UK Supreme Court judgment in FCA business interruption test case

This article is a follow-up to our previous discussion on the case.

On 15 January 2021, the UK Supreme Court handed down its much-anticipated, final judgment in the COVID-19 Business Interruption insurance test case of The Financial Conduct Authority v Arch and Others.

The Supreme Court unanimously dismissed the Insurer’s appeals, with the lead judgment given by Lord Hamblen and Lord Leggatt. After seven months of debate, this decision brings not only definitive guidance and clarity, but also positive news to insurance policyholders who have suffered huge financial loss due to the COVID-19 crisis.

The judgment is complex, running to 112 pages and dealing with many technical legal issues. Some of the main issues are briefly noted below.

A brief summary of the judgment
  • The Supreme Court deviated from the findings of the High Court in respect of identifying the trigger in disease clauses. The Supreme Court found that each case of COVID-19 was a separate occurrence of the disease, and, therefore, such individual occurrence could, as a matter of law, satisfy the test of causation. Accordingly, this concluded that there were no difference between policies which referred to an ‘occurrence’ of a disease, and those which referred to an ‘incident’ or ‘event’.
  • It confirmed that the definition of ‘restrictions imposed’ should be defined widely, and triggered more readily, by removing the requirement that such measures have the force of law.
  • It concluded that for an “inability to use” of use clause of a policy to have effect, there must be a real inability to use a premises rather than simply an impairment or hindrance in use. In highlighting this, the Supreme Court asserted that it would be unlikely that businesses which were not ordered to close would be able to rely on such clauses.
  • Similarly, it found that that a business could rely upon a “prevention of access” clause if it had been unable to use, or was prevented from accessing part of a premises. For example, restaurants that were prevented from operating a dine-in service, and therefore forced to establish a takeaway business, could rely on this clause as there was a prevention of access/inability to use the dining area of the restaurant.
  • The Supreme Court gave a detailed analysis into causation, trend clauses and pre-trigger losses. More specifically:
    • whilst the ‘but for’ test was almost always the correct test for causation, it is neither always necessary nor always sufficient. In this case, it was not necessary;
    • trends clauses should not be taken into account to reduce the level of cover on the basis that the business would have suffered a reduction in turnover due to COVID-19 anyway. The court’s reasoning was that these were losses which were “inextricably linked” to the insured peril; and
    • the Supreme Court disagreed with the High Court’s determination that insurers could account for a downturn on trade due to the effects of COVID-19 prior to the cover being triggered. The court held that insurers could not reduce the amount of a claim due to a downturn in business caused by COVID-19 prior to the insurance policy actually triggering.
  • The Supreme Court’s final notable conclusion was that the landmark Orient Express judgment, involving business insurance claims relating to hurricanes Katrina and Rita, was wrongly decided and should be overruled.
What does this mean for policyholders?

Unfortunately for insurance companies, this judgment has strengthened the position of policyholders significantly beyond that which was already established in the High Court decision. However, it is always worth bearing in mind that insurance cover will always depend on the specific wording of the policy in question.

This is a landmark victory for a small group of businesses, and will offer a lifeline to thousands of bars, restaurants, beauticians, hairdressers and other small businesses whose finances have suffered exponentially due to the COVID-19 pandemic.

This article was co-written by Sarah Milne, Trainee Solicitor.

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