The Financial Conduct Authority v Arch Insurance (UK) Ltd

Hearing dates: Monday 20 July – Thursday 23 July & Monday 27 July – Thursday 30 July 2020

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Lord Justice Flaux and

A. Introduction

This case has been brought by the Financial Conduct Authority (“the FCA”), the regulator of the defendant insurers, as a test case to determine issues of principle in relation to policy coverage under various specimen wordings underwritten by the defendants in respect of claims by policyholders to be indemnified for business interruption losses arising in the context of the COVID-19 pandemic and the advice of and restrictions imposed by the UK Government in consequence. We have been asked to determine those issues as to the correct construction of the policy terms and as to whether cover is available in principle by reference to a set of agreed facts (which we summarise in the next section of the judgment) and assumed facts (which were essentially illustrative factual scenarios as to how certain businesses have been affected). Since, in their oral submissions, the parties did not rely upon the assumed facts, we have not felt it necessary to set them out in this judgment, although we have taken them into consideration in reaching our conclusions.

These proceedings were commenced by the FCA on 9 June 2020, seeking declarations in respect of the relevant business interruption policy wordings, pursuant to a “Framework Agreement” between the parties dated 31 May 2020. The Framework Agreement provided that the parties have a mutual objective of achieving the maximum clarity possible for the maximum number of policyholders and their insurers, consistent with the need for expedition and proportionality. The parties agreed to put forward for consideration a representative sample of the standard form business interruption policies issued by the defendant insurers in the test case. In these proceedings, the FCA represents the interests of the large number of policyholders who purchased the relevant policies, many of whom are small to medium sized enterprises.

On the same day as the Claim Form was issued, the FCA made an application, supported by the defendant insurers, for (i) the expedition of the trial and (ii) the Financial Market Test Case Scheme under Practice Direction 51M to apply to the claim. That Practice Direction provides for the Scheme to apply to any Financial List claim which raises issues of general importance in relation to which immediately relevant authoritative English law guidance is needed. It also provides that in a case of particular importance or urgency the trial may, at the court's discretion, be heard by a court consisting of two Financial List judges, or a Financial List judge and a Lord or Lady Justice of Appeal. The first Case Management Conference (“CMC”) on 16 June 2020 was heard by Butcher J alone. Orders were made for the expedition of the trial and for the case to be heard under the Scheme with the trial being conducted by what was in effect a Divisional Court consisting of Flaux LJ and Butcher J. The trial was fixed for 8 days from 20 July 2020.

At that first CMC, there was an issue about the FCA's proposed reliance on certain expert evidence about the prevalence of the disease at various dates. The Court ruled that there would be no expert evidence going to the issue of actual prevalence, from either the FCA or the insurers. However, it was left open to the parties to raise arguments about what type of proof would be sufficient to satisfy the onus of proof on the insured about the prevalence of the disease, and the issue was to be revisited at the next CMC.

At the second CMC heard by both of us, we acceded to the applications of the Hiscox Action Group (“the Hiscox Interveners”) and the Hospitality Insurance Group Action (“the HIGA Interveners”) to intervene. We also dismissed Royal & Sun Alliance Insurance Plc (RSA)'s application to introduce additional policy wordings as part of the factual matrix for construing the wordings with which we were concerned. We also dismissed the FCA's application to adduce expert evidence in relation to certain diseases to aid the construction of an exclusion in the Ecclesiastical Insurance Office plc policies. Finally, on the question of expert evidence proving the prevalence of the disease, we reiterated the earlier ruling that such evidence was not to be adduced, ordering that at trial the issue would be confined to determining: (i) what type of proof could be sufficient to discharge the burden of proof on the insured as to prevalence of the disease; and (ii) assuming that the FCA's evidence was the best evidence available, whether that evidence would be sufficient in principle to discharge that burden.

The CMCs and the trial took place wholly remotely, using Skype for Business, and were broadcast by live-streaming pursuant to Schedule 25 of the Coronavirus Act 2020. We received detailed written opening submissions from all the parties and the two interveners and oral submissions from counsel for the FCA, each of the defendants and the interveners. It was and is evident that a tremendous amount of hard work went into the preparation and presentation of the case at trial, on the part of all those involved and their legal advisers. We are grateful to all those involved for the clarity and intellectual rigour of the written and oral submissions and for the professional way in which the trial was conducted.

In all we had some 21 “lead” policies to consider: one issued by Arch Insurance (UK) Limited (“Arch 1”), one issued by Argenta Syndicate Management Limited (“Argenta 1”), two issued by Ecclesiastical Insurance Office plc (“Ecclesiastical 1.1” and “Ecclesiastical 1.2”), four issued by Hiscox Insurance Company Limited (“Hiscox 1”, “Hiscox 2”, “Hiscox 3” and “Hiscox 4”), three issued by MS Amlin Underwriting Limited (“MSA 1”, “MSA 2” and “MSA 3”), three issued by QBE UK Limited (“QBE 1”, “QBE 2” and “QBE 3”), five issued by Royal & Sun Alliance Insurance plc (“RSA 1”, “RSA 2.1”, “RSA 2.2”, “RSA 3” and “RSA 4”), and two issued by Zurich Insurance plc (“Zurich 1” and “Zurich 2”). Certain of the lead policies are related to other policies issued by insurers who are not participants in the proceedings, such as RSA 4 which is in similar terms to certain policies issued by Aviva. Indeed, the FCA estimated that, in addition to the particular policies chosen for the test case, some 700 types of policies across over 60 different insurers and 370,000 policyholders could potentially be affected by the test case.

The relevant provisions of the lead policies essentially fell into three categories: (i) what the FCA termed “Disease Clauses”; (ii) what have been referred to as “Hybrid Clauses”; and (iii) clauses covering prevention of access and similar perils. We will deal with the three categories in turn. The structure of the remainder of this judgment is as follows: Section B, Factual Background, Section C, Applicable Principles of Construction, Section D, disease clauses, Section E, hybrid clauses, Section F, Prevention of Access and similar wordings, Section G, Issues of Causation (although as will become apparent we have reached the conclusion that most, if not all, of the issues of causation raised at some length by the parties are answered by the correct construction of the wordings) and Section H, Prevalence.

B. Factual Background

As we have already said, the factual background is essentially agreed between the parties and it is only necessary to set out the history of the disease to date and the government response to it to the extent necessary to put in context the issues of construction which we have to determine.

Developments between December 2019 and February 2020

On 31 December 2019, the World Health Organization (“WHO”) was informed of...