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

Business interruption cover must be construed objectively and as a coherent whole. A radius-limited disease clause covers cases of disease occurring within the specified area, but each such case may be an equally effective cause of national public-health measures and resulting loss. The causal test does not invariably require proof that the loss would not have occurred but for the insured peril.

Restrictions imposed by a public authority may include clear mandatory instructions issued during an emergency, even before they acquire legal force. Inability to use premises, or prevention of access, may relate to a discrete part of the premises or business. Trends clauses quantify insured loss; they cannot remove cover by treating consequences of the same originating cause as countervailing circumstances.

The Financial Conduct Authority v Arch Insurance (UK) Ltd and others was an expedited test case concerning whether standard-form business interruption policies covered losses caused by COVID-19 and the resulting Government measures. The FCA acted for policyholders against eight insurers. The Hiscox Action Group intervened.

The Commercial Court, in [2020] EWHC 2448 (Comm), substantially upheld the FCA’s claim. The insurers, the FCA and the Hiscox interveners brought leapfrog appeals to the Supreme Court. The principal issues concerned disease clauses, prevention-of-access and hybrid clauses, causation, trends clauses, pre-trigger losses and the correctness of Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm).

1. Disposition. The court unanimously dismissed the insurers’ appeals. It allowed the FCA’s appeal on grounds 1 and 4, and allowed grounds 2 and 3 in qualified terms where they affected the outcome. The Hiscox interveners’ appeal was allowed on the corresponding grounds.
2. Disease clauses. Lord Hamblen and Lord Leggatt, with whom Lord Reed agreed, held that an occurrence of disease meant an individual case of illness at a particular time and place. A radius-limited clause therefore covered cases within, but not outside, the stated area. General Exclusion L in RSA 3 did not remove COVID-19 cover because a reasonable SME policyholder would not understand a general exclusion buried at the end of the policy to obliterate specific infectious-disease cover.
3. Public-authority clauses. A restriction imposed by a public authority ordinarily connotes compulsion, but need not invariably have legal force. A clear mandatory instruction, reasonably understood as requiring compliance without recourse to legal powers, may suffice in an emergency. An inability to use premises, or prevention of access, may be established where the policyholder is wholly unable to use a discrete part of the premises or to conduct a discrete business activity. Mere hindrance remains insufficient. An interruption may include interference or disruption short of complete cessation.
4. Causation. Proximate causation is determined by construing the policy in its factual context. The “but for” test is not an invariable minimum requirement. Each case of COVID-19 occurring within the insured area was a separate and equally effective cause of Government action taken in response to the nationwide incidence of the disease. It was therefore sufficient that the action responded to cases which included at least one case within the insured area.
5. Composite perils and trends clauses. All elements of a hybrid or prevention-of-access peril had to operate in the stipulated causal sequence. Cover was not reduced merely because loss was concurrently caused by uninsured but non-excluded consequences of the pandemic arising from the same originating cause. Trends clauses were machinery for quantifying loss, not exclusions. Adjustments could reflect circumstances unrelated to the insured peril, but not circumstances arising from its underlying cause. Pandemic-related downturn before the trigger could not be projected into the indemnity period to reduce recovery.
6. Earlier authority. Orient-Express Hotels Ltd v Assicurazioni Generali SpA [2010] EWHC 1186 (Comm) was wrongly decided and overruled. Lord Briggs, with whom Lord Hodge agreed, accepted all the majority’s conclusions. He regarded the alternative construction that the pandemic as a whole entered the insured peril once it reached the radius as equally persuasive, but unnecessary to decide.

1. United Kingdom Supreme Court. The court unanimously dismissed the insurers’ appeals and allowed the appeals of the FCA and the Hiscox interveners in the respects stated in [2021] UKSC 1.
2. High Court, Commercial Court. Flaux LJ and Butcher J substantially upheld the FCA’s test claim in [2020] EWHC 2448 (Comm). They granted permission for leapfrog appeals directly to the Supreme Court.