Testing Times: The FCA Test Case on Covid-19 Business Interruption insurance7 October 2020
"Of particular importance was the acceptance of the High Court that Covid-19 was ‘one indivisible cause’ of loss."
Insurers, businesses and their stakeholders in the UK have all been anxiously awaiting the English High Court’s judgment in the test case on business interruption insurance coverage of Covid-19 losses.¹ The case was brought by the Financial Conduct Authority (FCA) on behalf of insurance policyholders. The Court was asked to construe 21 sample policy wordings from eight different BI insurers. From those judicial interpretations policyholders could then extrapolate guidance on whether their particular policies might cover business losses arising out of the Covid-19 epidemic in England and Wales and the UK Government’s measures to contain it.
Essentially, the High Court found in favour of the FCA (and policyholders) on most of the key issues. Of particular importance was the acceptance of the Court that Covid-19 was ‘one indivisible cause’ of loss. The Court decided that the Government’s restrictions and/or the outbreak of Covid-19 in England & Wales was the cause of localised business losses, even if the national and global manifestation of the pandemic would have caused those losses in any event.
On the back of this decision, the FCA and the insurers sought, and on Friday 2 October were granted, a leapfrog application for an appeal to the Supreme Court. It is anticipated that this hearing will occur before the end of 2020². In the meantime, the FCA is seeking to agree principles for the assessment of BI claims to avoid a Supreme Court battle.
The proceedings were commenced in June 2020 and heard in July on an expedited basis under the Financial Market Test Case Scheme. This allows a party to bring proceedings in the Financial List of the High Court without a present cause of action where there is an issue of public importance which would benefit from authoritative English law guidance.
The case proceeded on the basis of agreed facts concerning the developing response by the UK Government to the Covid-19 crisis, including the Government’s first guidance on social distancing and subsequent closure of non-essential businesses and imposition of a nationwide lockdown.
BI Clause Categorisation
The High Court considered three categories of BI insurance clauses that policyholders might seek to invoke in relation to the Covid-19 epidemic and/or the Government’s response:
"Three categories of BI insurance clauses that policyholders might seek to invoke in relation to the Covid-19 were considered: disease, prevention of access and hybrid clauses."
- ‘disease clauses’: where coverage is triggered by the occurrence of a ‘notifiable’ disease within a specified radius of the insured premises;
- ‘prevention of access clauses’: which cover restriction of access to, or use of, insured premises as a result of Government actions or restrictions; and
- ‘hybrid clauses’: which provide cover where there is restriction of access to, or use of, insured premises as a result of Government actions or restrictions in response to a notifiable disease.
The Court found that, generally speaking, these policies were triggered when it could be identified that a person within the specified limitation area (e.g. within 25 miles of the insured premises) had Covid-19, and that there was an interruption or interference which caused loss.
The losses which could be recovered under a disease clause included those directly or indirectly caused by Covid-19, including losses caused by:
- Government restrictions; and
- as a result of the public following Government directives. This included non-binding guidance and was not limited to legally enforceable prohibitions.
Importantly, the losses covered extended beyond those which could be directly linked to a specific local outbreak, or which were temporally proximate to the local outbreak. The Court considered that, to construe the policies otherwise would mean that policyholders’ losses caused by Government action in response to Covid-19 would not be covered unless there had been specific and targeted restrictions applied in the relevant limitation area, and only if those limitations came into effect immediately following the occurrence of a local outbreak.
"Prevention-of-access clauses could provide cover to businesses that had to fundamentally change their business in order to mitigate their potential losses."
The upshot of the Court’s construction on these types of clauses is that these policies will usually provide cover for damage caused by business interruption or Government restrictions as a result of Covid-19 from:
(a) the date at which a local occurrence was identified; or
(b) if later, 5 March 2020 (when COVID-19 was made a notifiable disease, even if those restrictions or interferences started prior to that date).
Prevention of access clauses
The Court tended to construe prevention of access clauses more narrowly than the disease clauses.
It drew an instrumental and nuanced distinction between:
- policies which covered the ‘prevention’ of access; and
- policies covering a ‘hinderance’ of access.
Coverage triggered by ‘prevention’ of access necessitated complete occlusion. Therefore, prohibition of access to members of the public to premises, but not to members of the insured’s staff, did not suffice. Whilst the Court rejected insurers’ argument that some physical obstruction of access was required, it said that the policy would only be engaged if the business was wholly closed and unable to operate as a result of binding legal restrictions.
Importantly, however, prevention-of-access clauses could provide cover to businesses that had to fundamentally change their business in order to mitigate their potential losses. For example, a restaurant that began offering a food delivery service during the nationwide lockdown (where it had not done so prior to the lockdown) could be said to have been prevented from carrying on the business covered by their relevant insurance policy. The corollary of this was that restaurants that operated a takeaway service prior to the nationwide lockdown were only partly prevented from carrying on their business, and therefore were not covered under these prevention clauses. This aspect of the judgment has important knock-on implications not only for the insured restaurant businesses but also their landlords, particularly where rent concession arrangements have been agreed which turn on whether or not the business has the benefit of BI insurance.
For those clauses which applied to a hinderance, restriction or interruption of use, the Court accepted coverage was much broader – and covered businesses which were permitted to trade during the Government’s nationwide lockdown, but which nevertheless were adversely affected.
Additionally, some of the clauses considered required there to be a specific ‘incident’ that led to a prevention of access to insured premises. The Court found that this type of cover was directed towards specific localised incidents (such as a gas leak or bomb scare) rather than the general incidence of Covid-19.
"In this case, the insurers argued that, given the substantial impact of Covid-19 on the global economy, as well as the UK economy, much of the damage caused to any individual policyholder would have occurred anyway."
‘Hybrid’ clauses are those that offer coverage for the restriction of access to, or use of, insured premises as a result of Government actions or restrictions in response to a notifiable disease. They shared some of the wording used in the ‘disease’ and ‘prevention-of-access’ clauses. Similar issues arose, and much turned on whether the clauses covered the prevention (or in one case, inability) of access to the insured premises, or merely the hinderance or limitation of access. As with the disease clauses, the Court made clear that these clauses operated to cover losses flowing from more than just a local outbreak of Covid-19.
Application of ‘trends clauses’
Generally speaking, trends clauses operate to prevent policyholders from claiming losses which would have occurred even if the insured peril had not occurred. In this case, the insurers argued that, given the substantial impact of Covid-19 on the global economy, as well as the UK economy, much of the damage caused to any individual policyholder by any localised outbreak, or the local application of national restrictions, would have occurred anyway.
In making this argument the insurers relied on the case of Orient Express Hotels Ltd v Assicurazioni Generali SpA³, which concerned the losses a New Orleans hotel could claim following Hurricanes Katrina and Rita. In that case, which turned on the application of a trends clause, it was held that the policy only covered losses caused by direct damage and prevention-of-access to the hotel itself, and not losses which were caused by damage to New Orleans and its flow-on effects more generally.
The Court was critical of Orient Express but, in any event, distinguished the case on its facts. It clearly had little sympathy for the insurers’ arguments in relation to the effects of trends clauses for Covid-19 BI coverage. Instead, the Court found that, when the incidence of Covid-19 triggered cover, all losses flowing from the nationwide lockdown, Government restrictions and/or the public’s response could be covered (depending on precise formulation of the policy). In this way, to the extent it was possible to differentiate them, both the localised specific impacts of Covid-19 and the broader national (and international) impacts were covered. As the Court put it, ‘the proximate cause of the business interruption is the notifiable disease of which the individual outbreaks form indivisible parts, in other words the disease in the UK is one indivisible cause’.
Burden of proof
The FCA sought guidance from the Court as to what type of evidence would suffice to prove that there had been an incidence of Covid-19 within a specific geographical area, as was required for coverage to be triggered under a number of the policies.
"As such, the final outcome of the case remains to be seen. However, for BI insurance policyholders the tenor of the judgment is encouraging."
The Court was not in a position to consider specific examples or expert evidence. However, it indicated that the following specific reports of occurrences could, at least in principle, be sufficient to discharge the burden of proof on the policyholder to demonstrate a local incidence of Covid-19:
- news coverage of cases within a local nursing home;
- NHS Deaths Data;
- ONS Deaths Data;
- The Government’s reported cases; and
- distribution analysis (including an examination which factored in the likely rate of undercounting).
Supreme Court Appeal
Both the FCA⁴ and the insurer defendants⁵ made applications for leapfrog appeals to the Supreme Court. On 2 October, the High Court granted the applications. As with the High Court proceedings, it is likely that, if (as is presumed) the Supreme Court grants leave to appeal, the appeal, will be on an expedited timeline in order to minimise the delay for policyholders awaiting decisions on their coverage.
As such, the final outcome of the case remains to be seen. However, for BI insurance policyholders the tenor of the judgment is encouraging. Policyholders should seek advice in relation to their specific policy to determine the extent to which the Court’s findings are, at least for now, applicable to their policy.
The Government and stakeholders in the insured parties (such as shareholders, landlords and others) that are providing support to businesses during the crisis will be watching these developments with keen interest.
 Financial Conduct Authority v Arch Insurance (UK) Limited & Others  EWHC 2448 (Comm).
  EWHC 1186 (Comm).