The Financial Conduct Authority & Ors v Arch Insurance (UK) Ltd & Ors [2021] UKSC 1

The FCA brought a test case concerning whether business interruption insurance policies covered losses caused by COVID-19 and government restrictions. The Supreme Court held that disease clauses, hybrid clauses, and prevention of access clauses did provide cover, and that trends clauses should not reduce indemnities for pandemic-related concurrent causes.

Facts

The Financial Conduct Authority brought proceedings under the Financial Markets Test Case Scheme on behalf of policyholders, many of whom were small and medium enterprises (SMEs). Eight insurers were defendants. The case concerned whether business interruption insurance policies provided cover for losses arising from COVID-19 and the UK Government’s response, including lockdown measures introduced in March 2020.

The policies contained various clauses including disease clauses (covering losses from notifiable diseases occurring within specified distances of premises), prevention of access clauses, hybrid clauses, and trends clauses (for quantifying loss). The Government had issued regulations requiring certain businesses to close and prohibiting people from leaving home without reasonable excuse.

Issues

Disease Clauses

The central issue was the interpretation of clauses covering occurrences of notifiable diseases within a specified radius of insured premises. The insurers argued that only cases within the radius were insured perils and that a ‘but for’ causation test meant no recovery where national measures would have been imposed regardless of local cases.

Prevention of Access and Hybrid Clauses

Issues arose regarding whether ‘restrictions imposed’ required the force of law, and whether ‘inability to use’ premises required complete closure or could include partial restrictions.

Causation and Trends Clauses

The court considered whether the ‘but for’ test applied and how trends clauses affected quantification of loss.

Judgment

The Supreme Court substantially dismissed the insurers’ appeals and allowed the FCA’s appeal on several grounds.

Disease Clauses

The court held that each case of COVID-19 was a separate occurrence, and only cases within the specified radius were insured perils. However, the court rejected the ‘but for’ causation test:

We accordingly reject the insurers’ contention that the occurrence of one or more cases of COVID-19 within the specified radius cannot be a cause of business interruption loss if the loss would not have been suffered but for those cases because the same interruption of the business would have occurred anyway as a result of other cases of COVID-19 elsewhere in the country.

The court held that each case of disease was an equally effective concurrent cause of government action:

We conclude that, on the proper interpretation of the disease clauses, in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of illness resulting from COVID-19, it is sufficient to prove that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause.

Restrictions Imposed

The court held that while restrictions ‘imposed’ would ordinarily mean measures having the force of law, mandatory government instructions in emergency situations could qualify even without immediate legal basis:

When the Prime Minister in his statement of 20 March 2020 instructed named businesses to close tonight, that was a clear, mandatory instruction given on behalf of the UK Government. It was an instruction which both the named businesses and the public would reasonably understand had to be complied with without inquiring into the legal basis or anticipated legal basis for the instruction.

Inability to Use

The court held that ‘inability to use’ could include inability to use a discrete part of premises or for a discrete part of business activities:

We consider that the requirement is satisfied either if the policyholder is unable to use the premises for a discrete part of its business activities or if it is unable to use a discrete part of its premises for its business activities.

Trends Clauses

The court held that trends clauses should be construed so as not to take away cover provided by insuring clauses. Trends or circumstances for adjustment should not include those arising from the same underlying cause as the insured peril:

In our view, the simplest and most straightforward way in which the trends clauses can and should be so construed is, absent clear wording to the contrary, by recognising that the aim of such clauses is to arrive at the results that would have been achieved but for the insured peril and circumstances arising out of the same underlying or originating cause.

Orient-Express Decision

The court overruled the Orient-Express Hotels case, acknowledging error in the earlier decision regarding concurrent causation and trends clauses.

Implications

This landmark judgment has significant implications for insurance law and the interpretation of business interruption policies. It establishes that concurrent causation principles apply even where there are multiple causes of equal efficacy, and that the ‘but for’ test is not always required. The decision clarifies that trends clauses are quantification mechanisms that should not be used to exclude cover otherwise provided by insuring clauses. The judgment affects an estimated 700 types of policies across over 60 insurers and 370,000 policyholders.

The case demonstrates the court’s willingness to interpret insurance policies commercially and in accordance with the reasonable expectations of policyholders, particularly SMEs. It also shows judicial flexibility in reconsidering previous decisions when better arguments are presented.

Verdict: The insurers’ appeals were dismissed. The FCA’s appeal was allowed on grounds 1 and 4, and on grounds 2 and 3 in qualified terms. The Hiscox Interveners’ appeal was allowed on ground 1 and on grounds 2 and 3 in qualified terms. The Orient-Express Hotels case was overruled.

Source: The Financial Conduct Authority & Ors v Arch Insurance (UK) Ltd & Ors [2021] UKSC 1