The Financial Conduct Authority v. Arch Insurance Ltd., and Others 2021 UKSC 1

The Supreme Court has made important decisions about the use of plain language in insurance policies and how they should be interpreted, particularly where there are concurrent, but proximate causes of loss.  This was a decision under the Financial Markets Test Case Scheme probably affecting the interpretation of 60 companies’ policies and over 3700,000 SMEs who had taken out Business Interruption Loss Insurance Cover.

The earlier decision of Orient Express Hotels v. Generali Global Risk (2010) EWHC 1186 (Com)  about concurrent events was overruled, and that each and every outbreak of Covid 19 was a concurrent event and a concurrent cause as a separate insured peril of the outbreak of disease.

When interpreting insurance policies one should use the language used by an SME businessman, using business commons sense, and not an erudite insurance lawyer. This decision used the Final Court of Appeal decision in Jumbo King (1999) @ HKCFAR 279 @ page 279 @296 Paras D-G

This is good news for policyholders, as they are to be fully indemnified in their claims for losses suffered as result of successive outbreaks and consequent closures of premises, owing to the Covid 19, pandemic, and brings a sense of fairness to existing insurance law following the older cases of Miss Jay Jay (1987) 1 Lloyds Rep 3 and Silversea Cruises (2004) L LR 217

And the “but for test” was not appropriate for use in these cases.

Their Lordships had to consider the interpretation of a number of clauses that will be of interest to practitioners when giving guidance to their clients, namely:-

  1. What was the nature of the “triggering event”, i.e. was an outbreak of Covid 19 a disease within the standard clauses:   Paras 48-95
  2. What was meant by closure or “prevention of access clauses”  Paras 96-159
  3. In cases where the triggering clause required both disease and prevention of access elements, giving rise to an insured loss – described as Hybrid Clauses”  Paras 96-159
  4. What should the causal link be between the losses and the occurrence of the notifiable disease or other insured peril? Paras 160-250
  5. When estimating business losses, should insurers take into account the continuing decline in turnover due to the pandemic itself.   Their Lordships said these “Tends Clauses” should not take into account the effects of the pandemic itself in the subsequent periods when comparing year on year in estimating the decline in turnover.   Paras 251-288
  6. How should the pre-triggering event losses be taken into account, before the cover was triggered, or post-period losses owing to a concurrent cause, and the status of the Orient-Express Hotels Case ( supra) .  Para 297-313

Their Lordships took as a specimen, the Royal Sun Alliance Policy; - similar wording is in use in Hong Kong; -

  1. Disease Clauses; When dealing with the occurrence of  a notifiable disease, not within the insured’s area or within a specified distance from the insured’s premises, to say it was not actually “notifiable” at the time losses were incurred because of the pandemic generally, was to go against the spirit of the policies;  Per Lord Briggs Paras 315/6
  2. To interpret “Trends Clauses” by reference to Covid being a condition of trading in 2020 was not appropriate, as otherwise, the cover would be illusory.
  3. Many policies were written with a requirement that the disease occurs within say a 25-mile radius or less, but in the context of a national or territorial pandemic, this distance was not relevant to places where there were no cases within the defined limit(s).  For otherwise again the cover would be illusory.  The court below decided there had to be a case within that radius, to be a triggering event.   This view was overturned.  See the remarks of Lord Briggs Para 321. Also Paras 161-212;
  4. The dominant cause had to be the government response to cases occurring outside the area.  See Paras 198-200.  The “but for test” was an inadequate tool where a series of events all cause the result, and their Lordships rejected an approach that involved weighing the impact of the events, as unworkable and indeed unreasonable.  Paras 202-205.
  5. Thus each and every Covid 19 Case/Outbreak was a concurrent event and concurrent cause, as the occurrences caused a national/territory reaction leading to consequential business losses, save in cases where there an exclusion explicitly stating that concurrent causes from being considered.  Lord Briggs  Para 319.
  6. Often in the policies there are clauses that require “restrictions imposed by a public authority “.  What are these?  Many of the Covid 19  initial restrictions placed on the operation of businesses did not have the force of law.  Did this prevent the insured from making claims?  Lords Hamblen & Leggatt at para 106-124 decided that these should cover restrictions announced as a matter of emergency.  Thus a restaurant owner who closed after such an announcement, would reasonably close for public relations purposes, rather than wait for the legal promulgation of the regulations.
  7. What was the level of causation required?  Often policies state that there should be proximal causation, by the peril insured against.   Logically their Lordships decided that the causation should follow the wording in Section 55 (1) of the Marine Insurance Action, namely if the losses were either directly or indirectly caused, this would be sufficient to establish causation.   See Para 162
  8. The next question of difficulty for insured, when dealing with the triggering clause for closure of premises, what does this mean?

What amounts to an inability to use premises?   Paras 130-133 Lords Hamblen &  Leggatt decided that all but a discrete loss of use of the premises would allow an insured to make a claim.  Thus if you have a bookshop with inside walkways which provide 80 % of turnover, and telephone and internet orders providing 20 % of the turnover.  If the shop is forced to close the inside, then such closure would amount to “inability to use the premises”. 

  1. For restaurants, they produced a very useful guide.  If a restaurant could not use the inside of the premises to serve meals but had a takeaway service in similar proportions to the bookshop, this would amount to an inability to use the premises.  If there was no takeaway before and they convert to a takeaway only, then this would not be taken into account, as there was a total inability to use the premises on its former basis.
  2. Pre Trigger Events;  their Lordships took an overall view and stated that adjustments could only be made to reflect circumstances not connected with Covid 19 Para 289-294. So the lower court’s findings that adjustments could be so made to reflect a measurable downturn in business due to Covid 19 was wrong.
  3. The Orient Express Hotel Case  ( supra)  2010 EWHC 1186 (Com)

This case effectively reduced the amount of damages which hoteliers in New Orleans could claim under their business interruption policies, as there were concurrent causes, which occasioned losses to hoteliers.  There were 2 hurricanes Katrina and Rita, and also thereafter New Orleans became flooded for some time, and so visitors did not want to go to New Orleans during this time.  The insurers argued that the insured perils were the hurricanes,  not the consequent flooding and the court including the then Mr. Justice Hamblen agreed with the insurers.  He reversed his view, displaying suitable judicial dexterity, as did the majority in the Supreme Court. So no adjustments need to be made reflecting circumstances connected with Covid 19  See Paras 289-294  This should reduce the work the loss adjusters have to do, and result in an increase in claimable losses which the insured can make under the policy. The flooding was the obvious consequential damage from the 2 hurricanes.

CONCLUSION AND TAKE-AWAY POINTS

This case makes the calculations of the losses arising from Covid 19 much simpler. It is a sensible policy decision covering many insurance companies’ policies with standard wording or similar wording.  Further, it ensures the average SME policyholder gets the cover for Covid 19 Losses he was expecting, and more in the sense that pre-triggering event losses due to Covid 19 are covered.  Successive events are dealt with appropriately, and a generous interpretation is given where 2 clauses provide cover. 

Further insurance policy wordings should be given meanings that the average manager or director of an SME can understand rather than an abstruse wording a clever insurance lawyer puts forward.

During the course of the judgments of their Lordships further limit the usefulness of the “but for test” as trigger or description of causation in damages claims.

Jurisdictions

Barrister, Wyndham Chambers