The appeal against the High Court decision in Financial Conduct Authority v Arch Insurance (UK) Ltd and others  EWHC 2448 (Comm) was heard by the Supreme Court last week from 16th November 2020 before Lords Reed, Hodge, Briggs, Hamblen and Leggat, and lasted four days.
On 15th September 2020, judgment in the landmark test case was handed down by the High Court consisting of two specialist judges, Lord Justice Flaux and Mr Justice Butcher. The test case required the Court to consider the correct interpretation of 21 sample business clauses underwritten by eight defendant insurers. The clauses are pertinent to business interruption claims arising out of the COVID-19 pandemic and the consequential government-mandated business closures. The FCA represented the interests of policyholders, who were mainly small to medium sized businesses.
In most instances, the Court favoured the FCA’s broader interpretation of the relevant policy wordings, which was generally favourable to small businesses. However, the Court did not find that the defendant insurers were liable across all 21 sample business clauses selected for the purposes of the test case. Ultimately, each policy will need to be considered on its own merits and against the detailed judgment provided by the High Court, which runs to over 150 pages.
The High Court judgment can be found here.
A more detailed insight into that judgment can be found here.
What is the Supreme Court being asked to determine?
On 2nd October 2020, the High Court granted “leapfrog” certificates for an appeal directly to the Supreme Court. The Appellant Insurers and the Hiscox Interveners appeal the decision on a number of points. Broadly speaking, the Supreme Court is asked to determine the following:
1. Certain matters of construction relating to:
a. “Disease Clauses”
The Disease Clauses are those which can be triggered by the occurrence of COVID-19 within a specified distance of the insured’s premises. At first instance, the defendant insurers raised a causation argument, that being, that the policy wordings required business interruption to be caused by the occurrence of a disease within, for example, 25 miles, rather than the wider effects of the pandemic. The High Court rejected that argument, holding that the policies applied a less rigid causation test, which could be fulfilled where there is a national lockdown, as was the case in March 2020.
b. “Prevention of Access Clauses”
These policy wordings are triggered by government or local authority intervention preventing access to, or hindering the use of, premises as a result of COVID-19. The phrase “prevention of access” was held to encompass closure as a result of government advice. The High Court held that complete closure was required, but this could extend to a fundamental change in the nature of the business using the premises, for example, a theatre providing a remote streaming service instead of a live performance.
The term “hindrance” in the policy wording could be triggered where the insured’s business closed in response to government advice (as opposed to instruction), for example, following the non-legally binding guidance issued on 16th March 2020.
c. “Hybrid Clauses”
Hybrid Clauses are those which contain wording from both (a) Disease Clauses and (b) Prevention of Access Clauses. They refer both to restrictions imposed on the premises and to the manifestation of the notifiable disease itself. The judgment analysed parts of the Hybrid Clauses in line with the findings considered above. For example, as with Disease Clauses, the High Court rejected that an “occurrence” of COVID-19 had to be local to the insured business to trigger the policy wording.
2. Whether the High Court was correct:
a. To apply certain counterfactual scenarios in relation to the operation of the clauses in relevant policies which provided for loss adjustments (the “Trends Clauses”)
Most of the insurance policies considered contained Trends Clauses. These provided for adjustments necessary to allow for the trends of a business; its calculation of profit, turnover, revenue and so on. The defendant insurers argued that losses would have to be adjusted according to the effects of the pandemic, for example adjustments to profit figures, and such adjustments would coincide with the losses caused by the insured event. The High Court held that, in relation to Trends Clauses, the COVID-19 pandemic and the government and public response were a single cause of the covered loss.
b. In its analysis of Orient-Express Hotels Ltd v Assicurazioni Generali S.p.A.  EWHC 1186 (Comm)
Of note was the defendant insurers’ reliance at first instance on the case of Orient-Express. It was raised in support of the causation argument: that insurers should only be liable for losses directly caused by the insured event and not by the wider effects of the pandemic and subsequent lockdown. In short, absent a local outbreak of COVID-19, the policyholders would still have suffered loss as a result of the wider effects of the pandemic. The argument follows, even if cover was triggered under various clauses, the insurers could rely on the relevant Trends Clauses allowed for adjustments to, for example, profit figures.
The High Court held that Orient-Express was clearly distinguishable from the test case, noting “nothing in the judge’s analysis [in Orient-Express] has any impact on the correct construction of the wordings we have been considering” [§529]. If, in the alternative, the reasoning in Orient-Express did apply to the policy wordings under consideration, the High Court has held that it was wrongly decided.
Effect of the test case
Unless successfully appealed, the High Court’s judgment is binding on the insurers that are party to the case in respect of the interpretation of the sample business interpretation policy wordings considered by the Court. The FCA have estimated that 700 types of policies affecting around 370,000 policyholders could be affected by the outcome of this case.
Lord Reed recognised the importance of an early judgment for the businesses affected. It is thought that judgment will be handed down as quickly as possible, but it is not yet clear whether that will be before Christmas or early in the New Year.