The Financial Conduct Authority v Arch Insurance (UK) Ltd and Others

This was an appeal from a decision ([2020] EWHC 2448 (Comm)) in a test case brought by the Financial Conduct Authority to clarify whether or not there was cover in principle for COVID-19 related losses under a variety of different standard insurance policy wordings for business interruption losses.

In issue on the appeal was the proper interpretation of four types of clauses which were to be found in many of the relevant policy wordings:

(i) ‘Disease clauses’ which, in general, provided cover for business interruption losses resulting from the occurrence of a notifiable disease, such as COVID-19, at or within a specified distance, e.g. 25 miles, of the business premises;

(ii) ‘Prevention of access clauses’ which, in general, provided cover for business interruption losses resulting from public authority intervention preventing or hindering access to, or use of, the business premises;

(iii) ‘Hybrid clauses’ which combined the main elements of the disease and prevention of access clauses; and

(iv) ‘Trends clauses’ which, in general, provided for business interruption losses to be quantified by reference to what the performance of the business would have been had the insured peril not occurred.

The appeal also raised issues of causation. In particular, the insurers argued that policyholders would have suffered the same or similar business interruption losses even if the insured risk or peril had not occurred, so that the claims failed because it could not be said that the loss was caused by the insured peril and/ or because of how the trends clauses required the loss to be quantified, applying Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm); [2010] 1 CLC 847.

Held, ruling accordingly:

(Per Lord Hamblen, Lord Leggatt and Lord Reed) Disease clauses

1. The court below was wrong to hold that the words ‘any … occurrence of a Notifiable Disease within a radius of 25 miles of the Premises’ covered the business interruption consequences of a notifiable disease wherever the disease occurred, provided that there was at least one case of illness caused by the disease within the 25-mile radius. The words ‘occurrence of a Notifiable Disease’ referred to an occurrence of illness sustained by a particular person at a particular time and place, and thus the clause covered only cases of illness resulting from COVID-19 that occurred within the 25-mile radius specified in the clause and did not cover interruption caused by cases of illness resulting from COVID-19 that occurred outside that area.

Prevention of access and hybrid clauses

2. A reasonable policyholder would understand the words ‘restrictions imposed’, without more, as making cover conditional on the existence or immediate prospect of a valid legal basis for the restriction. An instruction given by a public authority could amount to a ‘restriction imposed’ if, from the terms and context of the instruction, compliance with it was required, and would reasonably be understood to be required, without the need for recourse to legal powers. That was likely to arise only in situations of emergency. Such an instruction would need not only to be in mandatory terms, but also in clear enough terms to enable the addressee to know with reasonable certainty what compliance required. In those limited circumstances, ‘restrictions imposed’ need not have the force of law.

3. The words ‘restrictions imposed’ were general and unqualified. In most cases the relevant restrictions would be directed at the insured premises or the use of the premises by the policyholder, but they were not required to be so. A police cordon was an example of an inability to use the premises resulting not from a restriction directed at the premises or their use by the policyholder, but from a restriction which kept the public out. In context, the general words used should not be read as directed at the use of the insured premises by the policyholder, and not by anyone else, such as a customer.

4. Where the policy wording required the business interruption to be caused by the policyholder's ‘inability to use’ the business premises due to restrictions imposed by a public authority, the requirement was satisfied either if the policyholder was unable to use the premises for a discrete part of its business activities or if it was unable to use a discrete part of its premises for its business activities. In both those situations there was a complete inability of use. The ‘inability to use’ the business premises might include a policyholder's inability to use either the whole or a discrete part of its premises for either the whole or a discrete part of its business activities.

5. Similarly, in respect of ‘prevention of access’ wording, prevention meant stopping something from happening or making an intended act impossible and was different from mere hindrance. Such wording might, depending on the facts, cover prevention of access to a discrete part of the premises and/or for the purpose of carrying on a discrete part of the policyholder's business activities. In both situations, access to a discrete part of the premises or access to the premises for a discrete purpose would have been completely stopped from happening.

6. The ordinary meaning of ‘interruption’ was capable of encompassing interference or disruption which did not bring about a complete cessation of business or activities, and which might even be slight, although it would only be relevant if it had a material effect on the financial performance of the business. Furthermore, the possibility that interruption might be partial was inherent in the policy provisions which dealt with the calculation of loss and which envisaged that the business might continue operating during a period of interruption but with reduced income or increased costs of working.

Causation

Disease clauses

7. It had been held or recognised that an insured peril which acted in combination with other causes of equal efficacy to bring about loss was capable of being regarded as a proximate cause. In the insurance field it had been held or accepted in cases concerning the recovery of defence costs that policyholders were entitled to an indemnity even though the ‘but for’ test of causation was not satisfied. There was nothing in principle or in the concept of causation which precluded an insured peril that in combination with many other similar uninsured events brought about a loss from being regarded as a proximate cause of the loss, even if the occurrence of the insured peril was neither necessary nor sufficient to bring about the loss by itself. The causal requirement in the disease clauses was satisfied by showing that one or more cases of illness from COVID-19 had occurred within the specified radius before national restrictions which caused interruption of the insured business were imposed on the basis of those and all other cases of COVID-19 that had occurred by that date. It was not reasonable to attribute to the parties an intention that in such circumstances the question whether business interruption losses were caused by cases of a notifiable disease occurring within the radius was to be answered by asking whether or to what extent, but for those cases of disease, business interruption loss would have been suffered as a result of cases of disease occurring outside the radius. It was contrary to the commercial intent of the clauses to treat uninsured cases of a notifiable disease occurring outside the territorial scope of the cover as depriving the policyholder of an indemnity in respect of interruption also caused by cases of disease which the policy was expressed to cover. On the proper interpretation of the disease clauses, in order to show that loss from interruption of the insured business was proximately caused by one or more occurrences of illness resulting from COVID-19, it was sufficient to prove that the interruption was a result of Government action taken in response to cases of disease which included at least one case of COVID-19 within the geographical area covered by the clause, on the basis that each of the individual cases of illness resulting from COVID-19 which had occurred by the date of any Government action was a separate and equally effective cause of that action. (JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The Miss Jay Jay)[1987] 1 Ll Rep 32andInternational Energy Group Ltd v Zurich Insurance plc UK[2015] UKSC 33; [2016] AC 509considered; Orient-Express Hotels Ltd v Assicurazioni Generali SpA (t/a Generali Global Risk)[2010] EWHC 1186 (Comm); [2010] 1 CLC 847overruled,)

Prevention of access clauses

8. Properly interpreted, the prevention of access and hybrid clauses, which contained a series of elements which all had to be satisfied, indemnified the policyholder against the risk of all the elements of the insured peril acting in causal combination to cause business interruption loss, but did so regardless of whether the loss was concurrently caused by other (uninsured but non-excluded) consequences of the COVID-19 pandemic as the underlying or originating cause of the insured peril.

Trends clauses

9. To avoid inconsistency with the insuring clauses, the trends clauses could and should be construed, absent clear wording to the contrary, by recognising that the aim of such clauses was 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. Accordingly, the trends or circumstances referred to in the clause...