Business Interruption Losses: Clarity from the High Court

What legal and practical advice arises from this business interruption losses case?

Overall, the Stonegate case confirms principles that were set out in the FCA test case.  However, additional, and particularly useful, guidance arises in relation to two key issues, which factor in to the determination of whether any business interruption losses claim should be paid. The two issues are referred to in the judgment as Issue 2 (the Aggregation Issue) and Issue 6 (the Government Support Issue).

Issue 2 – the Aggregation Issue

In Stonegate, the High Court confirmed that, when assessing any business interruption losses claim, the insurance policy in question should be considered from the perspective that of “an informed observer placed in the position of the insured”.  The court then went on to explain that the FCA test case did not address:

1. When is the informed observer considered as making its assessment?
2. What knowledge is the informed observer taken to have at the time?

In relation to the first question, the judge stated: “the relevant time is not before business interruption loss begins to be sustained, but I consider that it is not necessarily the case that the relevant time is the moment at which loss begins to be sustained. The question is whether losses are to be aggregated. It may not make sense to seek to answer that question the moment that a loss begins to be sustained. I would suggest that the relevant point is the earliest time after the commencement of loss at which a reasonable person in the position of the insured would seek to decide whether there was one relevant occurrence [of potentially recoverable loss]”.

In relation to the second question, the court found that the informed observer is taken to have all the knowledge a reasonable person in the position of the insured would have at the date when the judgment as to whether there is an aggregating occurrence is made (that is, at the time ascertained in line with question 1. above).

The practical outcome of these findings is that business interruption losses claimants must determine, and must then properly plead: (1) the earliest time at which any one occurrence of potentially recoverable, potentially aggregating, loss occurred; and (2) what facts, matters or circumstances could be known to the hypothetical informed observer at that time.

Issue 6 – the Government Support Issue

As will be the case in many business interruption losses claims, Stonegate had participated in the Coronavirus Job Retention Scheme (“CJRS“, also known as the furlough scheme). The court referred to the “savings clause” in the relevant insurance policy, and the natural meaning of the definition of “Reduction in Turnover”.  It concluded that, insofar as costs were defrayed by the UK Government under the CJRS, the costs of the business were reduced.  The net financial effect of those payments, and therefore the commercial reality, was relevant to the assessment of the insurance claim.

The High Court also clarified that, even if this had not been the result of the savings clause and relevant definitions in the policy, the insurers would have been “subrogated to the CJRS payments”, as a matter of general law.

The practical outcome of these findings is that furlough payments made to a claimant under the CJRS should be taken into account when calculating any business interruption losses indemnity.  (It follows that other factors affecting the commercial reality in any individual case may also be taken into consideration.)

What happened in the Stonegate business interruption losses case?

Stonegate is the owner of a number of bars and restaurants across the UK.  It was affected by the spread of COVID-19 and the UK Government’s ‘lockdown’ response. Stonegate issued a claim against its insurers for business interruption losses.

The insurers defended Stonegate’s claim, alleging (in summary):

• All claimed business insurance losses were connected with a single occurrence and should therefore be aggregated and subject to a limit of £2.5 million, and the insurers had already discharged their obligations to indemnify Stonegate for business interruption losses by paying £2.5 million to Stonegate in December 2020; and
• the UK government’s Covid-related financial support, including furlough/CJRS payments, should be taken into account when calculating claimed business interruption losses.

As well as clarifying the correct approach in relation to the Aggregation Issue and the Government Support Issue, the Stonegate case considered additional issues concerning ‘triggers’ for business interruption losses claims, causation, and the interpretation and operation of certain clauses common to many of these types of insurance policies.  These wider points will be of interest to policy makers, holders and professional advisers operating in the business interruption losses insurance market.

On the key issues, the court found largely in favour of the defendants.  The Stonegate judgment will therefore be of significant interest and assistance to insurers responding to business interruptions losses claims going forward.

How we can help with business interruption losses disputes

Walker Morris’ specialist Commercial Dispute Resolution lawyers are experienced and expert in acting for both businesses and insurers in relation to business interruption losses claims. Whether arising off the back of Covid disruption or in the context of other economic uncertainty or commercial disruption, the team can also advise and assist clients in all aspects of commercial contract disputes.

Please contact Nick McQueen to discuss.

[1] [2021] UKSC 1

[2] [2022] EWHC 2548