Financial Conduct Authority v Arch Insurance and others  UKSC 1
In March 2020, as a result of the emergence of COVID-19, a number of small businesses made claims through their insurance policy providers for loss of earnings. They relied on provisions within those policies that ostensibly covered events of business interruption. The insurers refused to pay for losses claimed on the basis that the policies didn’t cover the unprecedented restrictions arising from COVID-19.
In the first instance the FCA, representing the interests of policyholders, took the matter to the Financial Markets Test Case Scheme. The FCA, Hiscox Action Group and six insurance companies appealed against various aspects of that first decision (the “Financial Decision”).
The judgment substantially allowed the FCA’s appeal but dismissed those of the insurers, finding largely in favour of small businesses who suffered losses as a result of the pandemic.
The main issues for determination by the Supreme Court were:-
- The interpretation of ‘disease’ clauses: which are triggered by the occurrence of a notifiable disease within a specified distance of an insured premises.
- The interpretation of ‘prevention of access’ clauses: which are triggered by a public authority’s intervention which prevents access to, and use of, a premises. Also, Hybrid clauses of 1 and 2.
- The nature of causation between the disease and business interruption.
- How a business’ loss is quantified, and ‘trend clauses’: which provide a standard method of quantifying these business interruption losses by comparing performance to an earlier period of trading.
- The significance of ‘pre-trigger’ losses, which are business interruption losses that occurred before the insurance cover was actually triggered.
- The status of Orient-Express Hotels Ltd v Assicurazioni Generali SpA  EWCH 1186 (Comm) (the “Orient-Express” case). This case concerned a claim for business interruption losses incurred as a result of damage caused by a hurricane in New Orleans, with the construction of trends clauses there being similar to those in the present case.
In summary the Supreme Court found as follows:-
- ‘Disease’ clauses – covered losses resulting from COVID-19 (a notifiable disease) as long as there was at least one occurrence within the relevant geographical radius. The Supreme Court also accepted the Insurers’ argument that each single person affected by COVID-19 was a separate ‘occurrence’.
- ‘Prevention of access’ and hybrid clauses – the Supreme Court rejected the interpretation within the Financial Decision that the restrictions imposed by the public authority had to be expressed in mandatory terms. Instead, they decided that it would suffice if the restriction carried an imminent threat of legal compulsion, or is in clear terms and indicates compliance is required without recourse to legal powers. The Supreme Court agreed with the Financial Decision that an inability to use the insured premises means complete, not partial, inability. The requirement may, however, be satisfied when a policyholder is unable to use the premises for a discrete business activity, or is unable to use a discrete part of the premises.
- Causal link – all COVID-19 cases occurring by the date of the Government measure were equally proximate causes. This rejected the argument on the part of the insurers that ‘but-for’ causation should be employed.
- Quantification and trends clauses –trends clauses should not be construed to take away cover provided by insuring clauses. Trends and circumstances for which the clauses require adjustments do not include circumstances arising out of the same underlying or originating cause as the insured peril (i.e. effects of COVID-19).
- Pre-trigger losses – adjustments should only be made to reflect circumstances affecting businesses when they are not connected with COVID-19.
- The “Orient-Express” case – which had accepted the insurers’ argument that the cover did not extend to business interruption losses which would have been sustained anyway as a result of the damage to the rest of the city of New Orleans (not including damage to the hotel), was overruled.
This judgment marks an important step for small businesses, it will ensure that thousands of them receive insurance pay-outs covering business interruptions resulting from the COVID-19 pandemic and the related restrictions. Conversely, it will cost the insurance sector heavily.