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COVID-19: An Insurance Nightmare - Kush Patel


On 30th January 2020, the World Health Organisation declared the outbreak of COVID-19 a ‘public health emergency of international concern.’ Following these words of warning, Boris Johnson told cafés, pubs, bars and restaurants across the UK to close on 20th March. The British government later imposed extensive restrictions on commercial operations, which made it an offence for businesses to continue running. This action had a detrimental impact on small businesses, many of which made claims through business interruption insurance policies for loss of earning when they had to close in the national lockdown. However, many insurers refused to pay, arguing that these policies did not cover widespread disruption and only the most specialist policies had cover for such unprecedented restrictions.

In November 2020, the City watchdog, the Financial Conduct Authority, brought a test case on behalf of small businesses against eight insurers. Some of the world’s largest commercial insurers, including Hiscox, Arch, Argenta, MS Amlin, QBE and RSA, were involved in the trial.

In issue on this appeal was the proper interpretation of the clauses which were found in a number of the insurance policies. The core principle that guided the Supreme Court Justices was 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 have been available to the contracting parties, would have understood the language and words of the contract to mean. Also playing on the minds of the Supreme Court Justices were the cautionary words of Lord Mustill in Charter Reinsurance Co v Fagan in 1997, who warned that ‘the court should remind itself that … to force upon the words a meaning which they cannot fairly bear is to substitute for the bargain actually made one which the court believes could better have been made. This is an illegitimate role for a court.’

Disease clauses

The first issue that faced the court was over the meaning of ‘disease clauses’ which provided insurance cover for business interruption losses caused by the ‘occurrence’ of a ‘notifiable disease’ within a specified distance (typically a 25-mile radius) of the policyholder’s business premises.

The word ‘occurrence’ has a widely recognised meaning in insurance law as something which has ‘happened at a particular time, at a particular place, in a particular way’. As such, the proper interpretation of the words, ‘occurrence of a notifiable disease’ was that each case of illness sustained by a particular person, at a particular time and place, as a result of COVID-19, had been a separate occurrence. Accordingly, it could not have been said that all the cases of COVID-19 in the UK constituted one occurrence; instead, those cases comprised thousands of separate occurrences of COVID-19. Thus, the disease clauses were properly interpreted as providing cover for business interruption that had been caused by any case of COVID-19 related illness occurring within the specified radius of the insured business premises.

Prevention of access

The court was also tasked with determining the extent to which insurance policies covered ‘restrictions imposed by a public authority’, which prevented or hindered access to business premises. Ordinarily, restrictions imposed by a public authority had been understood as mandatory measures enforced by statutory or legal powers. However, after much debate, Lord Leggatt concluded that a restriction did not always require the force of law. As such, when the UK Prime Minister, in his statement on 20th March 2020, instructed named businesses to close ‘tonight’, it was a clear and mandatory instruction given on behalf of the government. However, it was an instruction which both the named businesses and the public would have reasonably understood as having to be complied with, regardless of its legal basis. Such an order was therefore capable of being a ‘restriction imposed’, regardless of whether it was legally capable of being enforced.

This notwithstanding, the court acknowledged that there would be greater certainty in the operation of the insurance clause if ‘restrictions imposed’ were required in every case to have the force of law. However, given that contractual terms are to be interpreted in accordance with how they would be understood to a reasonable person, the reasonable policyholder would not understand ‘imposed’ to make insurance cover conditional on the existence of a valid legal basis for the restriction.

Furthermore, the insurance firms attempted to show that ‘inability of use’ required that there be a complete inability to use the business premises for all purposes. However, the Supreme Court held that the ‘inability to use’ requirement would be satisfied either if the policyholder had been unable to use the premises for a discrete part of its business activities, or if it had been unable to use a discrete part of its premises for its business activities. For instance, a department store, which had to close all parts of the store except its pharmacy, was found to be unable to use a discrete part of its business premises.


The Supreme Court concluded that on the proper interpretation of the insurance clauses, in order to show that loss from interruption was proximately caused by an occurrence of illness resulting from COVID-19, it had to be proved that the interruption arose as a result of government action taken in response to cases of the disease within the relevant geographical area. Thus, each individual case of illness was held to be a separate and equally effective cause of that action.

The outcome

In dismissing the appeals of insurance companies, who were providers of ‘business interruption’ insurance in the UK, the Supreme Court found largely in favour of small firms receiving payments from business interruption insurance policies.

Financial implications: The Winners and The Losers

Tens of thousands of small businesses will receive insurance pay-outs covering losses from the first national lockdown. This could provide a lifeline for these businesses in allowing them to trade beyond the coronavirus crisis. Richard Leedham, who represented the Hiscox Action Group on behalf of small businesses, said that ‘this is a landmark victory for a small group of businesses who took on a huge insurance player and have been fully vindicated.’

On the other hand, this ruling will cost the insurance sector hundreds of millions of pounds, as claims have been valued at almost £1.2 billion. Indeed, Hiscox shares plummeted by 4% after the Supreme Court announced their judgement. In this way, the insurance industry faces a significant financial burden.

It should also be noted that insurers are being urged to pay up without delay. COVID Claims Group and other small business owners are joining together to call for a quick resolution and pay-out. This is due to the fact that time is of the essence in the current economic climate, as some businesses may be forced to close down while waiting for payment.

Legal implications

This test case was fast-tracked to the Supreme Court owing to its importance. The final ruling provides authoritative guidance on particular insurance policies as well as similar ones that were not brought as part of the case. As such, the insurance sector will use the judgement, which has brought clarity to this area of law, to guide their decisions in the future.

It is testament to the success of the Test Case Scheme procedure that it will have enabled the important legal issues raised in this case to be finally decided following a trial and an appeal to the Supreme Court in just over seven months. It is hoped that this determination will facilitate other prompt settlements and achieve considerable cost savings in the resolution of individual claims.

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