Insurance Claims Out of Covid-19. Supreme Court Opens The Door.

The Financial Conduct Authority (Appellant) v Arch Insurance (UK) Ltd and others; appeals to provide clarification over losses resulting from the COVID-19 pandemic.

Presided over by justices: Lord Reed (President), Lord Hodge (Deputy President), Lord Briggs, Lord Hamblen, Lord Leggatt. Judgment 15 January 2020.

Background to appeal:

The Financial Conduct Authority, (FCA), brought proceedings to court under the Financial Markets Test Case Scheme following an agreement made with eight insurance companies. The agreement set out to resolve issues of general importance on which immediately relevant English law was needed to aid guidance. The FCA proceeded to represent two policyholders with the main aim to use appeals to clarify whether a variety of insurance policy wordings cover or do not cover business interruption losses resulting from the COVID-19 pandemic and public health measures taken by UK authorities.

In response the court considered 21 sample insurance policy wordings and accepted most of FCA’S arguments about the effect of such wordings. However, not all of FCA’s appeals were accepted leading to six insurance companies appealing against the decision of the court on such matters and also responded to FCA’s appeal. Such companies included: (UK) Ltd (“Arch”), Argenta Syndicate Management Ltd (“Argenta”), Hiscox Insurance Company Ltd (“Hiscox”), MS Amlin Underwriting Ltd (“MS Amlin”), QBE UK Limited (“QBE”) and Royal & Sun Alliance Insurance Plc (“RSA”). The importance of the issues raised has led the appeals to proceed directly to the Supreme Court; bypassing the Court of Appeal.

The Supreme Court addressed the issues of appeals as follows:

  1. The interpretation of “disease” clauses (which cover business interruption losses resulting from any occurrence of a notifiable disease within a specified distance of insured premises);

Ruling – Lord Hamblen and Lord Leggett accepted the insurers arguments that each case of illness sustained by a person as a result of COVID-19 is a separate “occurrence” and (ii) the clause only covers business interruption losses resulting from cases of disease which occur within the radius and that other disease clause wording should be interpreted in the same way.

  1. The interpretation of “prevention of access” clauses (which cover business interruption losses resulting from public authority intervention preventing access to, or the use of, business premises) and “hybrid clauses” (which contain both disease and prevention of access elements) ;

Ruling: The Supreme Court rejected the court’s interpretation as to narrow and held that an instruction given by a public authority may amount to a restriction imposed if it carries the imminent threat of legal compulsion or is in mandatory and clear terms and indicates that compliance is required without recourse to legal powers. In relation to the Hiscox wording, which provided cover where business interruption loss is caused by the policy holder’s “inability to use” the insured premises, the Supreme Court agreed that inability rather than hindrance of use must be established but held that this requirement may be satisfied where a policyholder is unable to use the premised for a discrete business activity or is unable to use a discrete part of it’s premises for it’s business activities. The Supreme Court interpreters wording requiring “prevention of access” to the premises in a similar manner.

  1. The question of what causal link must be shown between business interruption losses and the occurrence of a notifiable disease (or other insured peril specified in the relevant policy wording);

Ruling: It is sufficient for a policyholder to show that at the time of any Government measure there was at least one case of COVID-19 within the geographical area covered by the clause.

  1. The effect of “trends” clauses (which prescribe a standard method of quantifying business interruption losses by comparing the performance of a business to an earlier period of trading)

Ruling: Held that these clauses should not be construed so as to take away cover provided by the insuring clauses and that 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.

  1. The significance in quantifying business interruption losses of effects of the pandemic on the business which occurred before the cover was triggered (“Pre-Trigger Losses”) .

Ruling: The Supreme Court rejected the court’s approach. In accordance with the interpretation of the trends clauses, adjustments should only be made to reflect circumstances affecting the business which are unconnected with COVID- 19.


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