The Supreme Court judgment in the Financial Conduct Authority (FCA) test case was a resounding victory for policyholders. Two potential unintended consequences of that judgment are considered here
So-called ‘disease clauses’ provide cover for business interruption caused by the occurrence of a notifiable disease within (say) 25 miles of the insured premises. To many, the Supreme Court’s conclusion that such clauses cover losses from the Covid-19 pandemic is obviously correct.
But to insurance lawyers that is far from clear. The difficulty lies in the court’s reasoning about causation. The court accepted that the ‘insured peril’, namely the occurrence of the disease within 25 miles, did not cause the business interruption loss in a ‘but for’ sense: there would have been a lockdown even in the absence of that occurrence, because of the (uninsured) occurrences outside the area. The court further accepted that in the ‘vast majority of cases in any field of law or ordinary life’, the ‘but for’ causation test applied: ‘if event Y would still have occurred anyway irrespective of the occurrence of a prior event X, then X cannot be said to have caused Y.’
However, the court said that disease clauses were an exception to that rule. Here, the policyholder and insurer must be taken to have agreed that the ‘but for’ test should be dispensed with. Notifiable diseases are, by definition, capable of spreading far and wide. The disease clauses contemplated that an occurrence 25 miles away from the premises might cause business interruption. The parties must have contemplated that such an occurrence might be part of a wider outbreak, including cases both within and outside the policy area; and that the business interruption might be caused by government response to the outbreak as a whole rather than to an individual case. It cannot have been intended that the policyholder should not recover because the occurrence within the policy radius did not cause the interruption in a ‘but for’ sense. Rather, the policy should respond if the case within the area was one of ‘multiple concurrent’ causes, which collectively caused the government response and the resulting business interruption.
The problem with the Supreme Court’s analysis is that it introduces uncertainty to contractual interpretation: when are the parties to be understood as having dispensed with “but for” causation?
The difficulty with this analysis can be illustrated by reference to a similar clause, insuring business interruption caused by the occurrence of a notifiable disease at the premises. Surely, on any natural reading, that clause envisages that only loss directly caused by the very occurrence at the premises should be covered, rather than loss suffered because of a national lockdown? But, applying the ‘multiple concurrent cause’ test, the case at the premises, unknown to the government (and even to the policyholder) when the lockdown was imposed, was just as much a cause of the business interruption as all other cases, and the policy should respond. It seems doubtful that that reflects the intention of the parties, objectively interpreted.
The problem with the Supreme Court’s analysis is that it introduces uncertainty to contractual interpretation: when are the parties to be understood as having dispensed with ‘but for’ causation? It may be that the court’s conclusion in favour of policyholders in the Test Case has been reached at the expense of the certainty of English contract law.
Another potential consequence of the Test Case is an increase in professional negligence claims against insurance brokers. The Supreme Court has held that standard non-damage business interruption extensions, widely available in the market before the pandemic, provide full cover. Some policyholders without such extensions in their policies at the outbreak of the pandemic may allege that their insurance brokers were negligent.
Such negligence claims will face significant hurdles. The policyholders will first need to establish that the broker was under a duty to advise them to consider the risk of pandemic causing business interruption. The broker might argue that a pandemic was not foreseeable: the last global pandemic (the Spanish flu) occurred over a century ago. The policyholder might counter that a pandemic was foreseeable, having been characterised as a high risk on the UK Government risk register since 2008. But could the devastating business interruption consequences of a national lockdown, an unprecedented measure before 2020, have been foreseen?
Second, the policyholder needs to establish that the broker was negligent in failing to advise that the standard BI extensions would cover a pandemic. But before the Test Case, the prevailing view amongst insurers and brokers was that such clauses would not cover pandemics, being restricted to local occurrences of disease. If a broker had asked an underwriter whether a standard disease clause with a 25-mile radius would cover national government action in response to a pandemic, the underwriter would probably have said ‘no’. In those circumstances, it is doubtful that the broker would have been negligent in failing to advise the policyholder that the clause would cover pandemic-related BI.
Where brokers failed to advise policyholders to purchase disease clauses in policies renewing within that window, those policyholders might have a better prospect of making out a negligence claim.
Thirdly, the policyholder would need to show that it would have purchased the extension if ‘properly’ advised. In retrospect, that is easy to say; but in a pre-Covid world it is questionable whether a policyholder would truly have spent its premium on a ‘disease clause’ extension.
Many such negligence claims would have an air of unreality about them, being unfairly based on hindsight. But there may be exceptions. For example, some policyholders will have renewed their policies between, say, January and March 2020, when the Covid pandemic was beginning to cause widespread business interruption, but before insurers were imposing blanket Covid exclusion clauses across all policies. Where brokers failed to advise policyholders to purchase disease clauses in policies renewing within that window, those policyholders might have a better prospect of making out a negligence claim.
Overall, it remains to be seen whether the innovative approach to causation adopted by the Supreme Court will create uncertainty for English contract law, or whether the Test Case will be confined to its facts. In any event, insurance brokers should brace themselves for a potential wave of complaints by policyholders who had not purchased standard BI extensions before mid-2020.
Felix Zimmermann is a partner at Simmons & Simmons, specialising in defending insurers on professional negligence claims