15th January 2021

Supreme Court Judgment on FCA’S Business Interruption Insurance Test Case

On 15 January 2021, the Supreme Court handed down its judgment on the Financial Conduct Authority’s Test case (The Financial Conduct Authority & Ors v Arch Insurance (UK Ltd & Ors [2021] UKSC 1) which substantially allows the FCA’s appeal and dismisses the Insurers’ appeals.

Summary of issues decided by the Supreme Court:

(i)    Disease clauses – cover 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.

(ii)  Prevention of access and hybrid clauses

An instruction given by a public authority may amount to a “restriction imposed” by a public authority if it carries the imminent threat of legal compulsion or indicates that compliance is required without recourse to legal powers.
The policyholder’s “inability to use” the insured premises means complete and not merely partial inability to use the premises. But 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 (and similarly as regards “prevention of access” clauses).

(iii) Causation

Disease clauses – 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 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.
Prevention of access and hybrid clauses – 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.

(iv) Trends clauses – which provide for business interruption losses to be calculated by taking account of trends or other circumstances affecting the business – 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. the effects of the COVID-19 pandemic).

(v)  Pre-Trigger Losses – adjustments may not 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. Adjustments should only be made to reflect circumstances affecting the business which are unconnected with COVID-19.

(vi) The Orient-Express case was wrongly decided and should be overruled.