We review the judgment of the High Court in Financial Conduct Authority v Arch Insurance (UK) Ltd and others  EWHC 2448 (Comm) under the Financial Markets Test Case Scheme.
In advance of the Supreme Court’s ruling, following the appeal heard on Monday 16th November 2020 to Thursday 19th November 2020, we review the judgment of the High Court in Financial Conduct Authority v Arch Insurance (UK) Ltd and others  EWHC 2448 (Comm) under the Financial Markets Test Case Scheme, handed down on 15 September 2020. In submissions to the Court, the FCA, representing the interests of the policyholders, estimated that the decision could affect over 60 insurers and 370,000 policyholders. The case has been described by informed commentators as the major insurance case this century.
On 6 March 2020, COVID-19 was made a "notifiable disease" 1 across the UK. Since then the UK government has taken measures to fight against the transmission of COVID-19, ranging from informal announcements – such as the Prime Minister’s speech on 16 March 2020 asking the public to “avoid pubs, clubs, theatres and other such social venues” – to primary and secondary legislation, including the Health Protection Regulations made on 21 and 26 March 2020, which provided for the mandatory closure of certain businesses.
The impact of restrictions on businesses has understandably been significant. For those with the foresight to purchase business interruption insurance, the scale of claims rejected dealt a further blow. In July 2020 the UK’s insurance regulator, the Financial Conduct Authority ("FCA), brought a test case before the courts in pursuit of clarification on points of principle arising from the wording of 21 specimen insurance policies which were representative of key arguable issues.
Lord Justice Flaux and Mr Justice Butcher delivered a long (162 page) and complicated judgment on behalf of the High Court on 15 September 2020. It threw small to medium businesses a lifeline, holding that many policyholders were covered for losses resulting from the impact of the COVID-19 pandemic. Unsurprisingly, several insurers have appealed the decision on a number of points of law and construction. The FCA has also appealed certain aspects of the first instance judgment. Using a “leapfrog” process, the appeals were set down and heard over 4 days earlier this month.
Whilst the Supreme Court considers the copious oral and documentary submissions presented on behalf of the parties, we think it useful to summarise and contextualise the original findings by the High Court in relation to the hotly contested issues.
In the Court’s review of the wording contained within the 21 specimen policies the ordinary principles of contractual construction, as per Rainy Sky SA v Kookmin Bank  UKSC 50, were held to apply; that is that the Court had to ascertain what a reasonable person, with all the background knowledge reasonably available to the parties when making the contract, would reasonably have understood the parties to have meant by the language used.
The contested provisions in the policies fell into three categories, namely:
- Disease Clauses;
- Prevention of Access Clauses; and
- Hybrid Clauses, which contain both (1) and (2).
The High Court’s findings in relation to each of these categories of provisions are summarised below. First, however, it is important to touch upon the Court’s construction in relation to the ambit of the "insured peril".
Despite the parties’ extensive arguments on the issue of causation, the High Court appears to have side-stepped a full and detailed analysis by determining that the occurrence of COVID-19, the government’s response to the disease and the public’s reaction to the government’s advice and actions constituted one indivisible or "composite" cause. As such, the level of cover provided to policyholders is significantly wider than insurers propose should be the case. The Supreme Court is expected to revisit the subject of causation in far greater detail in its forthcoming judgment.
In broad terms, disease clauses provide coverage to policyholders for business interruption caused by the occurrence of a notifiable disease within a specified radius of the insured’s business premises. Some examples of policy wordings reviewed by the Court include interruption or interference:
- following any occurrence of a notifiable disease within 25 miles of the business premises;
- as a result of notifiable diseases occurring within the vicinity of the business premises;
- arising from a notifiable disease manifested by someone whilst in the premises or within a 25 mile radius of it; and
- in consequence of an occurrence of a notifiable disease at the premises or within a 1 mile radius of it.
The insurers’ reasoning for rejecting cover under such clauses was that the policyholders’ losses must stem from a local disease outbreak (e.g. within 25 miles) and, as a nationwide outbreak, COVID-19 was not covered where the local effects of the disease could not be distinguished from the nationwide effects. Put another way, insurers argued that if there had been no occurrence of COVID-19 within the prescribed locality, the insured would have suffered a business interruption in any event, as the nationwide response was implemented due to occurrences in other locations.
The FCA argued that losses were caused by one indivisible cause, COVID-19, of which all of the local outbreaks formed part. Alternatively, the FCA asserted that each cause was a different, concurrent cause. The Court agreed with this analysis. It held that the language used in the relevant clauses should be construed as meaning that there was cover for business interruption caused by a notifiable disease, of which there had been at least one instance, within the specified radius. This was indicated by the use of the term notifiable diseases. This expression generally requires a response which is not purely local, but wider in effect. The parties must therefore have contemplated that the authorities might take action in relation to an outbreak as a whole and not to particular parts of an outbreak. A radius limit may be imposed to ensure that diseases which make no local manifestation cannot lead to cover. Consequently, policyholders with disease clauses such as those exampled above will be able to obtain cover where they can show that COVID-19 has occurred inside any prescribed radius.
In the context of disease clauses, the Court was asked to construe the term “vicinity”. It accepted the FCA’s submissions that, as a notifiable disease with national impact, an occurrence of COVID-19 anywhere in the UK was capable of being within the vicinity of all premises in the UK. This should be contrasted with clauses which provide cover for localised “events” or “incidents” (see below), which limit cover to matters occurring at a particular time, in a particular place, in a particular way.
Prevention of Access Clauses
Generally, prevention of access clauses cover policyholders for business interruption resulting from denial of access to or use of the insured premises, often in an emergency due to the actions of, or restrictions imposed by, a government body. Some examples of policy wordings reviewed by the Court include interruption or interference caused by:
- prevention of access due to the actions or advice of a government or local authority;
- prevention or hindrance by any action of government or local authority due to an emergency which could endanger human life, excluding orders or advice of the local authority as a result of an infectious disease not listed (COVID-19 was not listed);
- an incident occurring within a 1 mile radius of the premises resulting in a denial or hindrance of access;
- prevention of access following action by a competent local authority following a danger or disturbance in the vicinity of the premises; and
- the actions or advice of a government authority in the vicinity of the premises.
"Prevention" or "hindrance"
A key issue in dispute between the parties was whether the social distancing advice and/or regulations implemented by the UK government following the outbreak of COVID-19 amount to the prevention or hindrance of access to a policyholder’s business premises.
The insurers construed the term prevention narrowly, asserting that access to the business premises must be physically obstructed or rendered impossible. They did not accept that businesses which were entitled to remain open throughout the lockdown had suffered a prevention of access. Similarly, access to pubs, cafes or restaurants with pre-existing takeaway services was not prevented, since the premises could still be accessed for the continuation of that part of their business. Some insurers went further, stating that none of the restrictions imposed by the government prevented access to policyholders’ premises, since access was still practically possible, for example to carry out urgent maintenance.
The FCA disagreed with this approach. It asserted that the relevant clauses did not specify that it had to be the owners who were prevented from accessing the property, and that employees’ or customers’ access should also be considered. It also disputed that partial prevention of access to the premises for customers amounted to a prevention which satisfied the policy wording.
The Court agreed with the insurers that the FCA’s interpretation conflated prevention with hindrance, which were two distinct concepts with different meanings. The touchstone of prevention was impossibility, whereas hindrance in this context meant that access was only rendered more difficult. That said, the Court disagreed with insurers’ submissions that prevention required access to be physically and legally impossible. Access only had to be prevented for the purposes of carrying on the business. The fact that premises were physically accessible to conduct essential maintenance did not change that.
The Court made clear that only total closure, not partial, would amount to prevention. Accordingly, businesses with existing takeaway services permitted by the regulations were not covered. Practically, this leads to the contentious situation where two competing neighbouring businesses, both serving takeaway food or drinks during lockdown, both covered by the same insurance policy, may result in different coverage outcomes where one of the businesses chose prudently to set up a takeaway service as a result of the government’s advice and the other already ran a takeaway service prior to the occurrence of COVID-19.
Similarly, the requirement for complete closure of a business premises to warrant prevention meant that, for those businesses permitted to remain open during the lockdown, to the extent that fewer people visited the business, this could at most be classed as a hindrance to the use of the premises. There was no prevention in the true meaning of the word.
"Actions or advice"
Another key issue of interpretation for the Court was the difference between action and advice of the relevant authority. The FCA argued that the dictionary definition of "action" included the exertion of influence and that, since the Prime Minister’s advice exerted such influence, it should also be construed to be an action for these purposes. The Court disagreed. In this context, the Court explained that action meant steps taken which have the force of law and which therefore legally prevent access to relevant premises. No matter how strongly worded, advice given by the government, could not amount to action within the meaning of the relevant clauses. In fact, it was not until the passage of the 21 March and 26 March regulations requiring businesses to close that action had taken place.
The parties also disagreed on what specific government advice triggered prevention of access clauses. The FCA submitted that the Prime Minister’s speech on 16 March, advising that social distancing take place, was advice within the meaning of the policy wording and that, as such, cover should begin from this date. Insurers argued that advice on social distancing could not trigger a prevention of access clause, given that the Prime Minister did not at this point recommend closure of premises. Likewise, the restrictions on free movement within Regulation 6 of the 26 March Regulations did not relate to closure of premises. Insurers asserted that it was only the government’s advice on 20 and 23 March – that certain categories of business should close – which triggered cover under these clauses. The Court agreed with the insurers; social distancing restrictions did not in themselves prevent access to premises.
The FCA contended that an incident, as exampled under clause (iii) above, should not be limited in terms of duration or geographical scale, as insurers proposed. Applying its natural meaning, an “occurrence” or “event” could be local, regional or national. What was important was that the local, regional or national “occurrence” included the area specified in the policy.
Insurers relied upon well-known established case law, clarifying that occurrences and events are generally something which happen at a particular time, in a particular place, in a particular way. Where the relevant clause focused on something occurring within, say 1 mile, of the premises, it was obvious that the clause contemplated a local incident, such as a burst water main or traffic accident. A nationwide pandemic could not satisfy such a requirement because it was too prolonged, too geographically dispersed, to variegated and too non-specific to qualify as an incident.
The Court agreed with the insurers. The FCA’s argument that there was an incident if someone with COVID-19 was present within the specified radius was wrong. The wording clearly indicated the clause was intended to cover only local incidents and incident was not synonymous with an “emergency” or “danger”. These clauses were intended to provide narrow, localised cover. It follows that there is no cover provided under such limited clauses in relation to loss or damage caused by restrictions imposed by the government’s COVID-19 response.
The parties also disagreed over the meaning of a danger in the vicinity of the premises (as in clause (iv) above). Vicinity had been given a wider interpretation under the disease clauses, but in the context of prevention of access clauses the Court agreed with insurers; whilst the term was an elastic concept, the essence of this cover was local and, as such, vicinity suggested that the danger had to be within the “neighbourhood” of the premises.
The government’s actions, imposing regulations in response to the national pandemic, cannot be said to follow (in the sense of being precipitated by) a danger occurring in the neighbourhood. This meant that policyholders would only be covered if they could demonstrate that it was the risk of COVID-19 in their neighbourhood which caused the relevant government action, thereby preventing or hindering access to their property. The Court accepted that it was highly unlikely that this could be demonstrated.
This interpretation should be distinguished from the use of vicinity in wording, such as specified at (v) above, where there is no requirement for the emergency or danger to be within the vicinity of the premises. Instead, it is the advice or action taken by the government which must be within the vicinity of the premises. Since the government’s advice and actions were taken nationally and affected all insured businesses, the requirements of this clause are satisfied.
"Infectious disease not listed" exclusions
In relation to the “exclusion” proviso at clause (ii) above, the FCA’s argument that this exclusion was restricted to local outbreaks was rejected by the Court. Construing the clause as a whole demonstrated that the insurer did not intend to provide wide infectious disease coverage - hence the specific list of diseases explicitly referred to. The competent local authority meant whichever authority was competent to take action, which included central government in relation to the advice and actions taken in March 2020 to combat COVID-19. There was therefore no cover provided under policies containing an “infectious diseases not listed” exclusion.
The hybrid clauses reviewed by the Court blend certain ingredients of the disease clauses and prevention of access clauses reviewed above. Some examples of policy wordings reviewed by the Court include interruption or interference caused by:
- an inability to use the premises due to restrictions imposed by a public authority following an occurrence of any disease;
- closure or restrictions placed on the premises as a result of a notifiable disease manifesting itself at the premises or within 25 miles; and
- notifiable diseases discovered at or occurring within the vicinity of the premises, where vicinity means an area surrounding or adjacent to the premises in which events that occur would reasonably be expected to have an impact on the business.
The Court reached similar conclusions on these clauses as with those covering only the occurrence of a disease or the prevention of access due to government action or advice. For example, restrictions imposed and enforced closure were treated the same as actions, requiring the steps taken to have the force of law and an inability to use was treated the same as prevention, not to be equated with hindrance or disruption to normal use. However, because there is a great variety of hybrid wordings in existence, generalisations could be misleading.
The Court did pass comment on the use of the word interruption singularly, as opposed to "interruption or interference" with the premises. Insurers argued that where interference had not been included, this was deliberate and therefore interruption should have the same meaning as prevention; a complete cessation. The Court held that the stem wording should be construed in the context of the insuring clauses which follow. The learned Judges opined that in many of the clauses which they had reviewed interruption was clearly intended to mean "business interruption" generally, which included interference.
Regarding the definition of the term vicinity found in (iii) above, the Court held that it was the disease which needed to occur within the vicinity and as such this could embrace the whole country. This wider definition was possible because the clause did not require that there be particular cases at any given time within the prescribed area.
Many of the policies discussed in the judgment included clauses which seek to adjust the actual loss suffered by the insured party by accounting for losses occurring from current trends. An example of such a clause is:
Adjustments shall be made when quantifying the insured’s losses to provide for the trend of the business and for variations in or other circumstances affecting the business, either before or after the incident, or which would have affected the business had the incident not occurred. The figures thus adjusted shall represent, as nearly as may be reasonably practicable, the losses which "but for" the incident would have occurred during the relative period after the incident.
Such clauses tended to occur specifically in relation to damage to physical property. As such, the FCA argued that they did not apply to business interruption losses caused by non-property damage. Insurers disagreed, contending that these clauses, properly interpreted, should apply equally to both property and non-property damages. The High Court agreed with the insurers, stating that it would be commercially surprising if the parties, having agreed the quantification provisions applied to business interruption claims arising out of property damage, intended to later debate the correct approach to quantification for claims arising out of non-property damage.
In order to limit losses, insurers argued that the presence of COVID-19 was not the only cause of the losses suffered by businesses. There had been a general reduction in consumer demand and various lockdown measures imposed. Insurers argued that losses caused by such "trends" were distinguishable and therefore not covered. The Court did not agree. It held that trends clauses were not part of the delineation of cover, but part of the machinery for calculating loss on the basis that there was a qualifying insured peril. The object of the quantification machinery is to put the insured in the same position as it would have been if the insured peril had not occurred. Given the insured peril had already been deemed to include business interruption referable to COVID-19 including via the authorities’ and/or the public’s response thereto, it would seem contrary to principle if losses were limited by the inclusion of any part of the insured peril in the "but for" assessment.
In short, the reduced turnover of a business during the period of interruption should be compared against its turnover prior to COVID-19, or in cases where prevention of access was required, (but not hybrid-clauses), it should be compared against its turnover prior to the government’s advice or regulations enforcing the closure.
The parties considered the types of evidence which may be sufficient for a policyholder to discharge the burden of proof as to the prevalence of COVID-19 in a relevant policy area, where required under the wording of the insured’s business interruption policy. Four types of evidence were discussed:
- specific evidence of cases, for example widespread reports that a care home in the area had had an outbreak of COVID-19;
- NHS Deaths Data which showed those people who had died in hospitals in England after having tested positive for COVID-19, split into NHS Hospital Trusts;
- ONS Deaths Data which showed deaths in England and Wales where COVID-19 had appeared on an individual’s death certificate, split into local authorities or health boards; and
- reported cases of the numbers of lab-confirmed positive tests of COVID-19 across the UK, split at the Lower Tier Local Authorities level.
Both the FCA and insurers agreed that all four categories of evidence could, in principle, be capable of demonstrating the presence of COVID-19. Further methodologies were also provided by the FCA for when such evidence would not be sufficient. Insurers did not suggest that absolute precision would be required. Even so, the Court was unable to make any findings of fact, as no expert evidence was heard on the matter. This was an issue which must be considered on a case-by-case basis.
Causation and the Orient-Express case
A number of insurers relied upon the judgment in Orient-Express Hotels Ltd v Assicurazioni General SpA (t/a Generali Global Risk)  EWHC 1186 (Comm). This case concerned a claim by the owners of the 23 storey luxury Windsor Court Hotel, situated in the central business district of New Orleans, for loss and damage caused by Hurricanes Katrina and Rita in 2005. The hotel suffered significant physical wind and water damage from the hurricanes and was closed throughout September and October 2005, re-opening on 1 November not fully repaired or operational, but having suffered significant business interruption loss.
The surrounding area of New Orleans was also devastated by the hurricanes. A state of emergency was declared and curfew imposed on 27 August 2005, with a mandatory evacuation of the city imposed on 28 August and repeated on 6 September. The city only reopened with the curfew lifted at the end of September and early October 2005. Orient Hotels accepted that it could only recover in relation to the business interruption loss caused by physical damage to the Windsor Court Hotel.
The critical question to the original arbitral tribunal (which found in favour of the insurer) and to the High Court, on appeal from the arbitral tribunal’s decision, was how the policy responds when both the hotel and the wider area (“the vicinity”) are damaged. Further, what happens when the hotel contends that a significant proportion of its business interruption loss was caused by both the damage to the hotel itself and by damage to the vicinity, resulting in loss of attraction of the vicinity to visitors, both of which had been caused by the same hurricanes. The parallels with the current COVID-19 losses suffered by the policyholders claiming in 2020 are readily apparent.
Insurers in Orient Hotels argued that the hotel could only recover in relation to loss which it could show would not have arisen had the damage to the hotel not occurred; i.e. losses which satisfy the "but for" test of causation. This meant that the hotel was to be placed in a position of an owner of an "undamaged hotel in an otherwise damaged City". The outcome of the application of this test was that since an undamaged hotel would have suffered the same loss (i.e. nil or negligible) due to the vicinity damage and its consequences, there was no indemnity payable by insurers under the primary insurance policy, in relation to such loss.
The owners of the Windsor Court Hotel argued that the arbitration tribunal erred in law and decided the case wrongly. They pleaded that the “but for” causation test was not applicable in their case. The right approach should have been to regard the claim as a loss caused by two concurrent independent causes, one of which was insured (i.e. the physical damage to the property). The High Court agreed with the tribunal and dismissed the appeal holding that there had been no error of law.
It is easy to appreciate that the question of whether the Orient Hotels decision applies in the present FCA case attracted much vigorous argument and counter-argument. However, because the High Court had decided that the COVID-19 pandemic and the government’s response to it constituted a single indivisible “composite” cause, this enabled the Court to circumnavigate the difficult causation issues which had to be decided. The Judges did, however, observe that if the Orient Hotels reasoning had been applicable in the FCA case, they would have decided that the case was wrongly determined and declined to follow it. The High Court felt that to follow Orient Hotels would render the insurance cover purchased by policyholders "illusory".
Unsurprisingly, this interesting debate resurfaced in the Supreme Court appeal. Insurers argue that the "but for" test remains a fundamental element of the correct approach to causation of loss and that the FCA’s creation of a novel "intermediate category of interlinked concurrent causes" was incoherent and had no legal basis.
It will be particularly interesting to see how the Supreme Court addresses this fundamental issue – particularly as Lords Leggatt and Hamblen sit in the five person Supreme Court which will decide the current appeals. Mr George Leggatt QC, (as he then was) was a member of the three person arbitral tribunal finding in favour of insurers in the Orient Hotels case and Mr Justice Hamblen QC (as he then was) delivered the High Court judgment upholding the decision and reasoning of the tribunal.
As the UK gets set to exit its second national lockdown, policyholders should be keeping accurate and detailed records of their commercial dealings to substantiate their business interruption losses since March and should be considering how the principles established by the High Court, and in due course the Supreme Court, apply to their specific circumstances in the context of the specific wording contained in their policies.
Insurers, who are permitted to wait until final resolution of the test case before reaching a decision on affected claims and complaints, should look to FCA guidance on how best to deal with these in light of the High Court and forthcoming Supreme Court judgments. Insurers should also note that upon final resolution of the Test Case, they will be expected to reassess all claims and complaints previously rejected which would, if still open, have been impacted by the outcome of the test case. Finally, insurers should be alive to the fact that their response to the COVID-19 crisis will likely come under regulatory scrutiny in the coming months. As such, they should ensure their governance framework is robust and that they can evidence compliance with the FCA’s guidance. Training is likely needed for claims and complaints handlers and senior management should be fully involved to ensure that important decisions are being made at a higher level.
The question of whether business interruption policies cover losses caused by the COVID-19 pandemic is one of the most controversial commercial issues to result from the crisis. Billions of pounds worth of losses, for hundreds of thousands of policyholders hang in the balance and all eyes – particularly those of small businesses who celebrated the result of the High Court trial, which largely provided them with grounds to challenge their insurers over rejected claims – are on the Supreme Court to provide further guidance on the issues raised. One wonders whether the Supreme Court will be able to push aside the issue of causation quite as easily as the High Court, and consequently a less favourable judgment for businesses is likely on the cards. But with influential figures, including the outgoing President of the United States, calling on insurers globally to "do the right thing" it remains to be seen whether the Supreme Court of the UK will facilitate the popularised outcome.
The Test Case does not, however, cover all business interruption insurance policy wordings. Irrespective of the outcome of the Supreme Court hearing, we can expect there to be continued litigation and arbitration on this issue for years to come. That said, the FCA’s commendable initiative in getting the critical business interruption issues to Court so quickly, with the procedural co-operation of all legal teams and insurers involved in the virtual hearings in the High Court and the Supreme Court, must be applauded. We know of no other jurisdiction which has confronted the legal and commercial issues caused by the global COVID-19 pandemic with such care and alacrity.