. Once that insured peril is correctly identified, it is possible to distinguish non-insured causes and therefore largely bypass separate issues relating to causation. 

Following careful analysis of the precise wording in individual policies, the insured peril, across all of the wordings that were said to offer cover in principle, was held by the judges to be a composite peril made up of indivisible elements. For instance:

Disease: i) interruption or interference to an insured’s business as a result of ii) a specified provision (for example, a “notifiable disease occurring within the vicinity of an insured location”); 

Prevention of access: i) prevention or hindrance of access to or use of premises as a result of ii) an action of a governmental authority owing to iii) a specified provision (for example, “an emergency likely to endanger life or property”); and 

Hybrid: i) inability to use premises as a result of ii) an action of a governmental authority following iii) a specified provision (for example, “the occurrence of a notifiable disease”).  

Value of loss

When assessing the value of loss sustained by an insured, many policies required a comparison between actual revenue and what would have been generated had the insured peril not occurred – the “counterfactual”. 

The court held in determining the counterfactual, every element in an insured peril should be stripped out of the counterfactual situation. Thus construed, application of these composite perils would not enable insurers to use trends clauses to reduce the value of cover extended to insureds, as some of them had argued, by seeking to include in the counterfactual a scenario where Covid-19 was still present and having an impact elsewhere. 

By this route the judges did not expressly overrule Orient-Express Hotels v Assicurazioni Generali but made clear they considered it was wrongly decided.

Policyholder impact

The ruling on disease wordings that require the presence of the disease in the “vicinity” of the insureds’ premises is particularly favourable for policyholders. For most of these clauses, the court held an insured is only required to demonstrate the presence of the disease in the vicinity, not that such presence had any causal link to its losses. As losses will in most instances likely have been caused by national responses to the pandemic rather than any particular case of the disease, a contrary finding could have posed a significant obstacle for insureds.

Continued in PDF

Written by:

Baljit Rai, Clifford Chance Senior Associate, Financial Institutions Group

Kengyi Kwek, Clifford Chance Lawyer, Financial Institutions Group


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Please note this blog post was written by a Clifford Chance LLP employee. Clifford Chance LLP is the parent company of Clifford Chance Applied Solutions (CCAS). The content within this post does not constitute legal advice.