Business interruption test case: landlords and tenants benefit from policyholders' win

To the relief of policyholders, the Supreme Court has ruled decisively in favour of the policyholders in the so-called "business interruption test case" (FCA v Arch Insurance (UK) Ltd and others [2021] UKSC 1). The Financial Conduct Authority (FCA) brought the action on behalf of policyholders against certain insurers in relation to COVID-19 related business interruption losses.

The FCA, as the conduct regulator of insurers in the UK, took a representative sample of insurance policy wordings and put forward policyholders’ arguments with the objective of obtaining clarity for all parties involved as to whether COVID-19 losses were covered under so -called “non-damage” extensions to business interruption policies, where cover is triggered by the occurrence of an infectious disease within the vicinity of insured premises or by the inability to use premises due to government action.

In September 2020, the High Court confirmed cover to large numbers of policyholders (see News brief "FCA business interruption test case: cover for COVID-19", www.practicallaw.com/w-028-0698). Both the FCA and the insurers appealed to the Supreme Court through an expedited leapfrog appeal procedure.

Supreme Court decision

While the court did not agree with the High Court’s precise interpretation of every legal issue, the court overwhelmingly found in favour of the policyholders. The judgment broadens the circumstances in which they may recover their losses compared with those allowed by the High Court, particularly those bringing claims under prevention of access and hybrid clauses.

Although the test case related to business interruption insurance policies carried by SMEs, very similar concepts and policy language can be found in landlords’ loss of rent policies meaning that the court's findings will assist landlords in being able to claim for loss of rent, with turnover rents being a key area of focus.

The end result is that landlords and tenants that have the relevant cover in place are now in a much better position and there will now be a significant number of claims made in respect of COVID-19 losses although several issues remain to be determined (see "Issues to be determined in claims by landlords and tenants"). Where the insurers had previously pushed back on dealing with COVID-19 related claims on the basis of the ongoing test case, they will now have to process the claims if they are to avoid further litigation.

Disease clauses

The court considered the correct interpretation of disease clauses, which require the occurrence of a notifiable disease within a specified vicinity of insured premises, typically 25 miles.

The court’s decision on causation in relation to disease clauses is highly significant for future insurance claims, clarifying that a court can, [but?] does not have to, apply the “but for” test where it is deemed inappropriate. The court confirmed that where a series of events which together cause a result, but none of which on its own was sufficient to cause that result, the claim could still succeed. Accordingly, the court confirmed that cover would be effective under disease clauses on the basis that all individual COVID-19 cases as at the date of lockdown measures being imposed were equally effective proximate causes of those measures and of the public response to it. A policyholder need only show that there was at least one case of COVID-19 within the area defined in the relevant policy.

The evidence required for a policyholder to establish the presence of COVID-19 was addressed by the FCA in draft guidance dated 11 December 2020, and includes NHS death data, well-established media reports and, potentially, a case within an individual’s personal knowledge, even if that person was without symptoms).

Prevention of access clauses

Prevention of access clauses typically provide cover where there is a prevention or hindrance of access to, or use of, insured premises as a consequence of public authority instructions. The FCA successfully appealed the High Court’s narrow interpretation of public authority instructions, confirming that an instruction from a relevant authority need not have the force of law but can amount to a “restriction imposed” if it carries the imminent threat of legal compulsion or where it is in mandatory and clear terms and indicates that compliance is required without recourse to legal powers.

This means that some policyholders that would not have been able to claim until regulations came into force in late March 2020 may now be able to claim from an earlier date if their business was affected by instructions issued by the government.

The court considered that the term “inability to use” premises did not mean a complete inability to use them but could cover an inability to use part of them or an inability to use for a discrete purpose. For example, a restaurant that was closed but continued to offer takeaway services may now be able to claim, whereas this would not have been possible based on the High Court findings.

For landlords covered by these clauses, a question of particular importance is whether any temporary rent reductions or other arrangements agreed under the government's June 2020 code of practice for commercial property relationships during the COVID-19 pandemic constitute compliance with an instruction from a relevant authority (www.gov.uk/government/publications/code-of-practice-for-the-commercial-property-sector/code-of-practice-for-commercial-property-relationships-during-the-covid-19-pandemic).

Landlords may still argue that alternative arrangements were necessary to minimise loss of rent in accordance with the obligation to mitigate losses and should therefore be covered on that basis. However, that remains to be debated with insurers. The key issues in this situation are that rents, in most cases, continued to be payable under leases and that the buildings tended to remain open and available for use, leaving rent concessions as a voluntary matter for landlords as the code of practice is not legally binding. The position is different for turnover rents, which have fallen drastically due to the COVID-19 restrictions and leading to involuntary losses on the part of landlords which are likely to be the subject of claims in the near future.

Causation and trends clauses

Causation is, without doubt, one of the most significant areas of the judgment. The court overturned the High Court’s decision in Orient -Express Hotels Limited v Assicurazioni Generali SpA (UK) ([2010] EWHC 1186). The High Court had found that a trends clause prevented a hotel from recovering business interruption losses consequent on damage, because the hurricane damage caused to New Orleans and the city's closure meant the hotel would still have suffered business interruption losses even if it had not been damaged.

Insurers unsuccessfully tried to rely on Orient -Express arguing that, even without the occurrence of a notifiable disease within 25 miles of insured premises, the insured would still have suffered a loss because of the effect of the national lockdown measures.

Issues to be determined in claims by landlords and tenants

A number of issues still need to be worked through in claims by landlords and tenants as they have not been resolved, including:

• For the purposes of interpretation of policy sub-limits and excesses, how to determine the number of “losses”, “events” or “occurrences” that an insured has suffered. For example, if a policy excess applies on a “per occurrence basis”, whether landlords with multiple premises are liable for multiple excesses; and whether the extension of the lockdown arrangements created a separate occurrence giving rise to further claims where cover was on a time -limited basis.

• Whether it is possible for insured parties with cover that relates to the occurrence of disease at the premises, as opposed to within the vicinity of the premises, to identify relevant evidence that is likely to trigger cover.

• Where a tenant remains contractually liable to pay rent under the lease but has not paid it, how an insured landlord can establish the precise circumstances in which it is entitled to an indemnity. Some loss of rent policies will cover “loss of rent receivable”, which might cover this type of situation. However, the insurer may subrogate against any tenants that are not insured.

• Where landlords have waived rights under leases and have agreed reductions, perhaps in an attempt to minimise losses, whether this loss of rent would ever be insured. This will pose greater difficulties than the situation above where a tenant remains contractually liable to pay rent under the lease but has not paid it, and is likely to turn on the policy mechanics and arguments as to the landlord’s need to mitigate losses.

• Issues arising from the temporary suspension of the landlord’s right to forfeit under the Corporate Insolvency and Governance 2020 Act. For example, for landlords unable to collect rent due to a company voluntary arrangement (CVA), it is arguable that this loss would be covered to the extent that the financial difficulties necessitating the CVA were the result of COVID-19. A CVA cannot vary or remove a landlord’s right to forfeit but the right is temporarily precluded.