The Financial Conduct Authority (FCA) v Arch Insurance (UK) Ltd & Ors

Business interruption cover arising from a pandemic depends on the proper construction of each policy wording. Disease clauses may cover the consequences of a notifiable disease occurring both within and outside a specified radius where the local occurrence is part of the wider outbreak that caused the interruption.

Hybrid and prevention-of-access clauses require their particular elements to be satisfied. Mandatory restrictions, complete inability to use premises, local incidents and local dangers have distinct meanings. A trends clause quantifies loss and ordinarily requires removal of the whole composite insured peril from the counterfactual. It cannot reintroduce an insured element so as to deprive the cover of practical effect.

The FCA brought an expedited test case under the Financial Markets Test Case Scheme on behalf of policyholders claiming business interruption losses arising from COVID-19 and the governmental response. Eight insurers and two policyholder groups participated. The court considered 21 representative policy wordings affecting potentially hundreds of policy types.

The principal provisions comprised disease clauses, hybrid clauses combining disease and public-authority restrictions, and prevention-of-access clauses. The court determined whether the wordings provided cover in principle, the required causal connections, the proper counterfactual under trends clauses, and the types of evidence capable of proving the prevalence of COVID-19 within a specified area.

1. Disposition. The issues were determined partly in favour of the FCA and partly in favour of the insurers. Many disease clauses, several hybrid clauses and the RSA 4 prevention-of-access wording provided cover in principle. Other localised prevention-of-access provisions, the Hiscox and MSA 2 non-damage denial-of-access clauses, and the QBE 2 and QBE 3 disease clauses did not respond on the broad case advanced.

2. Disease clauses had to be construed individually. Under RSA 3, RSA 4, Argenta, MSA 1–2 and QBE 1, the cover was not confined to the consequences of the particular cases within the stipulated radius. The disease within and outside the area could be one indivisible cause, or the individual occurrences could be equally effective causes of the national response. QBE 2 and QBE 3 instead insured the consequences of specific local events or occurrences.

3. Under the Hiscox hybrid wordings, “restrictions imposed” meant legally mandatory restrictions. “Inability to use” required complete inability, although nugatory or vestigial use might suffice. The national COVID-19 outbreak could constitute an occurrence of a notifiable disease. RSA 1 similarly required mandatory closure or restriction. RSA 4’s enforced-closure wording applied only to closure under legal compulsion.

4. Prevention and hindrance were distinct. Prevention required closure for the purpose of carrying on the insured business, rather than physical impossibility of entry. Clauses requiring a danger, emergency or incident “in the vicinity” ordinarily connoted narrow, local cover. The nationwide pandemic was not an “incident” within the Hiscox or MSA 2 non-damage denial-of-access clauses. RSA 4 differed because its extended definition of “Vicinity” and wording could embrace national governmental action.

5. Trends clauses formed part of the machinery for quantifying an established loss. For composite perils, the counterfactual required removal of all interconnected elements of the peril, including the disease or emergency that produced the governmental action. Pre-trigger deterioration remained a relevant trend and was not itself recoverable.

6. Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm) misidentified the insured peril and produced illusory cover. If it governed, the court would have declined to follow it; in any event it was distinguishable.

7. Specific evidence, NHS and ONS death data, reported cases and reliable statistical methodologies could in principle prove local prevalence on the balance of probabilities. Their sufficiency depended on the individual claim. The burden remained on the insured.

This was a first-instance test case under Practice Direction 51M. Earlier case-management rulings expedited the proceedings, permitted the policyholder groups to intervene and confined the prevalence issue to permissible types of proof and their sufficiency in principle. The second ruling was reported as The Financial Conduct Authority v Arch Insurance Limited and Ors [2020] EWHC 1724 (Comm).