The Financial Conduct Authority v Arch Insurance (UK) Ltd and others  UKSC 1
Hundreds of thousands of businesses in the UK are due to receive payments for business interruption insurance claims relating to COVID-19 after a UK Supreme Court ruling, handed down on 15 January 2021, determined when such claims should be paid out.
This highly significant judgment examines whether numerous policy holders have effective insurance cover for business interruptions caused by the COVID-19 pandemic, such as those involving national lockdowns and related restrictions. The judgment also re-evaluates the test for causation in English insurance law and it is clear that the judgment will have far wider ramifications on this area of law, outside the context of COVID-19.
Following the introduction of the UK’s first national lockdown in March 2020 due to the COVID-19 pandemic, all non-essential businesses were closed. Thousands of businesses in the UK claimed for losses suffered as a result of these closures, however many insurers declined to pay on the basis that the policies did not cover the effect (or certain effects) of the pandemic.
Following widespread public concern, and in order to clarify the position before the court in relation to a selected number of policy wordings, the Financial Conduct Authority (FCA) brought a test case against eight defendant insurers. All insurers are leading providers of business interruption (“BI”) insurance.
In these proceedings, the FCA stood in the position of the policy holders, many of whom are small and medium enterprises. The aim of the proceedings, in the words of the Lordships, was to achieve “the maximum clarity possible for the maximum number of policyholders and their insurers”.
These proceedings were on appeal from the High Court judgment handed down on 15 September 2020.
The Supreme Court judgment
Causation and the disease clauses
The disease clauses provided cover for BI as a result of the occurrence of a notifiable disease within a specified radius of 25 miles of the policy holder’s premises.
A key issue discussed throughout the judgment was the appropriate test that applied to establish causation in relation to the disease clauses. The insurers relied primarily on the “but for” test, arguing that it was a minimum requirement of any causation test for the insured to show that the loss would not have been sustained but for the occurrence of the insured peril. In other words, the insured peril must have made a difference to the occurrence of the loss. Because the effects of the pandemic were so widespread across the country, insurers argued that policyholders would have suffered the same loss, whether or not they could identify an occurrence of COVID-19, within the 25-mile radius of their business premises.
The Lordships rejected this argument and held that while the clause responds to cases of illness resulting from COVID-19 that occur within the 25 mile radius specified in the clause, it was realistic to analyse the situation as one where all the COVID-19 cases occurring nationwide “were equal causes of the imposition of national measures”. This took into account that the restrictions introduced in the UK came about in response to information about all the COVID-19 cases in the country as a whole.
Importantly, the court decided that the “but for” test was not appropriate in this case. The court found that the pandemic situation was one where “a series of events combine to produce a particular result but where none of the individual events was either necessary or sufficient to bring about the result by itself.” The court therefore held that, once the insured proves that there was an occurrence of the disease within the radius specified in the policy, the disease clauses responded to a broader range of losses caused by the pandemic, including losses resulting from national lockdowns and restrictions.
A point of interest is that the court overruled one key authority in insurance law (Orient-Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186) in which two of the Lordships were involved. The Lordships now concluded that the case relied on an incorrect (but for) causation analysis.
Prevention of access and hybrid clauses
The court’s causal analysis above also applied to denial of access and hybrid clauses (where hybrid clauses refer to denial of access and disease). These clauses were construed broadly by the court as follows:
- Terms such as “restriction imposed” included any government instructions, whether or not they had been incorporated into law.
- “Inability to use” included partial inability to use the premises, rather than complete prevention. The court found that an “inability to use” must be read as an “inability to use the premises for the purposes of the business”. The Lordships recognised that certain businesses such as restaurants can still use a discrete part of the premises, such as the kitchen for take away orders, but cannot use the restaurant seating area. In these circumstances, the policy would still respond.
- The court applied the same logic to prevention of access wordings. The court found that so long as there was a complete prevention of access to a part of the premises or for a discrete purpose, this clause will be satisfied.
All of the sample policy wordings considered in the proceedings contained “trends clauses”. These form part of a standard method of quantifying an insured’s financial loss used in policies that provide BI cover. The typical method used in BI insurance to quantify the loss takes an earlier period of trading for comparison purposes.
The Lordships dismissed the insurers’ argument that amounts to be paid out should be based only on specific losses incurred against the backdrop of closures during the pandemic.
Instead, the court found that compensation should be calculated based on what a business earned in normal times. The court ruled that losses incurred before the insured peril was triggered under the policy should not be taken into account, where these had been caused by the pandemic. For example, people taking early measures (before lockdowns were introduced) to stay at home due to fear of virus, could not be taken into account to adjust the loss downwards.
It is difficult to overstate the impact of this judgment, not only for the potentially wide reaching impact this will have on English insurance law (in particular relating to causation), but also taking into account the Supreme Court estimation that 370,000 policyholders could be affected by the outcome of this limitation.
The court’s dicta on trends clauses will also have an important impact on loss-adjusting of insurance claims in terms of what trends can be taken into account.
BDM regularly advises businesses on legal issues relating to COVID-19 and if you have any questions please do not hesitate to contact us at firstname.lastname@example.org.