In a new article, Jeremy Brier considers the recent Supreme Court Judgment in Financial Conduct Authority v Arch (UK) Insurance & Others  UKSC 1 on appeal from  EWHC 2448 (Comm).
The FCA “test case” concerned a sample of 21 insurance policies used in the market and in relation to which claims have been made by policyholders (mainly small to medium sized businesses) for Covid-19 related losses.
The policies in question are essentially property damage covers which also contain non-damage BI extensions of cover which depend on proof that there has been (for example) an outbreak of a notifiable disease within a defined area of the premises, or a prevention or restriction of access to premises following the Government’s order that certain types of business must be closed during the first lockdown.
Financial List, Commercial Court
This was the first case decided under the Financial List test case scheme and a two-member Court was appointed. Lord Justice Flaux and Mr Justice Butcher found in favour of policyholders, finding that they were covered for losses resulting from the impact of the pandemic. They analysed the policies selected to be part of the test case and gave their judgment by reference to the type of policies: namely, disease clauses; prevention of access clauses and “hybrid” clauses (which comprised both disease wording and a prevention of access aspect).
In terms of disease clauses (e.g. coverage wording such as “following any occurrence of a notifiable disease within 25 miles of the business premises”) the Court found that disease clauses did provide coverage to policyholders for business interruption caused by a notifiable disease within a specified radius. Insurers’ arguments that losses must be caused by a local outbreak (i.e. within the radius) and that Covid-19 was not covered where it was in essence a national/international cause (rather than a cause within the radius) were rejected. The FCA’s analysis that it was enough, as a matter of construction, that there had been an outbreak within the radius. The purpose of the radius limit was essentially to ensure that diseases with no local impact could not result in coverage.
In terms of prevention of access clauses, the Court held that there was a distinction to be drawn between prevention and hindrance. The essential difference being impossibility of access, as opposed to making access more difficult. Much was made of the familiar sight of the restaurant which was required to close but which continued to offer a takeaway service from its premises. Was access prevented? At first instance, insurers argued successfully that prevention of access had not occurred where there remained access for a part of the insured business (such as providing takeaways) that was a not a de minimis part of the business previously.
Trends clauses were also considered in detail, namely clauses which allow for the adjustment of losses suffered by policyholders by accounting for losses occurring from current trends or circumstances (a simple example being where the Michelin starred chef was about to leave the restaurant in any event and so a downturn was inevitable notwithstanding the covered business interruption). Insurers argued that even if there had been no outbreak within the radius, or regulations requiring closure, the businesses in question would still have suffered losses because of the general lack of consumer confidence and other lockdown measures (such as the stay at home regulations) and that the operation of the insured peril had to be at least a “but for” cause of the losses. The Court held that the insured perils were as a matter of construction “composite” in nature (meaning that they covered in principle not just a prevention of access but a prevention of access, government action/advice and the pandemic itself) and that it would be contrary to principle if losses were limited by inclusion of any part of the insured peril in the but for assessment. The reduced turnover of a business during the period of interruption was to be measured against its turnover before the pandemic.
Causation was also considered. In particular, insurers relied on the judgment in Orient-Express Hotels v Generali  EWHC 1186 where Hamblen J (as he then was), on a s.69 Arbitration Act 1996 appeal from a Tribunal chaired by George Leggatt QC (as he then was; both are now in the Supreme Court of course: see below), held that Orient-Express Hotel could only recover for business interruption losses from the hurricane which it could show would not have arisen had the damage to the hotel not occurred. That is, there was a “but for” test: had the insured peril not occurred, it would have been an undamaged hotel in a damaged city (New Orleans) and its takings would have been consequently low or non-existent. Flaux LJ and Butcher J held this case was distinguishable and/or wrongly decided.
Using the “leapfrog” procedure, expedited appeals were heard over four days in November 2020. In summary, the FCA appealed the points on which they lost (such as the meaning of “prevention of access”) and the insurers appealed on the issues on which they lost. In short, the result was that the FCA succeeded on their appeals but the insurers did not. The leading Judgment was given by Lord Hamblen and Lord Leggatt (with whom Lord Reed agreed). Lord Briggs (with whom Lord Hodge agreed) gave a separate concurring judgment.
The Supreme Court found that diseases clauses covered business interruption losses resulting from Covid-19 provided there had been at least one case in the geographical radius provided by the clause. However the Supreme Court held that the Court was wrong to find that the disease clauses covered the consequences of disease outside the radius. The outbreak was not an occurrence. Each cause sustained by an individual was a separate occurrence of a notifiable disease. However, as a matter of causation (rather than on the construction approach of the Divisional Court), this was enough for a recovery.
The starting point for the causation inquiry is to identify whether an insured and/or excluded peril had any causal involvement in the loss, then to decide whether such peril made the loss inevitable in the ordinary course of events. Every single case of Covid-19 in the UK qualified as a proximate cause of loss, in the sense that it was an equal cause of the imposition of national measures. That interpretation (they held) is rational, clear and simple to apply. The real significance here is that whilst ‘but for’ causation is usually required, here it is inadequate because it returns too many false positives and excludes cases where one event could or would be regarded as a cause of another event.
When giving coverage for notifiable disease, insurers must contemplate that disease may occur both within and outside the radius. It is unreasonable to attribute to the parties an intention that disease outside the radius should deprive the insured of coverage for an event which results in part from disease within the radius. None of the policies excludes the consequences of events outside the radius. Therefore the existence of cases outside the radius cannot be relied upon to establish that the cases within the radius were not a ‘but for’ cause of loss. The Supreme Court rejected the argument that cases outside the radius may be relied upon to negate causation if, taken together, they outweighed the effect of the cases within the radius.
Accordingly, the Supreme Court held that the requirement of causation would be satisfied by government action taken in response to cases of disease which included at least one case within the radius. The decision is thus a new example of when the Court will disapply the ordinary requirement of “but for” causation.
On prevention of access and hybrid clauses, the Supreme Court held that inability rather than hindrance of use must be established in relation to “inability to use” but held that this would be satisfied where a policyholder is unable to use the premises for a particular business activity, or able to use a discrete part of its premises. Accordingly, if a department store with an in-store pharmacy was required to close all of the store barring the pharmacy, there was an inability to use part of the premises. By a similar token, “prevention of access” was held to apply where there was a “partial prevention of access”, e.g. where the prevention was a complete prevention but it was to access part of the business. For example, a bookshop which loses its walk-in customer business but may still operate mail order.
The most significant part of the Supreme Court decision is almost certainly what it has held about causation, as per the above. That all individual cases of Covid-19 prior to 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 measure there was at least one case of Covid-19 in the geographical area of the clause. The Supreme Court rejected the argument that one event cannot be a cause of another in law unless it can be said that the second event would not have occurred but for the first. The Supreme Court elaborated on why the “but for” test is sometimes inadequate and there are cases, such as this, where a series of events all cause a result even though none of them were necessary or sufficient to cause the result itself.
Applying this causation analysis to the prevention of access clauses, the Supreme Court held that the losses were only covered if they resulted from all elements of the risk covered by the clause operating. However the fact that such losses were also caused by other uninsured effects of the wider pandemic does not preclude recovery. Again, “but for” causation was rejected.
In terms of trends clauses, the Supreme Court held that they should not be construed to take away cover provided by the insuring clauses and, in making adjustments, one does not include circumstances arising out the same underlying or originating cause as the insured peril (i.e. one does not adjust for other effects of the pandemic). The Court below was wrong to treat the composite peril as being the risk of any one or more of the elements occurring. The composite peril is a causal sequence and trends clauses should be interpreted consistently with the insuring clause, so as not to take away the coverage provided by the insuring clause. The exercise is to recognise that the aim of the trends clause 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. So Insurers may only take account of trends which are unrelated to the insured peril. An insurer was not entitled to apply a counterfactual which assumes that the premises had remained open but all other effects of the pandemic had remained the same. That approach incorrectly treats the indemnity as confined to loss which would not have occurred but for the operation of the insured peril. The insured effects of the closure and the uninsured effects of the pandemic were concurrent causes of loss, each sufficient to cause loss without the other.
Lord Leggatt and Lord Hamblen (in a particularly graceful passage) both held that the Orient-Express case was wrongly decided and should be overruled. Or, as they put it, they surrender “former views to a better considered position.” The error in that case was to overlook that the insured damage to the hotel and the wide area damage to the city both arose from same underlying fortuity – the hurricane. The correct approach would have been to exclude the hurricane from the assessment of what would have happened if the damage had not occurred.