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 Supreme Court has taken a pragmatic, policyholder-friendly approach to allow policyholders to claim under their insurance policies for BI losses caused by the COVID-19 pandemic, as long as their specific policy provides for it. In particular:
- Policyholders will generally be able to establish cover under disease clauses for all BI losses sustained as a result of the COVID-19 pandemic, provided that there was at least one occurrence within the specified geographical area at the relevant time.
- Prevention of access clauses may be invoked where a policyholder is unable to use the premises for a discrete business activity or a discrete part of the premises for its business activities. In addition, the restrictions imposed to prevent access do not need to be legally binding to trigger coverage; mandatory instructions or measures issued by a public authority are sufficient.
- Insurers cannot invoke trends clauses to reduce the indemnity payable to policyholders on the basis of the wider consequences of the COVID-19 pandemic. The scope of trends clauses was significantly restricted to capture only factors that are wholly unrelated to the insured peril. The Supreme Court concluded that all “consequences of the Covid-19 pandemic” are related to the insured peril in this context, and therefore fall outside the scope of the trends clauses.
- The FCA will now work with insurers to ensure that valid claims are paid out promptly. The FCA will also publish (1) a set of Q&As to aid policyholders to understand the test case, (2) a list of BI policy types that may cover the pandemic, and (3) guidance to assist policyholders in proving the presence of COVID-19 within the specified geographical area. The Supreme Court itself, with cooperation from the parties in the case, will also issue a set of declarations in relation to its judgement to provide further guidance on resolving claims.
- Whilst the FCA sought to cover the insurance market as widely as possible in their choice of sample policies to include in the claim, the position is less clear for policyholders whose specific policies were not considered by the Supreme Court. Whether or not such other policies provide cover for BI losses arising out of the COVID-19 pandemic will turn on the facts of each case and will require those policies to be considered in light of the Supreme Court decision. It is possible that further litigation will be required to resolve these issues.
- Over time, the impact of the Supreme Court’s decision may well decline, as insurers will very likely closely scrutinise their existing policies so as to carve out potential liability for wide-ranging events such as pandemics, hurricanes, and floods. Policyholders with policies coming up for renewal should be aware of potential changes in their policy wording, as insurers seek to restrict their exposure for such events, and will likely be required to pay larger premiums for more wide-ranging insurance cover.
- The Supreme Court’s unorthodox approach to causation could also have implications beyond the insurance sphere. By adopting a new test for proximate causation, litigants may attempt to argue that “but for” causation is no longer a required feature of causation.
The Need for Clarity
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:
- Disease Clauses – which cover business losses sustained as a result of BI following the occurrence of a notifiable disease within a specified geographical radius (typically 25 miles) of the insured premises (the “Relevant Area”);
- Prevention of Access Clauses – which cover losses sustained as a result of a denial or restriction of access to the insured premises due to government or local authority actions or restrictions (e.g. where restaurants were forced to close but offered takeaway services) and include Hybrid Clauses, where the actions or restrictions relate to a notifiable disease; and
- Trends Clauses – which allow for an insured business’ profit figures to be adjusted to take account of any trends or events that would have affected the business notwithstanding the insured event (in these circumstances, the COVID-19 pandemic).
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 Decision
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.
Prevention of Access Clauses and Hybrid Clauses
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”.
- Concurrent causes (i.e. two events that caused the harm): In a situation where there are two proximate causes of loss, and one of them is an insured peril while the other is not, the Supreme Court considered that the insurance policy would be required to pay out, unless that uninsured peril was specifically excluded from the policy cover by the insurer. In this situation, the combination of the two causes together made the loss inevitable and neither would have caused the loss without the other. The Supreme Court found that there is no reason why this same analysis could not be applied to multiple causes which act in combination to bring about a loss (see Multiple Causes below).
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.
- Multiple causes: In a situation where multiple causes act in combination to bring about a loss, the Supreme Court held that the typical “but for” causation test (i.e. the house would not have burnt down (the harm) but for the fire (the cause)), as advocated by the Insurers, is not always the determinative factor in ascertaining whether the test for causation has been satisfied. The Supreme Court sought to encourage commercial sense in the causation test by holding that in such instances, it will be a question of contractual interpretation as to whether multiple causes can each amount to a proximate cause.
The impact of the causation ruling on the specific clauses
- Disease Clauses: The Supreme Court held that in order to show that the BI loss was proximately caused by one or more cases of COVID-19, it was sufficient to prove that the BI was as a result of Government action taken in response to cases of the disease, which included at least one case of COVID-19 within the Relevant Area covered by the clause (i.e. locally). The Supreme Court agreed with the FCA’s submission that each case of COVID-19 was a separate and equally effective cause of the Government measures, and consequent BI. The Supreme Court held that Disease Clauses do cover BI losses caused by local COVID-19 cases in combination with the pandemic generally, even if the local cases would not have been enough to cause the BI losses on their own.
- Prevention of Access Clauses and Hybrid Clauses: The Supreme Court noted that Prevention of Access Clauses and Hybrid Clauses specify more than one condition which must be satisfied in order to establish that BI loss has been caused by an insured peril. The Supreme Court held that BI losses are only recoverable if they result from all the elements of the risk, covered by the clauses, and operate in the required causal sequence, which is (A) an occurrence of a notifiable disease, which causes (B) restrictions imposed by a public authority, which cause (C) an inability to use the insured premises, which causes (D) an interruption to the policyholder’s activities that is the sole and direct cause of financial loss. For there to be an indemnity, the elements of the insured peril that are present must be proximate but indemnity will still be granted even where concurrent uninsured but not excluded consequences of the COVID-19 pandemic occur. To establish that the BI loss was proximately caused, it is sufficient to prove that the interruption was a result of action by the Government taken in response to cases of the disease, which included at least one case within the Relevant Area.
- Trends Clauses: The Insurers argued that the Trends Clauses have the effect of removing the liability of insurers to indemnify policyholders for losses that would have occurred regardless of the operation of the insured perils, due to the wider consequences of the COVID-19 pandemic. The Supreme Court, however, held that Trends Clauses should be construed consistently with the insuring clauses to avoid the effect of removing the cover provided by such insuring 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”).
Significance of the Decision and Next Steps
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