On 15 January 2021, the UK Supreme Court (“Supreme Court“) delivered its much-anticipated judgment in The Financial Conduct Authority v Arch Insurance (UK) Limited and Others  UKSC 1 in respect of a representative sample of business interruption property insurance (“Business Interruption“) policies.
In light of the decision by the Supreme Court to construe the relevant clauses broadly, we anticipate that there will be an increase in claims by policyholders for losses resulting from business interruptions caused by COVID-19 pandemic.
Malaysian insurers are encouraged to revisit their existing Business Interruption policies, to consider how the existing policy wordings may be impacted by the judgment, and if needed, consider revising and refining their policies.
While the Supreme Court’s judgment is not binding on Malaysian courts, the judgment will likely be persuasive authority in Malaysia when deciding the cover afforded under a Business Interruption policy.
As the judgment provides greater clarity on Business Interruption policies, Malaysian insurers are encouraged to consider how the wording in their existing Business Interruption policies can be refined to reflect the intended cover.
For further insights on what this development might mean for your insurance policies, please get in touch with us.
The FCA brought a test case on behalf of policyholders of Business Interruption policies who were affected by the COVID-19 pandemic to clarify the scope of cover under various Business Interruption policies.
The UK High Court’s (“High Court“) judgment handed on 15 September 2020 was in favor of the policyholders but an appeal was filed shortly thereafter. The Supreme Court unanimously dismissed the Insurers’ appeals, and decided in favor of the policyholders.
Overview of the judgment
The Supreme Court decided as follows:
The disease clauses (e.g., notifiable disease clauses or infectious disease clauses)
A disease clause generally provides cover for business interruption losses caused by the occurrence of a notifiable disease at or within a specific radius of the insured premises.
For such clauses, the Supreme Court decided that there is a need to identify the occurrence of at least one case of the notifiable disease within the specific radius of the insured premises set out in the policy for the cover to apply. Once cover is established, it is irrelevant whether or not the insured’s losses are attributable to the existence of COVID-19 outside the area.
The Supreme Court judgment clarifies that cover would be established by a single occurrence of notifiable disease (i.e., one case of COVID-19) at the insured premises or within a specific radius of the insured premises set out in the policy, and would also cover losses resulting from the occurrence of the COVID-19 case in the area in combination with the wider COVID-19 pandemic.
The prevention of access and hybrid clauses
A prevention of access clause generally provides cover for business interruption losses resulting from public authority intervention preventing access to, or use of, the insured premises. A hybrid clause is a clause which is a combination of the main elements of the disease and prevention of access clauses.
The Supreme Court applied the following interpretation in respect of these clauses:
- Restrictions: Clauses which required “restrictions imposed by a public authority” does not need to have the full force of law to be triggered. It would be sufficient if the restriction imposed provided reasonable certainty to the insured that compliance is required or that the restriction was expected to have the force of law in the near future (e.g., the cover would apply when the Prime Minister instructs all non-essential services to close with effect from a specific date even though the relevant legislation mandating the closure has yet to be passed or issued). Overlaid in the current Malaysian environment, an announcement by the Prime Minister on the imposition of a Movement Control Order or a Conditional Movement Control Order, prior to the orders being gazetted under the Prevention and Control of Infectious Diseases (Measures within Infected Local Areas) (Movement Control) Regulations and the Prevention and Control of Infectious Diseases (Measures within Infected Local Areas) (Conditional Movement Control) Regulations respectively would be broad enough to trigger the clause.
- Inability to use and prevention of access: Clauses which required an “inability to use” the insured premises does not require complete inability to use. It can apply to an inability to use the insured premises for one of the insured’s business activities or a section of the insured premises for business activities (e.g., the cover would apply when a golf club is allowed to open its golf course but is restricted from opening its clubhouse used for serving food and drinks and hosting functions. The clubhouse would constitute a section of the insured premises which cannot be used and where the insured would otherwise have carried out a business activity). Similarly, clauses which required a “prevention of access” to the insured premises would cover prevention of access to a discrete part of the insured premises or part of the insured premises for the purpose of carrying on a discrete part of the business activities.
- Interruption: Clauses which required an “interruption” to the business would encompass interference or disruption and does not require a complete cessation of business or activities.
The Supreme Court’s judgment provides much needed guidance on how these clauses would be interpreted in the context of a pandemic and more generally to similar clauses in insurance policies.
The Supreme Court decided that it is not necessary for the cover to apply only when it can be shown that “but for” the insured risk occurring, the policyholder would not have incurred the relevant business interruption loss. Instead, taking into account the nature of the cover provided, the causation test may be satisfied where the insured risk, in combination with other uninsured risks brings about the same loss, even if the occurrence of the insured risk is not necessary or sufficient to bring about the loss by itself.
The Supreme Court’s judgement clarifies that to prove causation, it would be sufficient if it can be proven that the business interruption loss was caused by the occurrence of the insured risk (e.g., the occurrence of the disease within the insured premises or the prevention of access to the insured premises due to restrictions imposed by the public authority) and it does not matter if the loss was also caused by the other effects of the COVID-19 pandemic. In short, the business interruption loss does not need to be caused solely by the occurrence of the insured risk.
The trends clauses and pre-trigger losses
A trends clause is the loss quantification provision in the Business Interruption policy which ensures that the indemnity given by the insurer reflects the cover afforded by the policy and is not reduced or inflated by factors unrelated to the cover.
It was decided that the trends clause should be construed such that the standard turnover or gross profit derived from previous trading of the business is adjusted only to reflect circumstances which are unconnected with the insured risk and is not adjusted for circumstances which are inextricably linked with the insured risk (e.g., the indemnity should be adjusted for factors/circumstances unrelated to the COVID-19 pandemic generally, such as a separate burglary incident which is not covered by the policy that caused additional losses to the policyholder’s business).
The Supreme Court also considered whether the trends clause should take into account the general effects of the COVID-19 pandemic, which may have impacted the policyholder’s business prior to any claim being triggered. It concluded that absent any clear wording in the business insurance policy to the contrary, the trends clause should not take into account circumstances arising from the same underlying or originating cause as the insured risk. Given this, any revenue drop prior to the claim being triggered should not be taken into consideration, provided that the revenue drop pattern also resulted from the COVID-19 pandemic or its effects.
This ruling is a departure from previous interpretations of the trends clause and has wider implications on insurance policies, particularly those providing cover for environmental events and political events.
FCA’s expectations post-judgment
Following the Supreme Court’s judgment, the FCA outlined its expectations of UK insurers to, amongst others:
- reassess and settle Business Interruption claims as quickly as possible, including claims which were previously rejected or not fully paid as the judgment should provide the required clarity to conclude claims processing with a large majority of business insurance policyholders;
- for affected claims where full and final settlements have been agreed, insurers are expected to review the information provided to the policyholders on the offer of settlement to ensure that it contained details on the implications of the judgment and was clear, fair and not misleading, and where this is not the case, further action and residual payments may be necessary;
- take a pragmatic, transparent and consistent approach to interactions with policyholders over remaining evidence and loss adjusting processes that apply to individual claims instead of creating additional barrier or delays to pay valid claims;
- directly communicate with policyholders who have made claims or complaints that are potentially affected by the judgment to explain the next steps; and
- where there are further disputes that are subject to legal proceedings, insurers are expected to narrow the issues in dispute to ensure that the litigation can progress in the cheapest and quickest way possible as part of their obligation to act fairly, honestly and professionally in the best interest of its customers.
Application of the Supreme Court’s judgment in a Malaysian context
The Supreme Court’s judgment will have persuasive weight in Malaysian courts. Applying the principles of this landmark judgment to Malaysia:
- cover will extend to losses suffered by policyholders if there has been at least one case of COVID-19 within the prescribed geographical area which results in the business being interrupted e.g., temporary closure for sanitisation purposes. This may be the case without the need for the imposition of orders to limit movement;
- cover will run from the effective date and time the Prime Minister announces a limitation on movement and operation of business i.e., without the need to await the publication of subsidiary legislation to formalise such restrictions;
- cover for losses arising from the inability to access premises will apply where the policyholder is unable to use/prevented from accessing its premises for a discrete part of its business activities e.g., eateries only being able to utilise the premises for take-away business only; and
- the loss covered will be calculated by reference to what would have been earned had there been no COVID-19 pandemic, disregarding any revenue drop prior to the policy being triggered, provided that the revenue drop pattern resulted from the COVID-19 pandemic or its effects.
While the Supreme Court’s judgment provides greater clarity on the extent of cover, the validity of claims and the basis for calculating amounts due to successful policyholders, it should be noted that the construction of the relevant clauses by the Supreme Court was largely dependent on the actual wording of the Business Interruption policies which were considered by the Supreme Court.
The impact of the Supreme Court’s judgment to Malaysian insurers will therefore be largely dependent on the wording of business interruption cover afforded by the Malaysian insurers in their existing policies.