On 15 September 2020, the High Court handed down judgment in The Financial Conduct Authority v Arch and Others, which determined issues of principle relating to business interruption claims arising from the COVID-19 outbreak. This test case was expedited under the Financial Market Test Case Scheme due to the importance of the matters in dispute to both insurers and policyholders.
The case, in which eight insurer defendants agreed to participate, saw sample wordings from 21 “lead” policies considered. The Financial Conduct Authority (FCA) estimates that the outcome could affect around 700 types of policies across more than 60 different insurers and 370,000 policyholders.
The 21 sample wordings fell broadly into three categories: disease, prevention of access, and hybrid (the analysis of which largely tracked the analysis of the disease and prevention-of-access clauses). In addition to considering each of these categories of wordings, the defendant insurers advanced arguments relating to the operation of trends clauses and arguments of causation based on the decision in Orient Express.
Disease clauses generally provide cover for losses resulting from business interruption due to any notifiable disease within the “vicinity” (or within a specific radius) of the premises.
The insurers argued that such clauses covered only losses stemming from a local disease outbreak, and that in the event of a wider outbreak (as with COVID-19), coverage would be provided only insofar as the local effects of the disease could be distinguished from the nationwide effects. The FCA argued that on a correct analysis, either there must be only one indivisible cause (the disease) of which all local outbreaks formed a part, or there must be many different effective causes (each a local outbreak), none of which are excluded.
The High Court ruled in favour of the FCA, holding that the correct analysis was that the cause of the interruption is the disease, of which individual outbreaks form indivisible parts. It also concluded that each individual occurrence could be a separate but effective cause, though it deemed this analysis less satisfactory.
Prevention-of-access clauses generally cover losses resulting from a prevention of access to the insured premises due to actions of, or restrictions imposed by, a government body due to an emergency likely to endanger life. The High Court interpreted these clauses more restrictively, though ultimately held that some wordings did cover prevention of access caused by the UK government’s mandated closure of businesses due to the pandemic.
The High Court’s consideration of the sample wordings that fell in this category made it clear that the analysis of such clauses will depend heavily on the exact wording used, though it did deliver useful guidance on the interpretation of commonly used language:
- For clauses that covered the “prevention” of access, there must have been an actual closure of the premises. For clauses that covered “interruption” of the business, complete business cessation was not a requirement, so coverage generally would extend to business disruption and interference. Where “action” by an authority was required, only mandatory government restrictions would be captured, not mere advice.
- Where clauses covered “the vicinity,” or a certain specified radius around the premises, the High Court considered that such language indicated that coverage should be available only for local emergencies. Wordings to this effect will cover only government measures which are specific to the locality of the premises or “neighborhood” (which could be particularly relevant in the context of the local lockdowns). By contrast, and highlighting the very different result that can be reached depending on specific policy wording, in policies that defined “vicinity” as an area that could reasonably have an impact on the policyholder’s business, the court held that the scope could include all of England and Wales.
Trends clauses consider whether any “business trends” affected the insured’s business before or after the “insured peril” (here, the COVID-19 outbreak). If any such trend is identified that would have affected the insured’s business regardless of the insured peril, the quantum of any payout will be adjusted to ignore the effects of those “business trends.”
The insurers argued that the insured peril was the occurrence of the disease, and that the other effects of the outbreak (including the UK government’s mandated closures) were “business trends.” As such, they contended, the losses associated with the government’s restrictions should be disregarded in the quantification of any payout. This would hugely decrease the insurers’ liability to policyholders.
This argument was considered against an example of a mandated closure of a hypothetical restaurant by a local authority due to the presence of vermin. If the insurer’s argument succeeded, the policyholders would be able to recover only if they could prove that customers would have still eaten there despite the presence of vermin if closure had not been mandated. Insurers would contend that no customer would eat at a restaurant with vermin present (or, in this case, give their custom to a business during the COVID-19 outbreak), so the business interruption would have occurred in any event, even without the restrictions.
The High Court rejected the insurers’ argument. Instead, it agreed with the FCA’s contention that stripping out the government restrictions as “business trends” would render the coverage largely illusory, and cannot have been the intention of the parties.
Causation and Orient Express Hotels Ltd v Assicurazioni Generali SpA 
The insurers also relied upon Orient Express in their arguments on causation. The Orient Express case related to a hotel in New Orleans that was physically damaged by Hurricanes Katrina and Rita. In the case, the High Court held that there was no coverage because, even if the hotel had avoided any damage at all, it would still have suffered the same business interruption losses due to the damage to the surrounding area. On this basis, they ruled that the causal test was not satisfied, as the business interruption was not caused by the hurricanes alone.
Though the High Court in this case distinguished Orient Express due to the difference in the types of insured perils between the cases (that case included an “all risks” policy), the court did say that if it had been required to consider the decision in Orient Express, it would have reached the conclusion that it was wrongly decided and so would decline to follow it.
Though the insurers are likely to appeal the decision, and it is likely that the appeal will “leapfrog” to the Supreme Court, policyholders will welcome this ruling as it provides much needed certainty as they continue to navigate the changing business landscape during the COVID-19 outbreak. Time is of the essence for many businesses that may have made claims at the start of the outbreak and require a speedy payout for business survival. However, the extent to which insurers might be inclined to pay on claims based on this ruling may depend not only on the particular wording of their contracts, but also on the attitude of any reinsurer standing behind them (as the reinsurance community was not involved in this hearing).