The Financial Conduct Authority (“FCA”) has succeeded in its “leapfrog” appeal to the Supreme Court in its test case seeking urgent clarity as to the requirement of insurance companies to pay policyholders for business interruption (“BI”) losses arising from the COVID-19 pandemic.
The Supreme Court’s decision provides highly-anticipated guidance on the meaning, effect and application of certain common non-damage BI insurance clauses, including “Disease Clauses”, “Prevention of Access Clauses”, “Hybrid Clauses”, and “Trends Clauses”, in the context of COVID-19. The Supreme Court substantially favoured the FCA’s interpretation of these clauses over that of the defendant representative insurers. As a result, the decision will provide a boost to the multitude of businesses seeking to invoke these clauses to recover business losses related to COVID-19. The FCA has itself stated that it “decisively removes many of the roadblocks to claims by policyholders” .
The widespread impact of the COVID-19 pandemic on businesses inevitably led to a raft of BI insurance claims and, unsurprisingly, to questions about the scope and coverage of BI insurance policies in these unprecedented circumstances. The FCA brought the test case as a result of many insurance companies refusing to make payouts to policyholders for losses sustained as a result of the COVID-19 pandemic. In particular, the case focused on sample wording from the following non-damage BI insurance clauses contained in 21 types of BI policy issued by eight insurance companies who agreed to be part of the test case:
In September 2020, the High Court ruled that most of the Disease Clauses and certain Prevention of Access Clauses were engaged, and that BI losses were recoverable as a result of both the pandemic and the government’s and public’s responses to it. (See our discussions of the High Court judgment in our previous alert.)
Appeals from the High Court judgment were brought on various grounds by the FCA, the Hiscox Action Group and six of the eight original insurer defendants who had agreed to be part of the FCA’s test case (the “Insurers”). The appeals were heard directly by the Supreme Court as part of a “leapfrogging” procedure, thereby bypassing the Court of Appeal. Leapfrog appeals are rare, but permission was granted in this case given the importance and urgency of the issues raised in the appeal. The significance of this case is also demonstrated by the fact that only seven months elapsed from issuance of the claim (9 June 2020) to the handing down of the Supreme Court’s judgment; a very speedy process by any legal system’s standards.
The Supreme Court allowed the appeals brought by the FCA and dismissed all of the appeals brought by the Insurers.
The Insurers argued that the scope of the Disease Clauses should be restricted to the effect of cases of the notifiable disease (i.e. COVID-19) occurring within the Relevant Area, and that any cases of the disease outside the Relevant Area should not form part of the insured peril. The FCA, however, argued that the Disease Clauses should be read as extending to cases of the notifiable disease, wherever they occur, provided that there is at least one case within the Relevant Area. The Supreme Court accepted the Insurers’ argument by ruling that the Disease Clauses only cover BI losses caused by any cases of illness within the Relevant Area, and not BI losses caused by COVID-19 cases outside that area.
The Supreme Court, therefore, adopted a narrower construction of the Disease Clauses than that adopted by the High Court, which had arguably stretched the principles of contractual interpretation to extend the insured peril to include all cases of COVID-19. The Supreme Court nonetheless went on to conclude, based on principles of causation rather than contractual interpretation, that Disease Clauses do provide cover for BI losses arising from the wide-reaching consequences of COVID-19 (see Causation below). As a result, the practical effect of the High Court and Supreme Court judgments is the same.
To satisfy the elements of Prevention of Access and Hybrid Clauses, there must be “restrictions imposed” and an “inability to use the premises” or a “prevention of access” as a result. The Supreme Court found that such restrictions are not required to always have the force of law and may cover a broad range of rules and instructions, such as those given by a public authority in anticipation of legally binding measures which would follow. The Government’s directions to the public to stay home would therefore meet this requirement, even before they were ordained in law.
The Supreme Court interpreted the principles of an “inability to use the premises” and “prevention of access” as requiring more than mere impairment or hindrance to use the premises. However, the Supreme Court also recognised that the “inability to use” and “prevention of access” the business premises may include the policyholder’s inability to use either the whole, or a discrete part, of the premises for either the whole, or a discrete part, of its business activity. For example, a restaurant that cannot allow its customers to dine-in but continues to offer takeaway services, should be able to recover under the Prevention of Access Clauses.
As outlined above, the Supreme Court focused on the issue of causation in determining that policyholders could recover for BI losses as a result of the pandemic and ruled in favour of the FCA on the basis of the causal link between the pandemic and BI losses (as opposed to the High Court, which had found for the FCA on the basis of contractual interpretation principles).
As a general rule, in order to recover under an insurance policy there needs to be proximate causation (i.e. the insured event was the effective cause of the harm for which the claim is made). This has traditionally been assessed on a common sense basis. However, the Supreme Court found that the test for proximate cause is whether the cause was such as to make the loss inevitable in the ordinary course of events.
The Supreme Court went on to consider situations where there is more than one cause involved. In doing so, the Supreme Court, in agreement with the High Court, held that no single case of COVID-19 caused the Government’s restrictions to be imposed, which, in turn, led directly to BI and BI losses. It was clear that the Government measures were taken in response to the cumulative impact of COVID-19 in the entire country; therefore, the situation was one in which “all the cases were equal causes of the imposition of national measures”.
In considering the issue of causation, the Supreme Court overruled the case of Orient-Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186. That case concerned a claim for BI loss arising from damage to a central New Orleans hotel, as a result of Hurricanes Katrina and Rita. The English High Court upheld the arbitral tribunal’s finding that the policyholder was only entitled to recover BI loss it would not have suffered “but for” the physical damage to the hotel, meaning that the BI loss attributable to the wider impact of the hurricanes on the city was not recoverable. The Supreme Court agreed with the High Court, in this case, that the case had been wrongly decided (despite two of the same justices appearing in both the Orient‑Express Hotels case and giving the Supreme Court’s judgment) and decided that it should be overruled. The Supreme Court instead considered that the correct analysis of the case should have been that where both the insured and uninsured perils operate concurrently and arise from the same underlying cause, then provided that cover for the uninsured risk is not excluded, loss resulting from both concurrent causes is recoverable.
The impact of the causation ruling on the specific clauses
The Supreme Court held that Trends Clauses should be construed “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”. Trends Clauses, therefore, only allow adjustments to reflect circumstances “which are unconnected with the insured peril and not circumstances which are inextricably linked with the insured peril”.
The Supreme Court accordingly found that Trends Clauses do not permit any adjustment of losses to reflect that, even if the insured peril had not occurred, the business’ results would nevertheless have been affected by “other consequences of the COVID-19 pandemic”. In failing to include any geographic limitation on such consequences, the Supreme Court has arguably gone further in restricting insurers’ ability to rely on Trends Clauses to reduce the indemnities payable for COVID-19 claims than the High Court (which referred only to the consequences of “the national outbreak of COVID-19”).
The Supreme Court’s decision demonstrates a high level of judicial pragmatism, in assisting policyholders to recover BI losses incurred as a result of the COVID-19 pandemic. It is estimated that around 370,000 policyholders with over 700 types of policies may be affected by this decision, some of whom may have been waiting for an insurance payout to act as a lifeline for their businesses.
The Supreme Court has provided a clear decision with regard to the sample policies that it considered, in relation to which there is no scope for insurers to further challenge the meaning of the policy wording. As a result, policyholders covered by the policies considered will no longer need to resolve many issues individually with their insurers, saving costs and time and providing the wider market with much needed certainty.
However, it is important for policyholders to remember that each case will turn on its facts and the specific policy wording. There may, therefore, be further litigation on factual issues or in relation to those policies, which were not considered by the Supreme Court, in which case the lower courts will be required to interpret the alternative wording in light of the Supreme Court’s decision.
It is anticipated that the FCA will work with insurers to ensure that claims are paid out under valid policies promptly. The Supreme Court is due to issue a set of declarations in relation to its judgment, which will provide further helpful guidance in resolving claims. The FCA has also stated its intention to publish (1) a set of Q&As to assist policyholders in understanding the test case, (2) a list of BI policy types that may cover the pandemic (based on data gathered from insurers), and (3) guidance to assist policyholders in proving the presence of COVID-19 within the Relevant Area following a consultation which closed on 22 January 2021.
While the Supreme Court’s decision has major significance for the insurance industry and policyholders in relation to the COVID-19 pandemic, it may end up being a confined and narrowly applicable decision. Inevitably, insurers will be extremely careful when drafting future policies to carve out any possible liability for the consequences of a national or worldwide pandemic (or similar event), and policyholders should pay close attention to the wording used when renewing or buying new policies. Cover for pandemic-related BI losses may still be available, but it is unlikely to come cheap for policyholders.
Carlotta Pregnolato, a trainee solicitor in our London office, contributed to the writing of this alert.
 Financial Conduct Authority v Arch Insurance (UK) Ltd and others  UKSC 1.
 JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss Jay Jay)  1 Lloyd’s Rep 32.
 Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corpn Ltd  QB 57
 FCA v Arch Insurance, para. 268
 FCA v Arch Insurance, para. 287
 FCA v Arch Insurance, para. 288
 Financial Conduct Authority v Arch Insurance (UK) Limited and others  EWHC 2448 (Comm), para. 278