On 15 January 2021, the Supreme Court handed down its judgment in the COVID-19 insurance test case for business interruption losses - The Financial Conduct Authority (the "FCA") v Arch and Others . This follows the judgment of the High Court handed down on 15 September 2020 and marks the final say in a lengthy battle that directly affects 370,000 policyholders and has wider implications for 700 types of policies from over 60 insurers.
Hailed as a landmark victory for policyholders, the Supreme Court unanimously allowed the FCA's appeals (two of which were allowed on a qualified basis) and dismissed the Insurers' appeals. Although the FCA was originally successful on many of these issues in the High Court, the Supreme Court's judgment serves to remove a number of further hindrances that policyholders might face when bringing a claim for business interruption losses as a result of COVID-19.
Many businesses across the UK are suffering substantial losses due to the implications of the COVID-19 pandemic, and in turn this is resulting in significant numbers of insurance claims being made for business interruption, particularly under those policies with infectious or notifiable diseases clauses ('disease clauses') and prevention of access and public authority closures or restrictions clauses ('prevention of access clauses'). However, in many cases, the insurers are disputing or refusing liability.
Consequently, the FCA test case was brought in order to clarify the position on policy coverage through the consideration of a sample of 21 policies by 8 insurers. The High Court's judgment held that almost all of the disease clauses and some prevention of access clauses (12 policy types from the sample of 21, issued by 6 insurers) provided cover and that COVID-19 and the Government response had caused business interruption losses that could be claimed. The FCA, the Hiscox Action Group and 6 insurers appealed the High Court decision and these appeals were 'leapfrogged' to the Supreme Court.
Supreme Court Judgment
This article considers the Supreme Court's judgment on each issue of appeal in the same order as they are examined in the judgment.
1. Disease clauses
A "disease clause" is a clause that provides insurance cover for business interruption loss caused by the occurrence of a notifiable disease at or within a specified distance of the policyholder's business premises.
The High Court had found that there would be cover for business interruption losses that had resulted from COVID-19 (which was made a notifiable disease on 5 March 2020) wherever cases of the disease occurred, provided that there had been at least one occurrence of the disease within the specified radius. Cover was held to not be confined to a situation where loss resulted only from cases of the disease within the specified radius on the basis that it would not make sense for the cover to be confined to only local occurrences, since some diseases can spread so rapidly.
The Supreme Court did not agree with this analysis and favoured a narrower interpretation, despite ultimately reaching a similar conclusion as a result of their analysis on causation (see below). The Supreme Court accepted the Insurers' arguments that:
- each case of illness sustained by a person as a result of COVID-19 is a separate 'occurrence'; and
- only a case of illness within the specified radius amounts to the insured peril and not any cases occurring outside it.
Consequently, disease clauses only cover business interruption losses resulting from cases of COVID-19 which occur within the specified radius.
There was also held to be no distinction between policies which referred to an "occurrence" of a disease and those which referred to an "incident" or "event".
2. Prevention of access and hybrid clauses
A prevention of access clause provides cover for losses resulting from public authority intervention preventing access to, or the use of, the insured premises. A hybrid clause combines the disease and prevention of access clauses.
The High Court held that the public authority intervention requirement is satisfied only by a measure expressed in mandatory terms imposed legally. This was rejected by the Supreme Court on the basis that a mandatory instruction may be given by a public authority in the anticipation that legally binding measures will follow afterwards, or if compliance is not achieved. By this reasoning, the Prime Minister's instruction to businesses to close "tonight" on 20 March 2020 could be viewed as a mandatory instruction and was therefore capable of being a "restriction imposed" for the purposes of policy coverage, irrespective of whether it was legally capable of being enforced.
The Supreme Court then agreed with the High Court and Hiscox that an inability of use has to be established, as opposed to an impairment or hindrance in use. Yet, despite this, the Supreme Court held that "business premises" could be read as including a discrete part of those premises, which is then capable of being used separately. For example, a book shop that had to close but could still receive telephone orders that made up 20% of its business. The Supreme Court considered that the requirement is satisfied if either the policyholder is unable to use the premises for a discrete part of its business activities, or it is unable to use a discrete part of its premises for its business activities. Both of these situations would result in an inability of use. This will be good news for businesses that were able to continue certain services such as online orders and takeaways.
Unlike the High Court, the Supreme Court considered the issue of causation in great detail. The Insurers argued that the loss must not have occurred "but for" the insured peril and that due to the widespread nature of COVID-19, policyholders would have suffered business interruption losses even if the insured peril (either the occurrence of the disease within the specified radius, or the public authority action causing a prevention of access) had not occurred, and so there would be no cover.
This was rejected by the Supreme Court, holding that the "but for" test was not always the appropriate test to apply. It agreed with the High Court that it would be realistic to analyse this situation as one in which "all the cases [of COVID-19] were equal causes of the imposition of national measures" as it could not be said that any individual case of COVID-19 caused the restrictions. Consequently all of the individual cases of COVID-19 which had occurred by the date of any Government measure were equally effective "proximate" causes of the restrictions.
As regards disease clauses, a policyholder therefore need only prove that loss arose from interruption caused by any relevant Government measure taken as a result of cases of the disease, where there was at least one case of COVID-19 within the radius specified by the policy.
In relation to the prevention of access and hybrid clauses, the Supreme Court concluded that where all the elements of the insured risk (as defined by the relevant clause) combine together to cause business interruption loss, cover will be provided even if these losses were also caused by other uninsured effects of the pandemic.
4. Trends clauses
Typically, trends clauses work to adjust quantification so that the level of indemnity provided reflects the cover provided by the policy, and is not artificially increased or reduced.
In this instance, Insurers argued that the relevant factor for the purpose of making adjustments under a trends clause was what results would have been achieved by the business during the indemnity period had the outbreak of COVID-19 not occurred.
The Supreme Court held that trends clauses should be interpreted consistently with the indemnity clauses. Accordingly, its view was that they do not require losses to be adjusted on the basis that, if the insured peril had not occurred, the results of the business would still have been affected by other consequences of the COVID-19 pandemic. Instead, losses should only be adjusted so as to reflect circumstances which are unconnected to the insured peril, rather than circumstances which are inextricably linked to it and have the same underlying or originating cause.
5. Pre-trigger losses
Similarly to the above trends clause discussion, the Supreme Court concluded that adjustments should only be made to reflect circumstances affecting the business that are not related to COVID-19. Were insurers to reduce the indemnity to reflect a downturn caused by other effects of the pandemic, whenever they began, this would equate to a refusal to indemnify the policyholder for loss proximately caused by COVID-19 on the basis that the loss was also proximately caused by uninsured (but non-excluded) perils with the same originating cause.
6. The Orient-Express Hotels decision
The Court in the Orient-Express case had examined a claim for business interruption loss arising from hurricane damage to a hotel. The claim was put before the High Court in the form of an appeal from an arbitral tribunal. It was held that the cover did not extend to business interruption losses which would have been sustained as a result of damage to the city of New Orleans, even if the hotel itself had not been damaged.
The High Court in the FCA test case considered that the Orient-Express decision could be distinguished from the present case, but would have reached the conclusion that it was wrongly decided and would have declined to follow it, had that been necessary.
The Supreme Court took this one step further to conclude that Orient-Express should be overruled. Instead, in circumstances where both the insured peril and an uninsured peril operate concurrently and arise from the same underlying fortuity, then provided that damage proximately caused by the uninsured peril is not excluded, the loss resulting from both causes is covered. Consequently, the Court in Orient-Express was incorrect to hold that the business interruption loss was not covered to the extent that it did not satisfy the "but for" test.
What to do now
The Supreme Court's judgment can be seen as a landmark victory for many Small to Medium Enterprises (SMEs) across the country that have suffered business interruption loss as a result of COVID-19 and the subsequent restrictions imposed by the Government. In practical terms, all policies including insuring clauses which mirror those examined and approved by the High Court and the Supreme Court will provide cover in cases where the pandemic has resulted in business interruption. Further, the Supreme Court's interpretation of trends clauses means that payments due to policyholders will not be reduced by other consequences of the COVID-19 pandemic.
However, the judgment is not without caveats, which may cause coverage issues and further legal battles. Businesses should therefore carefully consider their own insurance policies in light of this judgment and be wary of any clauses or wording which differ from the sample wording considered in this case and which have the effect of excluding or limiting cover. It is also advisable for businesses to get in touch with their brokers and, where relevant, their lawyers in order to discuss the effect of the judgment on their policy and any further issues which may still need to be resolved with their insurers.
Of some assistance to policyholders in relation to evidencing the presence of COVID-19 in a particular area around policyholders' premises will be the FCA's consultation draft guidance, published on 11 December 2020. The FCA will issue finalised guidance as soon as possible after 22 January 2021, which will take into account any supplemental comments arising from the Supreme Court judgment. The FCA also has a dedicated webpage for business interruption insurance which may prove helpful in the first instance.
Look out for our follow up alert on "What next", in which we will discuss next steps in greater detail, including how to approach new court guidance around business interruption claims arising from the pandemic.
If you have any queries on this or any insurance issue, please contact Samantha Holland.
 FCA v Arch Insurance (UK) Ltd and others 
 Orient-Express Hotels Ltd v Assicurazioni General SpA (UK) (t/a Generali Global Risk)