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Supreme Court Decision in Covid-19 Business Interruption Test Case

  • Legal Development 12 February 2021 12 February 2021
  • UK & Europe

The Supreme Court has handed down its appeal judgment in the UK business interruption test case. The Supreme Court's judgment and relevant background are summarised below.

Supreme Court Decision in Covid-19 Business Interruption Test Case

The Supreme Court rejected insurers' appeals and accepted some elements of the FCA's appeal. 

The key points from the Supreme Court judgment are as follows:

(a) The Court dismissed the appeals by insurers and continued to hold that notifiable disease extensions (which provide cover for "an occurrence of any notifiable disease within 25 miles of the premises", for example) and hybrid extensions (which require both the occurrence of a notifiable disease and restrictions imposed on the premises) respond to the effects of the COVID-19 pandemic. 

The reasoning of the majority of the Supreme Court was significantly different to the first instance judgment dis-applying the "but for" test of causation and expanding the scope of proximate cause.

(b) The Court allowed some limited aspects of the FCA's appeal under prevention of access extensions and hybrid extensions. 

Specifically the Supreme Court held that partial closure would be sufficient to trigger those clauses.  So, for example, those restaurants which had operated a takeaway service would still have suffered a prevention of access in respect of their dining-in service.

The types of such extensions in scope provide cover for an "emergency" resulting in action taken or advice given by the Government leading to "prevention of access" to the premises.

(c) The Court overturned the leading decision on trends clauses, Orient-Express Hotels, and held that trends clauses had no application to the effects of the COVID-19 pandemic as a whole.  If an insurer insures any impact from the pandemic it cannot argue that some other (uninsured) facet of the pandemic would have reduced the loss.   


In June 2020, the Financial Conduct Authority and 8 insurers, commenced test case litigation under the Financial Markets Test Case Scheme, with a view to clarifying the extent to which policy wordings may respond to business interruption losses sustained as a result of the coronavirus pandemic.  The trial was held over 2 weeks at the end of July and the first instance Court handed down its judgment on 15 September 2020. 

The first instance Court broadly held that:

(a) Notifiable disease extensions and hybrid extensions would respond;

(b) Prevention of access extensions which provided localised cover would not respond;

(c) Prevention of access required total closure of the premises which meant that only certain categories of business such as restaurants without takeaways, pubs and non-essential shops could claim;

(d) Where an insured's loss had occurred as a result of insured and uninsured effects of the pandemic, insurers would only be able to reduce payments for any uninsured effect to the extent such a "trend" had manifested itself prior to the triggering of the policy.

Following on from the Test Case judgment on 15 September 2020 the FCA, six of the eight Defendant insurers (Arch, Argenta, MS Amlin. Hiscox, QBE and Royal & Sun Alliance) and the Hiscox Action Group, applied to appeal various aspects of the High Court's judgment and declarations pursuant to the "Leapfrog" procedure, which allows an Appellant to make an expedited appeal direct to the Supreme Court, bypassing the Court of Appeal.  The insurers appealed the decision in respect of notifiable disease and hybrid extensions.  The FCA appealed on the meaning of prevention of access and related terms.  Both appealed the application of the trends clause.

That application was granted and an appeal hearing took place before the Supreme Court from 16 to 19 November 2020, with judgment handed down on 15 January 2021.

The Supreme Court's Judgment  

The Supreme Court addressed the appeal issues under the following headings:

  1. The disease clauses
  2. The prevention of access and hybrid clauses
  3. Causation
  4. The trends clauses
  5. Pre-trigger losses
  6. The Orient-Express Hotels decision

Issue 1: the disease clauses

In relation to the disease clauses, the High Court had considered two central issues:

  1. What was the scope of the disease clause peril?
  2. What is the required causal link between the insured peril and the business interruption?

In relation to the RSA 3 wordings (and others like it) the High Court found that the insured peril was the business interruption consequences of disease anywhere, provided that there was at least one case within the specified radius and, on that basis, the causal link issue was self-evident.

The Supreme Court disagreed with that decision, and found that the insured peril was, in fact, only the business interruption consequences of disease within the specified radius.  It held that "… they cover only relevant effects of cases of COVID-19 that occur at or within a specified radius of the insured premises. They do not cover effects of cases of COVID-19 that occur outside that geographical area." 

The Supreme Court's view of the insured peril was influenced by its conclusions on the meaning of "occurrence", which it held had an established meaning in insurance law as “something which happens at a particular time, at a particular place, in a particular way”: see Axa Reinsurance (UK) plc v Field [1996]. That being the case, a disease could not be regarded as an "occurrence" because it happened "at a multiplicity of different times and places and may occur in different ways involving differing symptoms of greater or less severity".  It was therefore better to view each case of illness as a separate occurrence. This differs from the High Court's view that the pandemic as a whole was an occurrence.

Issue 2: The prevention of access and hybrid clauses

The Supreme Court considered the meaning of a number of phrases within prevention of access (POA) and hybrid clauses, including:

(a) Restrictions "imposed" by a public authority:  "imposed" will "ordinarily" mean measures imposed by an authority under statutory or legal powers but not always.  A mandatory instruction, issued in anticipation of such measures could also be a restriction "imposed" by a public authority.

(b) "Inability to use": requires an inability to use as opposed to an impairment or hindrance in use but may include a policyholder’s inability to use either the whole or a discrete part of its premises for either the whole or a discrete part of its business activities.

(c) "Prevention of access": the prevention of access must be shown (i.e. mere hindrance will not be sufficient) but does not have to be physical and may, depending on the facts, cover prevention of access to a discrete part of the premises and/or for the purpose of carrying on a discrete part of the policyholder’s business activities.

(d) "Interruption": includes interference or disruption which does not bring about a complete cessation of business or activities, and which may be slight (provided it has a material effect on the financial performance of the business).

Issue 3: causation

The disease clauses

Consistent with its views on the disease clauses, the High Court had held that the disease clause covers the effects of each case of disease wherever in the country it occurs, provided that at least one case occurs within the radius specified in the clause.  

On the Supreme Court's view of the disease clauses, causation was more complex.  In cases involving multiple concurrent causes, all of which contribute to a loss which would not otherwise have occurred, the Supreme Court took the view that causation was not a pure question of fact but depended on context.  In the present case, the relevant context was what insurers had agreed to cover – "a question of contractual interpretation which must accordingly be answered by identifying (objectively) the intended effect of the policy as applied to the relevant factual situation."

To establish causation for the purposes of the disease clauses, the Supreme Court held that it was "sufficient to prove that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause". This was based on the High Court's factual finding that each of the individual cases of illness resulting from COVID-19 which had occurred by the date of any Government action was a separate and equally effective cause of that action (and of the response of the public to it).

The Supreme Court held there is nothing which "precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause - indeed as a proximate cause - of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself". 

The Supreme Court considered that it was not reasonable to try to answer the causal question by asking whether, "but for" cases in the radius, the business interruption would have occurred in any event. This would have:

(a) Given rise to "intractable counterfactual questions";

(b) Being "contrary to the commercial intent" of the provision, depriving insureds of cover the policy was expressed to provide;

(c) Allowed disease outside the relevant radius to be "set up as a countervailing cause which displaces the causal impact of the disease inside the radius".

The Supreme Court's conclusion was reinforced by the fact that the disease wordings were not triggered by business interruption arising "only" from events within the radius and its view that applying "but for" causation to a situation where cases within and outside the radius were concurrent causes of loss, would give insureds the same protection as if cases outside the radius expressly excluded.

This meant that all disease clauses in the appeal responded to the pandemic.

The hybrid clauses

The hybrid clauses differed from the disease clauses in that they had many elements, described by insurers as A→B→C→D.

The High Court concluded that the correct approach to causation involved considering the position of the insured business as if none of the elements (including the pandemic) had occurred, describing the insured peril as being "composite" in nature. In other words, once the A→B→C→D causal chain is established, all the consequences of A are recoverable under the insurance.

The Supreme Court agreed that the High Court had correctly identified the peril as being one in which all elements occur, but got the causal test wrong because stripping out all elements, including the pandemic, was to treat the insured risk as being the risk of any one or more of the elements occurring, as opposed to the risk of the elements occurring in casual sequence – the indemnity that insurers agreed to give.

Further, applying the High Court's approach would "limit the indemnity to business interruption loss which is solely and exclusively caused by the insured peril and has no other concurrent proximate cause." Although the words "solely and exclusively" featured in the wordings, they were intended to describe the loss as opposed to restricting cover.  

Issue 4: trends clauses

The Supreme Court held that a trends clause can only be used to reflect circumstances which are unconnected with the insured peril and not circumstances which are inextricably linked with the insured peril in the sense that they have the same underlying or originating cause.  

In reaching that decision, the Supreme Court took into account the following principles:

(a) First, the trends clauses are part of the machinery contained in the polices for quantifying loss. They do not address or seek to delineate the scope of the indemnity. That is the function of the insuring clauses in the policy.

(b) Second, the trends clauses should, if possible, be construed consistently with the insuring clauses in the policy.

(c) Third, to construe the trends clauses consistently with the insuring clauses means that, if possible, they should be construed so as not to take away the cover provided by the insuring clauses. To do so would effectively transform quantification machinery into a form of exclusion.

Issue 5: pre-trigger losses  

The Supreme Court found that the High Court was wrong to hold that the indemnity for business interruption loss sustained after cover was triggered should be reduced to reflect a downturn in the turnover of the business due to COVID-19 which would have continued even if cover had not been triggered by the insured peril.

Given that the High court had (correctly) concluded that losses should be assessed on the assumption that there was no COVID-19 pandemic, it ought to have held that, in calculating loss, the assumption should be made that pre-trigger losses caused by the pandemic would not have continued during the operation of the insured peril.

Issue 6: The Orient-Express Hotels decision

In order to reach the above decisions Lord Hamblin and Lord Leggatt had to overrule their own decisions in Orient-Express Hotels Ltd v Assicurazioni General SpA [2010] saying: "On mature and considered reflection we also consider that it was wrongly decided and conclude that it should be overruled".


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