On 15 January 2021, the Supreme Court handed down its judgment in the FCA COVID-19 test case, heard on a “leapfrog” appeal (bypassing the Court of Appeal) from the first instance decision of Lord Justice Flaux and Mr Justice Butcher (see our previous blogs here and here ). The Supreme Court judgment can be accessed here.
The Supreme Court substantially allowed the appeals of the Financial Conduct Authority (“FCA”) on behalf of the policyholders and dismissed the appeals of the insurers, and in doing so, has broadly endorsed (and in some cases extended) the finding at first instance that many of the policies in question provide cover, albeit for slightly different reasons. As part of its reasoning, the Supreme Court concluded that the Orient Express case, on which the insurers placed significant reliance, was wrongly decided and should be overruled.
Overall, 14 of the 21 representative policy wordings reviewed have been found to provide cover in principle.
The judgment is noteworthy for its extensive review of the issue of “causation”; in particular, the causal connection that must be established between the insured peril and a loss in order for the policyholder to be entitled to an indemnity.
Businesses have suffered financial losses as a result of COVID-19 and the resulting public health measures taken by the UK Government. Many businesses have insurance policies which cover them against loss arising from interruption of the business due to various causes. This appeal was heard urgently in a test case brought to clarify whether or not there is cover in principle for COVID-19 related losses under a variety of different standard insurance policy wordings.
The case was brought by the FCA under the Financial Markets Test Case Scheme for the benefit of policyholders, many of whom are small and medium enterprises (“SMEs”). The defendants were eight insurers who are leading providers of business interruption insurance.
The aim of the proceedings was to achieve the maximum clarity possible for the maximum number of policyholders and their insurers. The court considered a representative sample of standard form business interruption policies in the light of agreed and assumed facts. It is estimated that, in addition to the particular policies chosen for the test case, some 700 types of policies across over 60 different insurers and 370,000 policyholders could potentially be affected by the outcome of this litigation.
Summary of findings
We set out a detailed analysis of all aspects of the decision of the Supreme Court below, but in broad summary, the court found as follows in respect of the major issues before it:
“Disease clauses” – These clauses will provide cover in respect of business interruption losses resulting from COVID-19 provided there had been an occurrence (meaning at least one case) of the disease within the radius specified in the clause.
“Prevention of access” and “hybrid clauses” – All of the requirements must be met before the insurer is liable to pay. For a “restrictions imposed” requirement, an instruction given by a public authority may in certain circumstances be sufficient. For wordings requiring an “inability to use” the insured premises, an inability rather than hindrance of use must be established, but this requirement may be satisfied where a policyholder is unable to use the premises for a discrete business activity or a discrete part of the premises for its business activities. “Prevention of access” has a similar meaning.
Losses are covered only if they result from all the elements of the risk covered by the clause operating in the required causal sequence. The fact that losses were also caused by other (uninsured) effects of the COVID-19 pandemic does not exclude them from cover.
“Trends clauses” – There should be no adjustment for any trends or circumstances relating to the COVID-19 pandemic or for a downturn in a business connected to the pandemic before the insured peril was triggered.
Orient-Express – This case was wrongly decided and should be overruled.
There was no appeal in relation to questions of “prevalence” of the disease and proof and therefore section H of the first instance decision stands.
Before addressing the detail of the decision and the legal concepts which underpinned it, it is worth reflecting upon the decision reached by the Supreme Court and the implications of the judgment.
- The decision is of obvious significance to the thousands of policyholders (and their insurers) with policies of the kind addressed by the Supreme Court. Although each case will still need to analysed on its particular facts and circumstances, there is now clear and final guidance as to the application of the relevant principles to this kind of business interruption cover.
- Staying within the business interruption context, it is likely that future wordings will be amended to ensure this type of issue does not arise again: where it is intended, by both parties, that there should be no cover under these types of clauses for losses arising from pandemics, or that losses should be restricted to those which arise only from a particular cause (and not also some other non-excluded clause), clear words will probably be added to reflect this understanding. Where it is intended that such cover will be provided, wordings will be adapted and, in all likelihood, premiums significantly increased to reflect this risk.
- The relevance of this test case to the reinsurers of the risks affected by these judgments was never mentioned. The judgment will be carefully reviewed, especially in the context of aggregation issues.
- Considering the broader context, the ramifications of the Supreme Court’s position on the correct test for the identification of the “proximate cause” of a loss and its overruling of the Orient Express case may be felt in a number of different contexts. Certainly, it is likely to have a significant effect on so-called wide area of effect cases (such as hurricanes, earthquakes, fires and floods), in which it will be much harder, and perhaps impossible, for insurers to make “but for” type arguments to seek to reduce the insured loss by reference to the damage to the wider area.
- It is also possible that the Supreme Court’s more flexible, purposive (and perhaps it could be said rather vague) approach to determining issues of causation will give rise to disputes in many other areas in the future. If past experience has taught us anything, it is that although decisions of the Supreme Court are not subject to further appeal, they remain very much subject to the law of unforeseen consequences.
Principles of contractual interpretation
The Supreme Court stated that there is no doubt or dispute about the principles of English law that apply in interpreting the policies. The core principle is that an insurance policy, like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean.
In general, the clauses reviewed by the court provide cover for business interruption losses resulting from the occurrence of a notifiable disease, such as COVID-19, at or within a specified radius (typically 25 miles or one mile) of the policyholder’s business premises. They are an extension of the cover in a property damage policy in that they provide cover for business interruption that is not consequent on physical damage to property. The RSA 3 wording was reviewed as an exemplar.
COVID-19 had been designated as a notifiable disease in all parts of the UK by 6 March 2020. There was no challenge to the first instance finding that it was sufficient for a person to have contracted the disease; there was no requirement for symptoms or diagnosis.
The court addressed two central issues:
- First, what is the scope of the peril insured against?
- The second issue, which has to be approached in the light of the answer given to the first, is what causal link between the insured peril and interruption to the business is required in order to entitle the policyholder to be indemnified under this clause?
Scope of the insured peril
At first instance, the court had taken a very broad view of the insured peril. It had found that the insured peril was the disease itself and not a particular outbreak of the disease. The Supreme Court disagreed with this on the basis that it did not reflect the words of the clause.
The Supreme Court found that the interpretation which makes best sense of the clause is to regard each case of illness sustained by an individual as a separate occurrence. On this basis there is no difficulty in principle, and unlikely in most instances to be difficulty in practice, in determining whether a particular occurrence was within or outside the specified geographical area.
The clause uses the word “occurrence”. The Supreme Court stressed that the word “occurrence”, like its synonym “event”, has a widely recognised meaning in insurance law which accords with its ordinary meaning as “something which happens at a particular time, at a particular place, in a particular way”. The court referred to established authorities on this point (for example, Axa Reinsurance (UK) plc v Field  1 WLR 1026, 1035 (Lord Mustill)). It said:
“…Once it is recognised that the words “occurrence of a Notifiable Disease” refer to an occurrence of illness sustained by a particular person at a particular time and place, it is apparent that the argument that the disease clause in RSA 3 applies to cases of illness resulting from COVID-19 that occur more than 25 miles away from the premises should be rejected. As a matter of plain language, the clause covers only cases of illness resulting from COVID-19 that occur within the 25-mile radius specified in the clause…”
It is only an occurrence within the specified area that is an insured peril and not anything that occurs outside that area.
The Supreme Court made it clear that the correct approach was to separate matters that relate to the identification of the insured peril from questions relating to causation:
“…Returning to the two matters seen by the court below as fundamental and which led the court to a different conclusion, it is right that the language of the disease clause in RSA 3 does not confine cover to business interruption which results only from cases of a notifiable disease within the 25 mile radius, as opposed to other cases elsewhere. That is an important point when considering questions of causation. But it does not follow that cases of a disease occurring outside the specified radius are themselves part of the peril insured against by the disease clause. On the contrary, it is clear from the words used that they are not…”
“…Similarly, we think the court below was right to attach significance in interpreting the policy wording to the potential for a notifiable disease to affect a wide area and for an occurrence of such a disease within 25 miles of the insured premises to form part of a wider outbreak. But again, the significance of those matters, in our view, is in relation to questions of causation. They cannot justify extending the geographical scope of the cover beyond the area clearly specified in the policy. As discussed, that goes beyond interpretation and involves rewriting the clause …”
The court acknowledged the significance of the effects of cases of the disease outside the specified radius and the potential for COVID-19 to affect a wide area (much larger than the radius), but emphasised that they were relevant to causation. To include them as part of the analysis of the insured peril would be to ignore the language of the clause.
The clause “does not cover” interruption caused by cases of illness resulting from COVID-19 that occur outside that area. The Supreme Court found that a similar interpretation was applicable to all of the disease clauses involved in the test case.
Read in isolation, this conclusion in relation to the scope of the insured peril is misleading. The question of what the clause “covers” in the sense of what losses it indemnifies is answered by the court’s analysis in relation to causation.
Causation – the causal link between the insured peril and interruption to the business
The first instance court’s interpretation of the disease clauses meant that questions of causation largely answered themselves. That is because, if the insured peril is COVID-19, the policy covers all effects of COVID-19 on the policyholder’s business. This would be so whether the disease as a whole is treated as an indivisible cause or whether each individual case is treated as a separate but equally effective cause of the government actions and ensuing business interruption.
The Supreme Court noted that on its interpretation of the insured peril, questions of causation do not answer themselves. The court had found that the disease clauses covered only the effects of cases of the disease occurring within the specified radius. The question of what connection must be shown between such cases and the business interruption loss claimed is therefore critical.
The court began with the proposition that although the issue of causation is a matter of interpretation of the policy, this is not dependent “to any great extent” on the language of the wording; rather, the court must look at the “legal effect of the insurance contract as applied to a particular factual situation”. In its analysis of the causation issue, the court relied heavily on the “background knowledge” of the parties (principally of the policyholders) and the facts of the case to identify what reasonable parties would have “supposed” in relation to various matters affecting the cover. Moreover, the court referred on numerous occasions to common-sense and what was commercially-sensible. The fact that the policies being reviewed were principally sold to SMEs and often had relatively low financial limits appears to have been of some relevance in identifying the parties’ intention.
The court undertook a wide-ranging and technical review of the various tests and principles on which courts have relied when looking at the issue of causation and analysed them in the context of numerous factual examples. This exercise was undertaken to answer a question that the court could probably have expressed in beguilingly simple terms: what would a reasonable person think the policy covered? There is an element of apparent incongruity as one would not normally associate what a reasonable person thinks with the technical issue of causation.
The court reviewed the test of “proximate cause” (noting that the expression originated in 1596). It was developed as a general approach to the question of causation in marine insurance cases. It was codified in section 55(1) of the Marine Insurance Act 1906 and is treated by the courts as also stating the law applicable to non-marine cases.
The court focused on judicial comments to the effect that the test of causation is a matter of interpretation of the policy and that the court should look at a contract as a whole and quoted a passage from a House of Lords decision in 1918 which stated that the court’s task was “to ascertain what the parties to it really meant”. The court also noted that identifying the “proximate cause” had been treated by the courts as a matter of common-sense and highlighted one judicial comment that causation is “to be understood as the man in the street would understand it”.
The Supreme Court set out principles to be applied in identifying the proximate or efficient cause:
“…The common-sense principles or standards to be applied in selecting the efficient cause of the loss are, however, capable of some analysis. It is not a matter of choosing a cause as proximate on the basis of an unguided gut feeling. The starting point for the inquiry is to identify, by interpreting the policy and considering the evidence, whether a peril covered by the policy had any causal involvement in the loss and, if so, whether a peril excluded or excepted from the scope of the cover also had any such involvement. The question whether the occurrence of such a peril was in either case the proximate (or “efficient”) cause of the loss involves making a judgment as to whether it made the loss inevitable – if not, which could seldom if ever be said, in all conceivable circumstances – then in the ordinary course of events. For this purpose, human actions are not generally regarded as negativing causal connection, provided at least that the actions taken were not wholly unreasonable or erratic…”
The court identified the question of whether a cause made the loss inevitable as being an important element of the inquiry.
The court considered the established law in relation to “concurrent causes”. Where there are two effective causes of a loss, but only one is an insured peril, the loss is covered provided the uninsured cause is not excluded: JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss Jay Jay)  1 Lloyd’s Rep 32). In contrast, where the uninsured cause is excluded, this exclusion will generally prevail: Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corpn Ltd . The court noted that in the cases addressing issues of two “proximate causes”, neither of the causes rendered the loss inevitable. Neither would have caused the loss without the other.
The court said:
“…There is, in our view, no reason in principle why such an analysis cannot be applied to multiple causes which act in combination to bring about a loss. Thus, in the present case it obviously could not be said that any individual case of illness resulting from COVID-19, on its own, caused the UK Government to introduce restrictions which led directly to business interruption. However, as the court below found, the Government measures were taken in response to information about all the cases of COVID-19 in the country as a whole. We agree with the court below that it is realistic to analyse this situation as one in which “all the cases were equal causes of the imposition of national measures”…”
“But for” test
The insurers argued, as a “central plank” of their case, that whatever the exact nature of the causal link in the wording of the policy, it is a minimum requirement of any causation test that the occurrence of the insured peril made a difference to the occurrence of loss. The insurers’ position was that the “but for” test should be applied: it must be established that the loss would not have been sustained but for the occurrence of the insured peril. The insurers relied on the Orient Express case to support this argument.
As a starting point in its analysis, the Supreme Court noted that in almost all cases before them, a policyholder would not be able to satisfy the “but for” test: in short, it would be impossible to show that without (but for) the cases within the specified radius, the interruption to the business would not have occurred. The Government’s response was national. An enclave (the size of the specified radius) without cases would not have been exempted from the response.
The court reviewed the inadequacies of the “but for” test. First, it is “over-inclusive” and produces countless “false positives”: it does not exclude many possible causes of a loss that would not be regarded as “plausible candidates” for selection as the effective or proximate cause. For example, if a ship sinks and a cargo is lost, the test would not exclude the decision to build the ship or to put the cargo on that vessel as causes of the loss.
The test is also inadequate because it excludes some cases where one event could or would be regarded as a cause of another event. The court referred to the example of two hunters simultaneously shooting a hiker who is behind some bushes, where medical evidence shows that either bullet would have killed the hiker instantly even if the other bullet had not been fired. Applying the “but for” test would produce the result that neither hunter’s shot caused the hiker’s death, a result which the court said is manifestly not consistent with common-sense principles. Each shot (cause) was sufficient, but not necessary, to bring about the harm. This is an example of the result being causally “over-determined” or “over-subscribed”.
Another class of case is where a series of events combine to produce a particular result but where none of the individual events was either necessary or sufficient to bring about the result by itself. The court discussed the example of 20 individuals who together push a bus over a cliff. If it is shown that only 13 or 14 people would have been needed to push the bus, it could not be said that the participation of any given individual was either necessary or sufficient to destroy the bus, yet each person’s involvement would be described as a cause of the loss. Treating the “but for” test as a minimum threshold which must always be crossed if X is to be regarded as a cause of Y would produce the “absurd conclusion” that no one’s actions caused the bus to go over the cliff.
Defence costs cases
The court reviewed a number of cases concerning indemnity in respect of defence costs. These establish an entitlement to indemnity under cover for defence costs even where those costs are incurred in defending, at one and the same time, insured and uninsured claims (see, for example, New Zealand Forest Products Ltd v New Zealand Insurance Co Ltd  1 WLR 1237). These cases were relied upon by the FCA as examples of a situation where, in an insurance indemnity context, the “but for” test was not satisfied.
Multiple concurrent causes
The situation of multiple cause was considered, especially the question of whether to recognise “trivial contributions” as causes; for example, a teaspoon of water added to a flood. The court said:
“…Whether an event which is one of very many that combine to cause loss should be regarded as a cause of the loss is not a question to which any general answer can be given. It must always depend on the context in which the question is asked. Where the context is a claim under an insurance policy, judgements of fault or responsibility are not relevant. All that matters is what risks the insurers have agreed to cover. We have already indicated that this is 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…”
“…For these reasons there is nothing in principle or in the concept of causation 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 context for the consideration of multiple concurrent causes was that there were hundreds of thousands of cases of illness from COVID-19 at the relevant time.
All of the examples considered by the court involved a causal connection of some sort between the event and the loss. Whether that causal connection is sufficient to trigger the insurer’s obligation to indemnify the policyholder is a matter of interpretation of the agreement between them. Several matters of “background knowledge” are important. The parties to the contract are presumed to know that infectious diseases will spread widely, rapidly and unpredictably; it is highly likely that cases would not occur only in the specified radius, but would also occur outside that area; and that a public authority would take measures that affected businesses in response to the outbreak as a whole, not just the cases occurring in the specified radius.
Application of the “ but for” test would involve asking whether if the cases of the disease had not occurred within the specified radius, business interruption loss would have been suffered as a result of cases of disease occurring outside the radius. The court decided that this was not the intention of the parties. It would be contrary to the commercial intent of the clause to treat uninsured cases of the disease occurring outside the territorial scope of the cover as depriving the policyholder of an indemnity in respect of interruption also caused by cases of disease which the policy is expressed to cover. In other words, the parties could not reasonably be supposed to have intended that cases of disease outside the radius could be set up as a countervailing cause which displaces the causal impact of the disease inside the radius.
The court rejected the application of the “but for” test:
“…We accordingly reject the insurers’ contention that the occurrence of one or more cases of COVID-19 within the specified radius cannot be a cause of business interruption loss if the loss would not have been suffered but for those cases because the same interruption of the business would have occurred anyway as a result of other cases of COVID-19 elsewhere in the country…”
If the “but for” test were applied in the context of the COVID-19 pandemic, cases of the disease outside the specified radius would, in effect, remove all cover even though the cases within the radius trigger the cover.
The weighing approach
The court was asked to consider an approach in which the relative potency of insured causes (cases of the disease within the specified radius) and uninsured causes (cases outside the radius) is “weighed”. The court rejected this approach on the basis that the effect (via the Government measures) of all the cases of COVID-19 on any insured business is “indivisible”. The approach would be unworkable. It would not be possible to isolate the financial effect of each discrete case of the disease. Moreover, the court said that there was a more fundamental objection to this approach. As with the application of a “but for” test, it sets up cases of disease occurring outside the radius in competition with the occurrences of disease within the radius in determining whether the policy will respond. The approach could produce whimsical results and introduces an arbitrariness in contrast to the “hard-edged” radius requirement.
The individual cause analysis
The court summarised the advantages of its approach as:
“…an interpretation that recognises the causal requirements of the policy wordings as being satisfied in circumstances where each case of disease informs a decision to impose restrictions and treats each such case as a separate and equally effective cause of the restrictions irrespective of its geographical location and the locations of other such cases avoids such irrational effects and the need for arbitrary judgments and is also clear and simple to apply. This accords with the presumed intention of the parties to an insurance product sold principally to SMEs…It also accords with the desire for certainty manifest in the definition of cover by reference to a specific radius of 25 miles (or one mile) of the insured premises…”
The court noted that it had arrived at an interpretation that was broadly similar to the result reached in the first instance decision, but by a different route. The Supreme Court summarised its approach as follows:
“…On the interpretation that we think makes best sense, only the effects of any case occurring within the radius are covered but those effects include the effects on the business of restrictions imposed in response to multiple cases of disease any one or more of which occurs within the radius…”
Conclusion on causation
The court set out its conclusion as follows:
“…We conclude that, on the proper interpretation of the disease clauses, in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of illness resulting from COVID-19, it is 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…”
The Supreme Court indicated that it had based its conclusion on the analysis of the first instance court, namely 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 court stressed that the particular terminology used in the clause to describe the causal connection between the loss and the insured peril (typically “following”, “arising from” or “as a result of”) makes no difference because the court’s conclusion is “about the legal effect of the insurance contracts as they apply to the facts of this case.”
General exclusion L
The RSA 3 wording contains an exclusion which says that the policy does not cover any loss or damage due to “epidemic and disease”. The Supreme Court indicated that:
“…the overriding question is how the words of the contract would be understood by a reasonable person. In the case of an insurance policy of the present kind, sold principally to SMEs, the person to whom the document should be taken to be addressed is not a pedantic lawyer who will subject the entire policy wording to a minute textual analysis…”
The court found that a policyholder would understand the exclusion to be removing a substantial part of the cover for business interruption loss and therefore the Exclusion L does not exclude claims arising out of the COVID-19 epidemic.
Prevention of access and hybrid clauses
Although the wordings vary, prevention of access clauses, in general, provide cover for business interruption losses which arise from an interference in use of premises as a result of some form of public authority action. Hybrid clauses additionally require that the public authority action was caused (in a broad sense) by a notifiable disease, usually occurring within a specified radius (i.e. they incorporate elements of the Disease Clauses into the Prevention of Access clause).
The Supreme Court addressed two main issues in respect of the Prevention of Access and Hybrid Clauses: first, issues related to causation, and second, issues as to the proper application of the various specific requirements of the clauses.
On the question of causation in relation to the disease element of the Hybrid Clauses, the Supreme Court held that the analysis discussed above applied, such that in order to show a loss was caused by COVID-19 “it will be sufficient to prove that the interruption was a result of closure or restrictions placed on the premises in response to cases of COVID-19 which included at least one case manifesting itself within [the relevant distance requirement] of the premises.”.
However, given the structure of both the Prevention of Access and Hybrid Clauses (which contained various separate elements which must each be satisfied) a further issue arose as to how the the requirements of the clauses interacted with each other in determining whether or not a loss had been proximately caused by an insured peril.
At first instance, the court, having held that the clauses in question insured against “composite” perils, decided that a form of the “but for” test should be applied, where the counterfactual to be considered was one where none of the elements of the clause had occurred (ie a situation where there was no COVID-19 pandemic at all). The Supreme Court disagreed with this approach, holding instead that an insured had to demonstrate that all of the elements of the insured peril, acting in combination, caused the business interruption loss.
However, it also held, rejecting the arguments of the insurers and relying on its comprehensive analysis of the causation requirements (discussed above), that once it could be shown that the elements of the clause were present, cover would be provided by the clauses notwithstanding that the loss may have been concurrently caused by other (unexcluded) consequences of the COVID-19 pandemic (for example the “stay at home” requirements).
The Supreme Court also disagreed with the first instance judgment in respect of the interpretation of two elements common to many of the Prevention of Access and Hybrid Clauses, namely: (1) the meaning of the phrase “restrictions imposed” (and others like it); and (2) the meaning of the phrase “inability to use”.
At first instance, it was held that the where clauses required the relevant business interruption to have occurred due to “restrictions imposed” by a public authority, those restrictions had to be both expressed in mandatory terms and have the force of law in order for the cover to be triggered. The Supreme Court took a slightly different approach on this issue, holding that while an instruction from a public authority would need to be expressed in clear mandatory terms, it would not in all cases be necessary for the instruction to be backed with the force of law. The court explained: “we consider that an instruction given by a public authority may amount to a “restriction imposed” if, from the terms and context of the instruction, compliance with it is required, and would reasonably be understood to be required, without the need for recourse to legal powers”.
For those clauses which required there to be an “inability to use” the premises for cover to attach, Flaux LJ and Butcher J held that there must be a complete inability to use those premises for business purposes. The Supreme Court again disagreed in part with this approach. While it was accepted that the phrase did require an actual inability (rather than a mere hindrance or impairment) to use, the Supreme Court held that the requirement would be satisfied either if the policyholder was unable to use a discrete part of its premises for its business activities (the example given was a department store which was required to close all parts of the store except the pharmacy) or was unable to use the premises for a discrete part of its activities (the example given was a book shop which was unable to sell to walk-in customers, but was still able to sell online).
However, the Supreme Court did agree with the first instance decision that in practice, it was most unlikely that regulation 6 of the 26 March Regulations (the instruction to stay at home) would lead to any inability to use under the clauses in question. It was also emphasised that each claim would inevitably turn on its own facts.
As with other parts of the decision, the overall effect of the judgment of the Supreme Court is very similar to the decision at first instance, albeit that the conclusions reached on the meaning of the phrases “restrictions imposed” and “inability to use” widened the circumstances in which policyholders can obtain cover under these types of clauses
Trends clauses and pre-trigger losses
Trends clauses (forms of which appeared in all the sample wordings considered in the proceedings) are intended to account for factors which would have affected the insured’s financial position had the insured peril not occurred. The standard methodology of these clauses is, as a starting point, to take an earlier period of trading of the insured and compare it with the trading which occurred during the relevant period of business interruption, giving a rough indication of the losses suffered by the insured. To that figure, the clauses then seek to adjust to reflect any “trends” or “circumstances” which may have occurred during either period which, independently of the insured event, may have inflated or deflated the turnover of the business during the relevant period. The broad aim of the clauses is, therefore, to adjust the figures so that the figure claimed is as representative of the true loss as possible.
In order to apply a trends clause, it is necessary to identify, and strip out, those factors which affected the insured’s financial position even if the insured peril had not occurred. This required the application of an alternative scenario (the “counterfactual”) where certain events or circumstances are assumed not to have occurred.
At first instance, given the approach taken to the construction of the insured peril, it was held that every element of the insured peril had to be stripped out of the counterfactual scenario against which the loss was to be judged, meaning, broadly, that it was held that they would not apply so as to reduce the claims of the policyholders.
The Supreme Court reached the same conclusion, albeit for slightly different reasons. It agreed that as a general matter, given the function of the trends clauses, they were not to be construed so as to exclude claims otherwise covered by the insuring clauses of the policies in question. Applying the conclusions reached on causation (discussed in detail above), it was held that losses should be “adjusted only 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”. Accordingly, it was held that so called pre-trigger losses (i.e. losses which arose, in a general sense, as a result of the pandemic, but which arose prior to the relevant triggering event for cover) would not be stripped out by the operation of the trends clauses.
The Orient-Express case
Both before the Supreme Court and at first instance, insurers relied heavily on the decision in Orient Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm) to support their arguments on causation and as to the proper interpretation of the trends clauses.
The case involved the effects of Hurricanes Katrina and Rita on the business of a hotel in New Orleans. Two of the Supreme Court justices had been involved in that case. The judge (Mr Justice Hamblen, as he then was), on appeal from an arbitral award (one of the arbitrators who gave the award was Mr Leggatt QC, as he then was) held that a “but for” test for causation was appropriate in the circumstances. Applying this test, the business interruption losses were to be assessed on the hypothesis that the hotel was undamaged but that New Orleans was devastated. Having identified that the insured peril was confined to the damage to the hotel (and did not encompass the cause of that damage), it was held that the insured could not establish that the losses were caused by that damage and not by the surrounding devastation. In short, even if the hotel had remained undamaged, no one would have stayed there.
Given the position taken by the Supreme Court in relation to the causation issues, unsurprisingly (save for the fact that Lords Hamblen and Leggatt were, in effect, overruling their own prior decisions), it was held that the Orient Express case was wrongly decided and should be overruled. The court said that the principal error in the reasoning of the case related to the application of the “but for” test: the court in that case should instead have held that “when both the insured peril and the uninsured peril which operates concurrently with it arise from the same underlying fortuity (the hurricanes), then provided that damage proximately caused by the uninsured peril (i.e. in the Orient-Express case, damage to the rest of the city) is not excluded, loss resulting from both causes operating concurrently is covered.”
Article authored by Richard Hopley and Sam Tacey