On Friday 15 January in London, the Supreme Court handed down their judgment in the business interruption insurance test case: The FCA v Arch Insurance (UK) Ltd et al  UKSC 1.
The Supreme Court has brought welcome relief to business insurance policyholders, many of whom have faced severe hardship as a result of the Covid-19 pandemic. But the judgment has much wider significance, both domestically and internationally.
Background to the litigation
As the conduct regulator of insurers and insurance products in the UK, the Financial Conduct Authority (“FCA”) brought the test case with the objective of delivering certainty for policyholders, and to the wider market in general. As we noted in our previous article, the FCA very much cast itself as a consumer champion in this action, highlighting that holders of the relevant policies tend to not to be well-resourced or sophisticated in the way a large corporate would be, and arguing for consumer-friendly interpretations of the law.
Test litigation of this kind is novel in the UK. It was brought under the Financial Markets Test Case Scheme, a scheme introduced (but never used) to settle uncertainties arising from the UK’s departure from the European Union.
The FCA was joined by eight leading insurers and two policyholder action groups in the High Court in Summer 2020. Lord Justice Flaux and Mr Justice Butcher found largely in favour of the FCA and policyholders.
However, as anticipated, the High Court did not have the final word on the matter. In a ‘leapfrog’ appeal to the Supreme Court, the FCA and one action group argued that the High Court had wrongly found for the insurers in a number of areas, whilst six insurers appealed points where the High Court had found against them.
The Supreme Court went further than the High Court in many respects, finding substantially for the FCA and dismissing the insurers appeals. In a particularly welcome section for policyholders, the Supreme Court found that the High Court case of Orient Express (Orient Express Hotels v Assicurazioni Generali Spa (UK) (t/a Generali Global Risk)  EWHC 1186 (Comm)) was wrongly decided and should be overruled. Orient Express had been prayed in aid by insurers to support their arguments about causation and trends clauses. Orient Express concerned losses arising from property damage rather than disease, just one example as to how the Supreme Court’s judgment will be of enduring significance beyond the current pandemic.
The Supreme Court’s judgment
A detailed examination of the Supreme Court’s judgment is beyond the scope of this article, but some key points of note include:
The High Court held that where policies had ‘disease wordings’ such that they provided cover for business interruption arising from an outbreak of disease, it was not necessary to establish that there had been an outbreak on or within a defined distance of an insured premises. The Supreme Court took a view more in line with the insurers’ arguments, holding that disease clauses are triggered by cases of Covid-19 on or within the defined distance from the insured premises. This is a more restrictive view than the High Court, but its effect on policyholders is offset by the Supreme Court’s reasoning on causation, which is discussed below.
Prevention of access/hybrid clauses
The Supreme Court held that requirements of prevention of access and similar policy wordings can be satisfied where a policyholder cannot use their premises for a discrete business activity or conversely where they cannot use a discrete part of their premises for business activities. The Supreme Court interpreted “inability to use” in similar terms.
Importantly, the Supreme Court held that restrictions imposed by business interruption did not need to have to have the force of law in order to trigger relevant policy wordings. Some announcements by public authorities quite clearly fall into the category of restrictions imposed, whereas others will need a more careful analysis. At one end of the scale is the statements by the Prime Minister in March 2020 for schools and many businesses to close. At the more ambiguous end of the scale is the “change in tone” from the government which was cited by department store John Lewis as the reason for suspending its click and collect service in January 2021.
The Supreme Court were clearer and more decisive than the High Court on causation, finding that the “but for” test was simply not appropriate in cases such as the Covid-19 pandemic where there are multiple overlapping causes of loss. As a result, it will generally be unnecessary to disentangle the effect of the government response to the pandemic from the effect of specific cases local to the insured premises.
The Supreme Court were clear that trends clauses exist to quantify losses, not to exclude them. Circumstances which have the same cause as the insured peril are not properly trends as they would not have occurred but for the peril. To illustrate with an example, a florist suffering a general downturn in trading due to the pandemic would not have their losses reduced under a trends clause. But a florist suffering a general downturn in trading because of the construction of an adjacent sewage farm would. This clear guidance on trends is likely to lead to larger awards for policyholders, and to make bringing a claim more attractive.
The Supreme Court’s judgment in relation to pre-trigger losses follows from its reasoning on trends clauses and also brings welcome news for policyholders. Rejecting the High Court’s reasoning, the Supreme Court held that claims should not be adjusted for pre-trigger losses if those losses were connected to the pandemic. The Supreme Court gave the hypothetical example of a pub which had experienced a loss of business in the week before the Prime Minister’s announcements of March 2020. If those pre-trigger losses were attributable to public concern about the pandemic it would be wrong to adjust for them.
As we noted in our previous article, it is rare for an insurance dispute to be argued so thoroughly and so publicly with so many points in issue. The Supreme Court’s judgment will be of great assistance to policyholders in jurisdictions far beyond the UK. It also has clear relevance to claims for property damage.
It is important to note that the Supreme Court, like the High Court before it, heard no evidence and made no factual determinations. The focus was on the small number of sample wordings selected by the parties. On the FCA’s own estimate, there are around 700 types of policy that may be affected by the case. The precise relevance of the Supreme Court’s judgment to those policies, and the application of the judgment to the facts of individual cases will almost inevitably lead to further dispute.
The Supreme Court’s judgment presents an important opportunity for policyholders to reassess their positions. Those with existing claims may find their position has strengthened. Those who were unsure whether their policy provided meaningful coverage would do well to look again.
Any corporate policyholder with business interruption losses arising under a London Market policy may benefit from the assistance of English counsel with expertise in resolving similar complex coverage disputes.
Over the last three decades, David has developed a unique commercial insurance practice, which focuses on the resolution of London Market insurance claims on behalf of international policyholders, with a particular emphasis on North America.
He is considered to be a leading expert on legal issues arising out of Lloyd’s of London, Equitas and its successors and the London companies’ market, as well as in FSMA 2000 dealing with insurance business transfers.
Founder of Settlement Counsel in 2000, he has been retained in some of the largest commercial insurance settlements and litigation to act on behalf of the corporate policyholder, usually with the assistance of international counsel. He is an accredited mediator and contributor to insurance coverage panels, including the American Bar Association.
David received his LL.M. in Commercial Insurance from Cambridge University.
A versatile junior barrister, who trained in the UK and the USA, Amy maintains a busy trial advocacy practice alongside her advisory work.