Relief at Supreme Court judgment on business interruption insurance – but with a note of caution…

Posted on: January 20, 2021 by

It has been a worrying and torrid time for many businesses over the past twelve months, not least those in the arts sector. Cancelled exhibitions, revenue loss, closed doors, and staff cuts have become an all too familiar story for many museums and galleries, forced to suspend business-as -usual in response to the Covid-19 pandemic.

News that the much anticipated judgement of the Supreme Court on ‘business interruption’ (BI) insurance was largely positive for policy holders therefore provided some much-needed relief.

Many readers will no doubt be familiar with the background to this case, given its highly significant practical implications for so many businesses affected by the pandemic. The BI insurance at issue is intended to cover loss of revenue or increased costs incurred when a business can no longer operate owing (traditionally) to damage to its premises, or to other specified causes including ‘notifiable diseases’ and ‘denial of access’ to business premises.

The case was brought by the Financial Conduct Authority (FCA) when it became clear that policy holders were encountering resistance from insurers to claims under these BI policies. The FCA sought the High Court’s assessment of a representative sample of 21 selected policies in a hearing which took place last September. The verdict was largely favourable for the policy holders, but subsequently appealed by both sides. The appeal was ‘leap frogged’ directly to the Supreme Court in recognition of the grave importance of the matter for so many businesses (some 370,000 according to the FCA).

The decision of the Supreme Court, handed down on 15 January, brings welcome clarity on a number of the issues discussed, and greater confidence to policy holders that their BI claims will now be met.  Broadly speaking, the judgment confirmed that the particular policies considered do provide cover for business interruption caused by the pandemic. Of course, the devil is always in the detail, and each business will need to check very carefully the precise scope of its cover, but at least the starting point is a positive one.

Without labouring the detail of what was a complex case (certainly for those not imbued in the world of insurance) it’s worth highlighting a couple of interesting points. There was much debate about the scope of ‘denial of access’ clauses – exactly how they were triggered and what level of ‘denial’ was required. The Supreme Court usefully confirmed that the relevant restrictions need not necessarily be enshrined in legislation, and (as a separate point) that inability to use premises for a discrete part of a business’s activities (or inability to use a discrete part of the premises for its business activities) could suffice. One example would be a restaurant that had to close its dining facilities but could operate a take-away counter. This principle could be quite significant for many museums and galleries which carry on a wide range of enterprises including retail facilities, cafes, restaurants and events as well as the more core business of facilitating gallery visits and exhibition tours.

Another point – of particular fascination for lawyers, but of importance for insurers and policy holders more broadly – was the Supreme Court’s decision to overrule a previous judgment on which insurers have sought to rely to limit the scope and application of BI clauses. The case hails from 2010 and involved claims resulting from losses relating to hurricanes Katrina and Rita. The arguments are somewhat complex, but suggest that henceforth it will be difficult for insurers to deny claims on the basis that the losses claimed would have occurred in any event,  for example owing to the wider disruption caused by the pandemic even if the particular circumstance specified in the relevant clause had not occurred. Again, the wording of the particular policy will be key.

The note of caution which underlies the generally positive reaction to the judgment is echoed by lawyers closely involved in these issues. Rudy Capildeo,* Partner at Charles Russell Speechlys, who has been advising galleries in the UK and abroad on claims against insurers, commented that the ruling “is not a blank cheque” and that insurers may well interrogate policy holders’ losses assiduously – a warning for businesses to ensure accurate and comprehensive records are maintained.

Sadly, the decision may have come too late for some museums and galleries, whose doors have already been forced to close on a permanent basis. For many of those still in the running, there will undoubtedly be further work to do to progress their claims and, hopefully, to secure their futures. The Supreme Court’s decision does, however, provide the hope of a little light at the end of a very long and treacherous tunnel.

* Rudy will be speaking at our forthcoming Study Forum on 6 February with Tim Maxwell, also a Partner at Charles Russell Speechlys, so we will no doubt hear more of his thoughts on the matter then. If you’re keen to learn more, and hear about a wide range of other topical issues for the art world (Brexit, art contracts, copyright) you can book a place here. Congratulations are also due to IAL institutional member Mishcon de Reya LLP, who represented several of the successful policyholders in their claims before the Supreme Court.

Image credit: UK Supreme Court