A recent UK Supreme Court Judgment, the Financial Conduct Authority v Arch Insurance (UK Ltd) & Ors [2021] UKSC 1, clarified whether a variety of insurance policy wordings cover business interruption losses resulting from the COVID-19 pandemic and public health measures taken by UK authorities in response to the pandemic from March 2020.

Background to the appeal

The proceedings had been brought by the Financial Conduct Authority (FCA) under the Financial Markets Test Case Scheme (Scheme) pursuant to an agreement made with eight insurance companies to resolve issues of general importance on which immediately relevant and authoritative English law guidance was needed. As provided for under the Scheme, the case was heard by a court consisting of a High Court judge, sitting with a Court of Appeal judge, (Court). In the proceedings the FCA represented the interests of policyholders and two groups of policyholders had also intervened in the proceedings. 

The Court considered 21 sample insurance policy wordings and accepted many of the FCA’s arguments about the effect of these wordings, but the FCA appealed on certain issues on which it had not succeeded, as did some interveners. Six insurance companies (Insurers) appealed against the decision of the Court on other issues and also responded to the FCA’s appeal. Due to the importance and urgency of the issues raised, the appeals proceeded directly to the Supreme Court under the “leapfrog” procedure, bypassing the Court of Appeal.

Issues before the Supreme Court

The Supreme Court had to decide the following issues:

The Supreme Court substantially allowed the FCA’s appeal and dismissed the Insurers’ appeal, holding as follows:

Disease clauses

These clauses provide insurance cover for business interruption loss caused by any occurrence of a notifiable disease at or within a specified geographical radius (typically 25 miles) of the insured’s business premises. The Court took one of the Insurer’s (Royal & Sun Alliance Insurance Plc (RSA)) clauses as an example, which provided cover for business interruption following any occurrence of a notifiable disease at the business premises and for occurrence of a notifiable disease within a radius of 25 miles of the premises. RSA contended that the clause only covered business interruption consequences of any cases of a notifiable disease which occur within a 25 mile radius of the insured premises and that any cases of disease occurring outside that area did not form part of the inured peril. Conversely, FCA contended that the clause should be read as covering business interruption consequences of a notifiable disease wherever the disease occurs, provided it occurs (meaning there is at least one case of illness caused by the disease) within the 25 mile radius. The Court interpreted the clause as covering business interruption losses resulting from COVID-19 (which was made a notifiable disease on 5 March 2020) provided there had been an occurrence (meaning at least one case) of the disease within the geographical radius. The Supreme Court accepted the Insurers’ arguments that (i) each case of illness sustained by a person as a result of COVID-19 is a separate “occurrence”; and (ii) the clause only covers business interruption losses resulting from cases of disease which occur within the specified radius.

Prevention of access and hybrid clauses

Prevention of access and hybrid clauses specify a series of requirements which must all be met before the insurer is liable to pay. Some clauses apply only where there are “restrictions imposed” by a public authority following an occurrence of a notifiable disease. The Court held that this requirement is satisfied only by a measure expressed in mandatory terms which has the force of law. The Supreme Court rejected this interpretation as too narrow and held that an instruction given by a public authority may amount to a “restriction imposed” if it carries the imminent threat of legal compulsion or is in mandatory and clear terms and indicates that compliance is required without recourse to legal powers. The Supreme Court did not rule on whether individual measures satisfied this test but indicated that the argument is stronger in relation to some general measures, such as certain instructions in mandatory terms from the Prime Minister. The wording of one of the intervener’s policies provided cover only where business interruption loss was caused by the policyholder’s “inability to use” the insured premises. The Court held that this means complete and not merely partial inability to use the premises. The Supreme Court agreed that inability rather than hindrance of use must be established, but held that this requirement may be satisfied where a policyholder is unable to use the premises for a discrete business activity or is unable to use a discrete part of the premises for its business activities. The Supreme Court interpreted wording requiring “prevention of access” to the premises in a similar manner.

Causation

On the Supreme Court’s interpretation of disease clauses (see above) i.e. that such clauses only cover the effects of cases of COVID-19 occurring within the specified radius of the insured premises, questions of causation were of critical importance i.e. what connection must be shown between any such cases of disease and the business interruption loss. A key question was whether business interruption losses consequent on public health measures taken in response to COVID-19 were, in law, caused by cases of the disease that occurred within the specified radius of the insured premises. The Court found that the relevant measures were taken in response to information about all the cases of COVID-19 in the country as a whole. The Supreme Court held, in agreement with the Court, that all the individual cases of COVID-19 which had occurred by the date of any Government measure were equally effective “proximate” causes of that measure (and of the public response to it). It was therefore sufficient for a policyholder to show that at the time of any relevant Government measure there was at least one case of COVID-19 within the geographical area covered by the clause. In reaching this conclusion, the Supreme Court rejected the Insurers’ arguments: (i) that one event cannot in law be a cause of another unless it can be said that the second event would not have occurred in the absence of (“but for”) the first; and (ii) that cases of disease occurring inside and outside the specified radius should be viewed in aggregate, so that the overwhelmingly dominant cause of any Government measure will inevitably have been cases of COVID-19 occurring outside the geographical area covered by the clause. The Supreme Court explained why the “but for” test of causation was sometimes inadequate and that there can be situations (of which the present case was one) where a series of events all cause a result although none of them was individually either necessary or sufficient to cause the result by itself. The Supreme Court rejected the “weighing” approach as unworkable and unreasonable. In relation to the prevention of access and hybrid clauses, the Supreme Court held that business interruption losses are covered only if they result from all the elements of the risk covered by the clause operating in the required causal sequence. However, the fact that such losses were also caused by other (uninsured) effects of the COVID-19 pandemic did not exclude them from cover under such clauses.

Trends clauses

Almost all the policy wordings contained “trends clauses” which provide for business interruption losses to be calculated by adjusting the results of the business in the previous year to take account of trends or other circumstances affecting the business in order to estimate as nearly as possible what results would have been achieved if the insured peril had not occurred. The Supreme Court held that these clauses should not be construed so as to take away cover provided by the insuring clauses and that the trends and circumstances for which the clauses require adjustments to be made do not include circumstances arising out of the same underlying or originating cause as the insured peril (i.e. in the present case effects of the COVID-19 pandemic).

Pre-Trigger Losses

The Court, subject to qualifications, permitted adjustments to be made under the trends clauses to reflect a measurable downturn in the turnover of a business due to COVID-19 before the insured peril was triggered. The Supreme Court rejected this approach. In accordance with its interpretation of the trends clauses, adjustments should only be made to reflect circumstances affecting the business which were unconnected with COVID-19.

Status of Orient-Express

The Orient-Express case concerned a claim for business interruption loss arising from hurricane damage to a hotel in New Orleans. The policy contained a trends clause with similar wording to those in the present case. A panel of three arbitrators accepted the insurer’s argument that the cover did not extend to business interruption losses which would have been sustained anyway as a result of damage to the city of New Orleans even if the hotel itself had not been damaged. The Insurers had relied on this decision to support their arguments on causation of loss and the effect of the trends clauses in the present case. The Supreme Court concluded that the Orient-Express case was wrongly decided and should be overruled.

Comments

This judgment provides useful guidance to insurers who issue insurance policies relating to COVID-19. The Supreme Court’s ruling on causation is also relevant to construction cases. When there is more than one delaying event in a construction project, it is sometimes difficult to determine the question of causation. It provides the legal basis to argue that the “but for” test of causation may not be adequate for applying to all situations.