The Financial Conduct Authority brought this insurance test case because businesses that closed during the first COVID-19 restrictions faced a practical difficulty. Even if a case of illness had occurred near their premises, nationwide restrictions would have been introduced without that particular case. Could an insurer rely on that fact to defeat cover? The answer depended on the policy wording and on what had caused the interruption.
The Financial Conduct Authority brought this urgent test case under the Financial Markets Test Case Scheme, for the benefit of policyholders, to establish whether representative business interruption wordings covered losses from COVID-19 and the UK Government measures of March 2020. Eight insurers were defendants. The agreed facts included the designation of COVID-19 as a notifiable disease, the Prime Minister’s announcements, and the 21 and 26 March Regulations requiring closure of specified businesses and restricting movement. Lord Hamblen and Lord Leggatt gave the main judgment, with which Lord Reed agreed.
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Disease clauses
Disease clauses indemnify interruption following occurrence of a notifiable disease within a stated radius of the premises. The Court held that the insured peril is each case of illness within that radius, not the disease or outbreak generally, and not cases outside the radius. A reasonable reader would not treat a general exclusion of “epidemic and disease” buried at the end of one long policy as cutting down the specific disease extension.
Each individual case of COVID-19 was treated as a separate, equally effective cause of government measures taken in response to all the cases. On the relevant disease wordings it was enough to establish an occurrence within the specified radius at the time of the measure and interruption caused by the measure. The policyholder did not have to prove that local cases alone would have brought about national restrictions. The same reasoning applied to the disease element of the hybrid clauses.
Prevention of access and hybrid clauses
These clauses require a sequence: typically an occurrence of disease, restrictions imposed by a public authority, and resulting inability to use the premises or prevention of access, causing interruption and loss. “Restrictions imposed” ordinarily means mandatory measures made under legal powers, but can include a clear mandatory instruction given in an emergency in the expectation of compliance, such as the Prime Minister’s 20 March direction that named businesses close. Whether the earlier general or specific announcements met that test was left for agreement or further argument. An enforced closure does not include mere advice or social-distancing exhortations.
Inability to use, and prevention of access, need not be total. Cover can extend to inability to use, or prevention of access to, a discrete part of the premises, or to the premises for a discrete part of the business, provided the inability or prevention is complete as to that part. Mere hindrance is not enough, and cases in which the stay-at-home rule alone produced such an inability are likely to be rare. “Interruption” includes disruption short of total cessation where it has a material financial effect.
Where all elements of the composite peril operate in sequence, the policy covers the resulting loss even if other consequences of the same underlying pandemic would also have caused loss. Those other consequences are concurrent causes arising from the same fortuity; they are not excluded perils and do not reduce the indemnity. A counterfactual that assumes the pandemic and all restrictions occurred exactly as they did, save that the particular premises alone remained open, would make the cover uncommercial and was rejected.
Trends clauses and the calculation of loss
Trends clauses adjust standard turnover so that the figures represent, as nearly as possible, the results that would have been achieved had the insured peril not occurred. They are quantification machinery and should not be read as taking away cover given by the insuring clause. Adjustments are confined to trends and circumstances unconnected with the insured peril and its underlying cause. Other effects of the COVID-19 pandemic are not to be assumed in the counterfactual, whether they began before or after cover was triggered. Only the interrupted part of the business is compared; loss to a part that was not interrupted, such as continuing website sales, is not recoverable under these clauses.
Orient-Express Hotels
The Court overruled Orient-Express Hotels Ltd v Assicurazioni Generali SpA. Business interruption there had concurrent causes—damage to the hotel and damage to the surrounding city—both produced by the hurricanes. Provided the uninsured concurrent cause is not excluded, the loss is covered, and the trends clause should not treat circumstances sharing that underlying cause as reducing the indemnity.
Lord Briggs, with whom Lord Hodge agreed, concurred in the result. He considered the court below’s reading—that the disease itself was the peril once it occurred within the radius—equally available, and thought the majority’s concurrent-cause route more circuitous, but agreed that the clauses were not illusory and that the appeals should be decided as the majority decided them.
Verdict: The Supreme Court dismissed the insurers’ appeals and substantially allowed the appeals of the FCA and the Hiscox interveners, subject to qualifications on particular grounds. It invited the parties to agree the resulting declarations. The decision concerned the sample wordings and did not fix the value of individual claims.
Source: The Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2021] UKSC 1
