The Supreme Court decides on COVID-19 business interruption coverage – What does this mean for real estate?

On Friday 15 January, the Supreme Court handed down its highly anticipated appeal ruling in the Financial Conduct Authority test case litigation, finding substantially in favour of the FCA and, in turn, policyholders.  It goes without saying that most businesses have experienced significant disruption as a result of the COVID-19 pandemic, and many had turned to their business interruption insurance policies, only to find claims in the large part dismissed by insurers.  The outcome of the appeal, which was fast-tracked to the Supreme Court after the High Court's initial judgment, will provide welcome relief to many of the estimated 370,000 policyholders who have cover in respect of ‘notifiable diseases’.

The disruption and interruption experienced by businesses – particularly those in the retail, leisure and hospitality industries – have been particularly visible on the high street.  Yet as well as losing the ability to trade or conduct business from their premises, many tenant occupiers will have been obliged to continue paying rent to their landlords.  In turn, many landlords have faced their core business – the letting of property – fundamentally disrupted, with tenants either unable or unwilling to pay rent for premises they have not been able to use.

For both landlords and tenants, therefore, the result of the FCA test case should be of considerable interest.  The court did not examine policy wordings relating specifically to loss of rent, but several of the court’s conclusions will be of particular relevance in this context:

Disease clauses

The Supreme Court took a narrower approach to identifying the insured peril than the High Court had done.  However, because of their findings on causation, policyholders will be able to access cover under ‘notifiable disease’ clauses providing they can prove a case of COVID-19 within the relevant radius, irrespective of whether it was ‘that case’ which caused the subsequent business interruption.

Prevention of access / hybrid clauses

These clauses will now be more readily triggered because:

• Where clauses require the existence of a "restriction imposed" to trigger cover, the Supreme Court has overturned the High Court's ruling that such a restriction needed to be "mandatory and have force of law".  Instead, the Supreme Court has said the requirement will be satisfied if the government action referred to by the policyholder carries the imminent threat of legal compulsion or is in mandatory and clear terms and indicates that compliance is required without recourse to legal powers. 

This is a significant element of the ruling, since it is likely to mean cover is available to a greater number and variety of policyholders (including office occupiers whose premises were not forced by law to close), who may be able to rely upon (for example) the Prime Minister's instructions in his early national broadcasts that certain businesses should close and that people should stay at home. 

• The requirement in some clauses for there to be "inability to use" premises does not require total inability.  It may be satisfied where: a policyholder (i) is unable to use the premises for a discrete business activity; or (ii) is unable to use a discrete part of the premises for its business activities.  "Prevention of use" clauses were similarly construed. This element of the ruling is likely to be particularly helpful for occupiers who were able to continue at least a minimum element of trading during the pandemic (e.g. take-away, rather than restaurant service).

Causation

In addition to the impact on disease clauses referred to above, the Supreme Court’s findings on causation mean that, for prevention of access / hybrid clauses, cover will be available where the loss was caused by all the elements of the insured peril acting in combination, regardless of whether the loss was concurrently caused by other (non-insured but not excluded) consequences of the COVID-19 pandemic.  In essence, this means insurers cannot rely on the argument that the business would have suffered the same trading loss, even without the particular access issues covered by the clause. 

Comment

Now that the judgment is final and cannot be further appealed, insurers will be under pressure to settle and pay covered claims as quickly as possible.   However, the Supreme Court’s ruling is complex and will apply in different ways to different policy wordings, so those with outstanding or potential claims will need to consider the detail of the judgment as it applies to the specific claim.

It’s worth noting that the court didn’t consider ‘loss of rent’ policy wordings under buildings insurance policies.  In the majority of cases, as between landlords and tenants, the terms of typical ‘rent cesser’ clauses in leases mean that such cover only comes into play where there is physical damage to the let premises.  However, it’s clear from the ruling that both landlords and tenants may now have separate avenues of claim under their respective business interruption policies.  Whether that leads to any change in the way that leases (and, perhaps particularly, COVID-related side letters providing for additional rent suspensions) are negotiated remains to be seen.  

If you would like advice or assistance with a claim, or in relation to the outcome of the test case or any related insurance issue, please do get in touch with your usual Hogan Lovells real estate contact and we will introduce you to our global insurance team.

Authored by Chris Somorjay and Lydia Savill