The Supreme Court decision on the Business Interruption Insurance Test Case - FCA v Arch and others UKSC 2020/0177

Author: Kevin Holder
In: Article Published: Friday 15 January 2021

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Introduction - [2021] UKSC 1

The Supreme Court have today handed down their much awaited ruling on the appeals brought by the FCA and a number of the Insurer Respondents against the High Court decision ([2020] EWHC Comm 2448) on the Business Interruption Test Case - FCA v Arch and others. 

Today's judgment represents a victory for policyholders in a ruling that is more favourable than the High Court decision. 

The Parties 

  • The Financial Conduct Authority (Appellant) v Arch Insurance (UK) Ltd and others (Respondents)
  • Hiscox Action Group (Appellant) v Arch Insurance (UK) Ltd and others (Respondents) Argenta Syndicate Management Ltd (Appellant) v The Financial Conduct Authority and others (Respondents)
  • Royal & Sun Alliance Insurance Plc (Appellant) v The Financial Conduct Authority and others (Respondents)
  • MS Amlin Underwriting Ltd (Appellant) v The Financial Conduct Authority and others (Respondents)
  • Hiscox Insurance Company Ltd (Appellant) v The Financial Conduct Authority and others (Respondents)
  • QBE UK Ltd (Appellant) v The Financial Conduct Authority and others (Respondents)
  • Arch Insurance (UK) Ltd (Appellant) v The Financial Conduct Authority and others (Respondents)

The Panel

JUSTICES: Lord Reed (President), Lord Hodge (Deputy President), Lord Briggs, Lord Hamblen, Lord Leggatt

Lord Hamblen and Lord Leggatt gave the main judgment with which Lord Reed agreed [1 – 313]. This substantially allowed the FCA’s appeal and dismissed the Insurers’ appeals. Lord Briggs gives a separate concurring judgment with which Lord Hodge agreed [314 – 326].

Background to the Appeal

The Proceedings

These appeals concern whether certain insurance policy wordings cover business interruption losses resulting from the COVID-19 pandemic and public health measures taken by UK authorities in response to the pandemic from March 2020.

Proceedings were brought by the Financial Conduct Authority (the “FCA”) under the Financial Markets Test Case Scheme (the “Scheme”) pursuant to an agreement made with eight insurance companies to resolve issues of general importance on which immediately relevant and authoritative English law guidance was needed.

The eight insurer defendants were Arch Insurance (UK) Limited, Argenta Syndicate Management Limited, Ecclesiastical Insurance Office Plc, Hiscox Insurance Company Limited, MS Amlin Underwriting Limited, QBE Limited, Royal & Sun Alliance Insurance Plc, and Zurich Insurance Plc. The FCA represented the interests of policyholders, who were mainly small to medium sized businesses. Two groups of policyholders also intervened in the proceedings. 21 sample wordings were considered, but the FCA estimated that 700 types of policies, underwritten by 60 insurers, and held by 370,000 policyholders could be affected by the outcome of the case.

At first instance, in accordance with the Scheme, the case was heard by a High Court judge, Butcher J, sitting with a Court of Appeal judge, Flaux LJ. The matter was then directly appealed to the Supreme Court, owing to the importance and urgency of the issues raised, "leapfrogging" the Court of Appeal.

The High Court judgment

The High Court accepted many of the FCA’s arguments regarding the meaning and effect of the policies, however, the FCA appealed on certain issues on which it did not succeed along with Hiscox Action Group (the “Hiscox Interveners”). Six insurance companies (the “Insurers”) appealed against the decision of the High Court on other issues and also responded to the FCA’s appeal. The Insurer Appellants were Arch Insurance (UK) Ltd (“Arch”), Argenta Syndicate Management Ltd (“Argenta”), Hiscox Insurance Company Ltd (“Hiscox”), MS Amlin Underwriting Ltd (“MS Amlin”), QBE UK Limited (“QBE”) and Royal & Sun Alliance Insurance Plc (“RSA”). Zurich Insurance Plc was a respondent to the FCA’s appeal, but did not separately appeal from the decision of the High Court.

The Issues on Appeal

  1. the interpretation of “disease clauses” (which cover business interruption losses resulting from any occurrence of a notifiable disease within a specified distance of insured premises) [48 – 95];
  2. the interpretation of “prevention of access” clauses (which cover business interruption losses resulting from public authority intervention preventing access to, or the use of, business premises) and “hybrid clauses” (which contain both disease and prevention of access elements) [96 – 159];
  3. the question of what causal link must be shown between business interruption losses and the occurrence of a notifiable disease (or other insured peril specified in the relevant policy wording) [160 – 250];
  4. the effect of “trends clauses” (which prescribe a standard method of quantifying business interruption losses by comparing the performance of a business to an earlier period of trading) [251 – 288];
  5. the significance in quantifying business interruption losses of the effects of the pandemic on the business, which occurred before the cover was triggered (“Pre-Trigger Losses”) [289 – 296]; and
  6. in relation to causation and the interpretation of trends clauses, the status of the decision of the Commercial Court in Orient-Express Hotels Ltd v Assicurazioni Generali SpA (trading as Generali Global Risk) [2010] EWHC 1186 (Comm) (“Orient-Express”) [297 – 312].

The Judgment

Disease clauses

RSA3

The Supreme Court considered the wording in RSA 3: “any … occurrence of a Notifiable Disease within a radius of 25 miles of the Premises” as an exemplar disease clause wording [54].

This policy (like many other disease clause wordings) covers business interruption losses resulting from any occurrence of a notifiable disease within a specified geographical radius (typically 25 miles) of the insured premises.

The High Court interpreted the clause as covering business interruption losses resulting from COVID-19 (which was made a notifiable disease on 5 March 2020) provided there had been an occurrence (meaning at least one case) of the disease within the geographical radius [64].

Although they ultimately reached a similar conclusion to the Court about the scope of the cover (because of their analysis of causation – see below), unlike Lord Briggs and Lord Hodge, Lord Hamblen and Lord Leggatt (and by extension Lord Reid) did not accept the High Court's interpretation of the words used [61].

Indeed their Lordships went as far as to hold:

The court below did not spell out in its judgment precisely how, as a matter of the English language, it considered that the words “any … occurrence of a Notifiable Disease within a radius of 25 miles of the Premises” can be read as meaning “a Notifiable Disease of which there is any occurrence within a radius of 25 miles of the Premises” (our emphasis). It has not been suggested that this is one of those rare situations in which the court can be satisfied that, in Lord Hoffmann’s phrase, “something must have gone wrong with the language” and can engage in verbal rearrangement or correction of the words used in identifying what must have been meant: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 913; Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] AC 1101, para 25.

we do not consider that there is any ambiguity in the description of the relevant insured peril. No reasonable reader of the policy would understand the words “any … occurrence of a Notifiable Disease within a radius of 25 miles …” to include any occurrence of a Notifiable Disease outside a radius of 25 miles. To seek to interpret the language of the policy as bearing such a meaning is to stand the clause on its head.

Declaration 29.2, which records the court’s decision as to the correct interpretation of the disease clause in RSA 3, states that: 

“… there is cover under RSA 3 for any business interruption which an insured can show resulted from COVID-19 … from the date when the disease occurred in the relevant 25 mile radius of the insured premises.” 

This does not treat the insured peril as limited to any occurrence or outbreak of COVID-19. It treats the insured peril simply as COVID-19, wherever and whenever the disease occurs without any geographical or temporal limits except for requirements (a) that there is an occurrence within the relevant 25 mile radius of the insured premises and (b) that the cover runs from the date of that local occurrence.

The word “occurrence”, on the other hand, like its synonym “event”, has a widely recognised meaning in insurance law which accords with its ordinary meaning as “something which happens at a particular time, at a particular place, in a particular way”: see Axa Reinsurance (UK) plc v Field [1996] 1 WLR 1026, 1035 (Lord Mustill); Kuwait Airways Corpn v Kuwait Insurance Co SAK [1996] 1 Lloyd’s Rep 664, 683-686 (and the discussion in that case of the Dawson’s Field Award); Mann v Lexington Insurance Co [2001] 1 Lloyd’s Rep 1 (CA).

Their Lordships accepted the Insurers’ arguments that: (i) each case of illness sustained by a person as a result of COVID-19 is a separate “occurrence” [67 – 69];

A disease that spreads is not something that occurs at a particular time and place and in a particular way: it occurs at a multiplicity of different times and places and may occur in different ways involving differing symptoms of greater or less severity. Nor for that matter could an “outbreak” of disease be regarded as one occurrence, unless the individual cases of disease described as an “outbreak” have a sufficient degree of unity in relation to time, locality and cause. If several members of a household were all infected with COVID-19 when a carrier of the disease visited their home on a particular day, that might arguably be described as one occurrence.

and (ii) the clause only covers business interruption losses resulting from cases of disease which occur within the radius [71].

The interpretation which makes best sense of the clause, in our view, is to regard each case of illness sustained by an individual as a separate occurrence. On this basis there is no difficulty in principle and unlikely in most instances to be difficulty in practice in determining whether a particular occurrence was within or outside the specified geographical area.

it is apparent that the argument that the disease clause in RSA 3 applies to cases of illness resulting from COVID-19 that occur more than 25 miles away from the premises should be rejected. As a matter of plain language, the clause covers only cases of illness resulting from COVID-19 that occur within the 25-mile radius specified in the clause.

But crucially, the majority rejected the notion that whilst coverage did not extend to illness resulting from occurrences outside as opposed to inside the relevant radius, the fact that interruption was partly caused by illness within and partly caused by illness outside the relevant radius does not preclude cover:

it is right that the language of the disease clause in RSA 3 does not confine cover to business interruption which results only from cases of a notifiable disease within the 25 mile radius, as opposed to other cases elsewhere. That is an important point when considering questions of causation. But it does not follow that cases of a disease occurring outside the specified radius are themselves part of the peril insured against by the disease clause. On the contrary, it is clear from the words used that they are not. 

The majority also considered the fact that notifiable diseases have the potential to affect a wide area extending beyond a stipulated radius, and that other disease clause wordings should be interpreted in a similar way [81 – 94].

we consider that the court below correctly analysed the meaning of the disease clauses in QBE 2 and QBE 3 and was wrong not to interpret the other disease clauses in a similar way. On the correct interpretation of all the relevant clauses, they cover only relevant effects of cases of COVID-19 that occur at or within a specified radius of the insured premises. They do not cover effects of cases of COVID-19 that occur outside that geographical area.

Argenta

This was found to be "in almost identical terms"  to RSA3 and thus the majority's conclusion as to coverage was the same.

MSA1 and MSA2

Although the word “occurrence” is not used in the MSA wordings, the term “notifiable disease” is so far as relevant defined in the same way as in RSA 3. That definition accordingly makes it clear that the insured peril is not a disease as such but individual cases of “illness sustained by any person resulting from” a relevant disease.

QBE1

The wording of QBE 1 is something of an outlier in that, unlike the clauses we have considered so far, the clause has as its subject a disease, rather than an occurrence of illness sustained by a person resulting from a disease. Nevertheless, we think the wording makes it sufficiently clear that the insured peril is not any notifiable disease occurring anywhere in the world but only in so far as it is manifested by any person whilst in the premises or within a 25 mile radius of the premises..... We do not agree that the clause is naturally or reasonably read as if it said: “any human infectious or human contagious disease … on condition that and from the time when the disease is manifested by any person whilst in the premises or within a 25 mile radius of it.”

QBE 2 and 3

The FCA has appealed against that decision, arguing that there is no significant difference between the disease clauses in these two wordings and the disease clauses in the other sample policy wordings. We agree. However, the logic of the argument in our view flows in the opposite direction, as we consider that the court correctly interpreted the disease clauses in QBE 2 and QBE 3.

It will be recalled that at first instance, unlike the other disease policies, the High Court considered that by virtue of the fact that QBE 2 and 3 referred events or incidents that "It is the ‘event’ which is constituted by the occurrence(s) of the disease within the 25-mile radius which must have caused the business interruption or interference" and that unlike the other disease policies, it was not sufficient that there be “a Notifiable Disease of which there is any occurrence within a radius of 25 miles of the Premises.”

We agree with these observations but cannot accept that the terms “event” and “incident” are necessary to make it clear that what is covered by the clause is any occurrence(s) of a notifiable disease within the 25 miles. That is already plain from the description of the insured peril as “any occurrence of a notifiable disease within a radius of 25 miles of the premises”. We do not perceive any difference in meaning between the terms “occurrence” and “event”, and nothing significant is added by the use of the word “incident” as a compendious term instead of the phrase “occurrence discovery or accident” used, for example, in the definition of the indemnity period in RSA 3.

Prevention of access and hybrid clauses

Prevention of access and hybrid clauses specify conditions which must be met to engage coverage. Some apply only where there are “restrictions imposed” by a public authority following an occurrence of a notifiable disease. This raised the question whether:

the words “restrictions imposed” mean something which is both expressed in mandatory terms and has the force of law... only ... those which were promulgated by statutory instrument, and in particular regulation 2 of the 21 March Regulations and regulations 4 and 5 of the 26 March Regulations (see paras 266-267 of the judgment)... [as opposed to].... earlier instructions given by the UK Government which did not have the force of law do not fall within the description.

What constitutes "restrictions imposed?"

In other words did Boris Johnson's televised address in March ordering people to stay at home trigger coverage under the hybrid policies, or was coverage only triggered when those "orders" were subsequently translated into statutory instruments made under the Public Health Act 1984.

The High Court held that restrictions were only "imposed" when the statutory instruments came into effect and not when the Prime Minister made his televised address. 

The Supreme Court held: 

We agree with the court below that “restrictions imposed” by a public authority would be understood as ordinarily meaning mandatory measures “imposed” by the authority pursuant to its statutory or other legal powers. “Imposed” connotes compulsion and a public authority exercises compulsion through the use of such powers. We would not, however, accept that a restriction must always have the force of law before it can fall within this description.

An example was given of public health officers issuing an instruction to close a restaurant even though the legal order to do so might only be issued subsequently. Furthermore, the key issue is whether the public would have understood the Prime Minister's "order" to be a restriction imposed. The majority held that it would:

Whilst one would expect “restrictions imposed” generally to have the force of law or to carry the imminent threat of legal compulsion, we do not accept that the phrase is limited in its meaning to an exercise or threatened exercise of legal powers, as this case illustrates. When the Prime Minister in his statement of 20 March 2020 instructed named businesses to close “tonight”, that was a clear, mandatory instruction given on behalf of the UK Government. It was an instruction which both the named businesses and the public would reasonably understand had to be complied with without inquiring into the legal basis or anticipated legal basis for the instruction. We consider that such an instruction is capable of being a “restriction imposed”, regardless of whether it was legally capable of being enforced.

The Supreme Court did not rule on whether individual measures satisfy this test but indicated that the argument is stronger in relation to some general measures, such as the aforementioned instructions in mandatory terms from the Prime Minister.

When is there inability to use a premises?

The Hiscox wordings provide cover only where business interruption loss is caused by the policyholder’s “inability to use” the insured premises. The High Court held that this meant complete as opposed to partial inability to use premises.

The Supreme Court agreed that inability rather than hindrance of use must be established but held:

We consider that the requirement is satisfied either if the policyholder is unable to use the premises for a discrete part of its business activities or if it is unable to use a discrete part of its premises for its business activities. In both those situations there is a complete inability of use. In the first situation, there is a complete inability to carry on a discrete business activity. In the second situation, there is a complete inability to use a discrete part of the business premises.

this requirement may be satisfied where a policyholder is unable to use the premises for a discrete business activity, or is unable to use a discrete part of the premises for its business activities:

the FCA’s bookshop example would potentially be a case of inability to use the premises for the discrete business activity of selling books to walk-in customers. A department store which had to close all parts of the store except its pharmacy would potentially be a case of inability to use a discrete part of its business premises.

When is there prevention of access?

The Supreme Court considered "whether only the total (as opposed to partial) closure of premises for the purposes of the existing business could qualify as “prevention” or “denial” of access to the premises under the prevention of access clauses in the Arch wording (see judgment at para 330), Hiscox 1, 2 and 4 (para 407), MSA 1 and 2 (paras 431-432) and Zurich 1 and 2 (para 495).

The High Court held that "anything short of complete closure would not constitute “prevention of access” to the premises."

The court considered that, while it could be said that the restaurant owner policyholder and its employees were impeded or hindered in their use of the premises because they could not operate the restaurant for in-house dining, the government action did not cause prevention of access, as they were not prevented from accessing the premises for the purposes of carrying on that part of the existing business which involved providing the takeaway service. By contrast, the court accepted that if the restaurant did not previously offer a takeaway service but started one during lockdown, the position would be different. In such circumstances there would be prevention of access for the purposes of the business as it had existed when the insurance policy was issued.

The Supreme Court agreed that "prevention means stopping something from happening or making an intended act impossible and is different from mere hindrance," but that in the context of closing the dining part of a restaurant which remained open to takeway custom "access to a discrete part of the premises or access to the premises for a discrete purpose will have been completely stopped from happening." 

In this example the majority in the Supreme Court held:

there is prevention of access to (and inability to use) a discrete part of the premises, namely the dining area of the restaurant, and prevention of access to (and inability to use) the premises for the discrete business activity of providing a dining in service.

This differed from the decision of the High Court that prevention of access meant prevention of access to all parts of the business. The Supreme Court also dismissed the distinction made by the High Court between restaurants that had pre-existing takeaway facilities as not facing prevention of access and those which did not have pre-existing takeaway facilities (ie Michelin restaurants) but which established them in view of the closure of their dining facilities. This was dismissed as:

an unsatisfactory and arbitrary distinction. It is also illogical. If the premises can be put to such use, then it can be said that there is an ability to use them and that access to the premises for the purposes of carrying on the policyholder’s business is not prevented. A more realistic view is that there is prevention of access to (and inability to use) a discrete part of the premises, namely the dining area of the restaurant, and prevention of access to (and inability to use) the premises for the discrete business activity of providing a dining in service.

Interruption

The High Court held that interruption meant "business interruption generally" and included "interference or disruption, not just a complete cessation of the policyholder’s business or activities." This was challenged by Hiscox on appeal. The Supreme Court held:

The ordinary meaning of “interruption” is quite capable of encompassing interference or disruption which does not bring about a complete cessation of business or activities, and which may even be slight (although it will only be relevant if it has a material effect on the financial performance of the business). Furthermore, the possibility that interruption may be partial is inherent in the policy provisions which deal with the calculation of loss and which envisage that the business may continue operating during a period of interruption but with reduced income or increased costs of working.

Causation

As the majority of the Supreme Court interpreted the disease clauses (see above), a key question was whether business interruption losses consequent on public health measures taken in response to COVID-19 were, in law, caused by cases of the disease that occurred within the specified radius of the insured premises [161]. The High Court found that the relevant measures were taken in response to information about all the cases of COVID-19 in the country as a whole. In agreement with the High Court, the Supreme Court held that all the individual cases of COVID-19 which had occurred by the date of any Government measure were equally effective “proximate” causes of that measure (and of the public response to it). It is therefore sufficient for a policyholder to show that at the time of any relevant Government measure there was at least one case of COVID-19 within the geographical area covered by the clause [212]. In reaching this conclusion, the Supreme Court rejected the Insurers’ arguments:

(i) that one event cannot in law be a cause of another unless it can be said that the second event would not have occurred in the absence of (“but for”) the first [177 – 185]; and

(ii) that cases of disease occurring inside and outside the specified radius should be viewed in aggregate, so that the overwhelmingly dominant cause of any Government measure will inevitably have been cases of COVID-19 occurring outside the geographical area covered by the clause [198 – 200].

The Supreme Court explained why the “but for” test of causation is sometimes inadequate and that there can be situations (of which the present case is one) where a series of events all cause a result although none of them was individually either necessary or sufficient to cause the result by itself [182 – 185]. The Supreme Court rejected the “weighing” approach as unworkable and unreasonable [202 – 205]. In relation to the prevention of access and hybrid clauses, the Supreme Court held that business interruption losses are covered only if they result from all the elements of the risk covered by the clause operating in the required causal sequence. However, the fact that such losses were also caused by other (uninsured) effects of the COVID-19 pandemic does not exclude them from cover under such clauses [221 – 242].

Trends clauses

Almost all the policy wordings contain “trends clauses” which provide for business interruption losses to be calculated by adjusting the results of the business in the previous year to take account of trends or other circumstances affecting the business in order to estimate as nearly as possible what results would have been achieved if the insured peril had not occurred. The Supreme Court holds that these clauses should not be construed so as to take away cover provided by the insuring clauses [264] and that the trends and circumstances for which the clauses require adjustments to be made do not include circumstances arising out of the same underlying or originating cause as the insured peril (i.e. in the present case effects of the COVID-19 pandemic [268, 287 – 288].

The High Court, subject to qualifications, permitted adjustments to be made under the trends clauses to reflect a measurable downturn in the turnover of a business due to COVID-19 before the insured peril was triggered [289]. The Supreme Court rejected this approach. In accordance with its interpretation of the trends clauses, adjustments should only be made to reflect circumstances affecting the business which are unconnected with COVID-19 [294].

Status of Orient-Express

The Supreme Court concluded that the Orient-Express case, a case apparently supportive of the Insurer's position, was wrongly decided and should be overruled [304 – 312]. The Orient-Express case concerned a claim for business interruption loss arising from hurricane damage to a hotel in New Orleans. The policy contained a trends clause with similar wording to those in the present case. A panel of three arbitrators (who included Mr George Leggatt QC, later Lord Leggatt) and subsequently Hamblen J (on an appeal to the Commercial Court; later Lord Hamblen) accepted the insurer’s argument that the cover did not extend to business interruption losses which would have been sustained anyway, as a result of damage to the city of New Orleans even if the hotel itself had not been damaged [299 – 300]. The Insurers relied on this decision to support their arguments on causation of loss and the effect of the trends clauses in the present case, but the case did not provide support as the Orient-Express case was found to have been wrongly decided.

References in square brackets are to paragraphs in the judgment.

KEVIN HOLDER © 2021

BARRISTER

33 BEDFORD ROW

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.