Financial Conduct Authority v Arch Insurance (UK) Ltd
The COVID-19 pandemic has led to widespread disruption and business closures, causing loss of revenue, disruption to supply chains, and dented consumer and investor confidence. As a result, many businesses have turned to their 'Business Interruption' (BI) cover to seek reimbursement of their losses. Many insurers have responded to claims indicating that there is no, or very limited, coverage available.
As set out in our previous update here, in June 2020, the Financial Conduct Authority (FCA) brought a test case under the Financial Market Test Case Scheme. The FCA's stated intention in bringing the case was to resolve uncertainty around policy wordings, as quickly as possible, in line with its duties to take action in the public interest to advance its consumer protection and market integrity objectives. The FCA represented the interests of policyholders. Eight insurers (Arch, Argenta, Ecclesiastical, Hiscox, MS Amblin, QBE, RSA and Zurich) agreed to participate in the action, with the Court considering a number of representative policy wordings to provide guidance on the proper interpretation of relevant policy wordings. Two action groups were given permission to 'intervene' on behalf of policyholders with claims against Hiscox.
Judgment was handed down by a 'Divisional Court' of Lord Justice Flaux and Mr Justice Butcher on 15 September 2020. The judgment is binding on the parties to the test case (and of guidance in relation to other policies with similar wordings).
Key Legal Points
BI insurance cover is often found in property insurance policies, or sometimes in commercial combined insurance policies. It typically provides cover for loss of profits and costs that an insured suffers following insured damage to a physical property arising out of an insured risk – e.g. a fire, or flood. In the case of the COVID-19 pandemic, there is no such damage to physical property. Instead, losses suffered might be covered by a "non-damage" business interruption wording, which is often found in 'extensions' to cover (and would therefore usually be subject to a lower overall limit of liability).
While the Court reached different conclusions in relation to each wording, the judgment considered coverage in the context of three broad types of 'non-damage' extensions: disease wordings; prevention of access / public authority wordings; and 'hybrid' wordings:
- Disease wordings (RSA, MS Amlin and QBE) - Typically provide cover for interruption or interference in consequence of an occurrence of a notifiable disease within a radius of business premises. Insurers argued that there was only cover for a local outbreak of COVID-19, and that the interruption or interference had to arise from the local incidence of the disease. The Court disagreed and considered that if that was the case, "the parties would have been agreeing to the production of highly anomalous results". It accepted the FCA's argument that the cause of the interruption or interference was COVID-19, of which the local outbreaks were an indivisible part. In particular, the wordings did not require that COVID-19 only occurred within the specified radius, just that it did occur within that radius. The Court considered that this construction was in keeping with the nature of insurance in respect of notifiable disease. Two wordings from QBE policies were treated differently, as they covered loss resulting from interference "in consequence of" "events" within a specified radius. This has a specific meaning in English insurance law, which had the effect of narrowing the cover under these wordings to cases where a localised incident of the disease was the cause of the interruption or interference.
- Prevention of access/public authority wordings (Arch, Ecclesiastical, Hiscox, MS Amlin, RSA and Zurich) - Typically provide cover for restrictions of use of the business premises as a consequence of action by a relevant authority. Unlike the Disease wordings, these wordings were found to give narrower coverage in response to localised events, rather than in response to the wider pandemic. Whether cover is available is therefore likely to be closely tied to the wording and relevant facts. In particular, the Court distinguished between coverage for "prevention" of access and "hindrance" of use, requiring a detailed consideration of a particular policyholder's circumstances or business (e.g. because different "categories" of business were subject to different restrictions in the legislation related to coronavirus).
- Hybrid wordings (Hiscox, RSA) - Typically a mixture of disease and prevention of access/public authority wording, these provide cover where restrictions are imposed on the business premises in relation to a notifiable disease. The judgment on these wordings reflects that they combine the facets of the other two categories: the construction of the 'disease' element was broader (meaning that "disease" coverage would not be limited to local outbreaks alone); but the construction of restriction-related wording was more narrow (for example, "restrictions imposed" required something mandatory, like the mandatory requirements of government regulations). It is worth noting that the case raised an evidential issue: whether the insured can discharge the burden of proving that the disease occurred or manifested in a certain area. The Court did not make any findings of fact on this point; however, it is potentially helpful for policyholders that insurers have conceded (in principle) that certain categories of evidence can demonstrate the presence of the disease in a relevant area.
- Trends Clauses - Trends clauses allow for an adjusted assessment of business interruption losses taking account of overarching trends in the relevant business. They do this by establishing a relevant counterfactual scenario, which would put the insured in the position it would have been in had the insured peril not taken place, and considering whether, in that counterfactual scenario, the loss would have occurred anyway. If the loss would not have arisen, the operation of such clauses mean that the loss is not covered – as it cannot be said to have arisen from the insured peril. In the test case, insurers argued that the insured peril in this circumstance was narrow – for instance, in applying trends clauses, the counterfactual that would apply would involve removing the local occurrence of the disease, but not the wider pandemic or government actions. In making this argument insurers relied on the ruling in Orient-Express Hotels Ltd v Assicurazioni Generali SpA. This was an arbitration award which was upheld in the Commercial Court. The case concerned a hotel which had been damaged by Hurricane Katrina. In it, it was found that the 'counterfactual' for the purpose of the trends clause was removing the damage to the hotel itself, not the wider effects of the Hurricane on New Orleans. As such, the hotel's recovery of its business interruption losses was limited. The judgment in the test case states that the Orient-Express case is "clearly distinguishable from the present case". It found that the insured peril was, for each of the wordings, a composite one. For instance, in relation to the disease wordings, it was the effects of COVID-19 both inside and outside the specified radius (i.e. the pandemic) that should be removed from the counterfactual. The test case judgment goes further still: despite distinguishing the test case from Orient-Express, it also notes that if the decision in Orient-Express had been relevant, "we would have reached the conclusion that it was wrongly decided and declined to follow it".
The judgment has been welcomed by policyholders. However, it is nuanced, and fact-specific. This means that its application to any individual policyholder and policy is extremely fact-sensitive. It is therefore far from being a 'silver bullet' in disputes concerning BI policies between insurers and policyholders. Indeed, Hiscox announced that, following the judgment, it reduced its estimate of additional business claims arising out of such policies by £150 million.
Further, the practical impact of the judgment will depend on the outcome of any appeal. In a hearing on 2 October 2020, the High Court granted 'leapfrog' certificates permitting certain of the parties (FCA, Arch, Argenta, Hiscox, MS Amblin, QBE, RSA and Hiscox Action Group) to apply to the Supreme Court for leave to appeal. The Supreme Court has now agreed to hear the appeal, and it has been scheduled for a four day hearing from 16 November 2020. In particular, the Supreme Court is set to consider whether the first instance judgment was correct in its analysis of the Orient-Express case.
It is clear that regardless of the next steps in this action, there is no 'one-size-fits-all' solution in relation to BI claims arising from the coronavirus pandemic. However, the ongoing test case does provide some clarity as to certain issues that the parties should have regard to when establishing whether there is coverage. In the meantime, policyholders should ensure that they have taken steps to preserve their position and should look to progress their claims, with a view to the issues highlighted in this judgment.