The Supreme Court has handed down judgment in FCA v Arch Insurance (UK) Ltd and others  UKSC 1, more commonly known as the ‘FCA Test Case’. The FCA Test Case was brought by the Financial Conduct Authority on behalf of policyholders under the Financial Markets Test Case Scheme in order to determine whether certain non-damage clauses commonly used in business interruption property insurance policies would cover losses caused by the cessation of business due to the COVID-19 pandemic. The FCA Test case was brought with the agreement of eight insurance companies to resolve legal issues of general importance to the insurance market.
The Test Case has attracted significant media attention and the judgment was much anticipated. The decision will have an impact on future insurance claims and is not limited to those resulting from the pandemic.
On January 15, 2021, the Supreme Court handed down its judgment on appeal which was ‘leapfrogged’ from the decision of the High Court (FCA v Arch Insurance (UK) Ltd and others  EWHC 244). Six of the eight insurance companies appealed the first instance decision, as did the FCA in respect of those issues on which it had not been successful.
There were six issues that the Supreme Court considered:
- The interpretation of “disease clauses”, being clauses which relate to business interruption losses on the occurrence of a notifiable disease within a specified distance of the insured premises.
- The interpretation of “prevention of access clauses” and “hybrid clauses”. Prevention of access clauses typically concern those situations where business interruption occurs because the insured is unable to access their business premises due to restrictions imposed by a public authority. Hybrid clauses contain both disease and prevention of access elements.
- The nature and extent of any causal link that must be shown between the business interruption and the relevant event (in this case, the occurence of the COVID-19 pandemic and public health measures put in place to mitigate the impact of the disease).
- The effect of “trends clauses” which are used to determine the effect of business interruption on the business by considering previous or regular trading patterns.
- The significance of quantifying losses on the basis of trading patterns before the insured event (“pre-trigger losses”).
- The status of the decision in Orient-Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm) which concerns causation and the interpretation of trends clauses.
Lords Hamblen and Leggatt gave the main judgment, with which Lord Reed agreed. Lord Briggs gave a separate but concurring judgment, with which Lord Hodge agreed. The court found as follows:
- Disease clauses. Lords Hamblen and Leggatt did not agree with the first instance decision that disease clauses cover business interruption losses resulting from COVID-19 wherever there has been an occurrence within the relevant geographical radius. Instead, the Supreme Court found that each illness sustained is a separate occurrence and that disease clauses only cover cases within the relevant radius. Lords Briggs and Hodge would have upheld the wider interpretation at first instance.
- Prevention of access/hybrid clauses. The court at first instance held that prevention of access clauses can only be satisfied by a measure expressed in mandatory terms which has force of law. The Supreme Court rejected this view as too narrow deciding that an instruction by a public authority that restricts access to premises will 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 power. Where a policy covers the “inability to use” premises, this cannot cover mere hindrance. Nevertheless, this term will cover those situation where there is an inability to access a discrete part of the premises and will cover a discrete activity that cannot be undertaken.
- Causation. The Supreme Court held that all individual cases of COVID-19 that had occurred by the date of UK Government measures put into place were equally effective proximate causes of loss. Accordingly, policyholders need only establish that there was at least one case of COVID-19 within the relevant geographical area set out in the policy. The Supreme Court rejected insurers’ argument that one event cannot in law be a cause of another unless it can be said that the second event would not have occurred in the absence of (“but for”) the first. The insurers essentially arguing that it was necessary for the individual occurrence of COVID-19 within the relevant area be the effective cause of loss, rather than the wider Government measures. The Supreme Court instead held that the “but for” test was not an essential test of causation and can sometimes be inadequate in situations (such as those in this case) where a series of events all cause a result.
- Trends clauses and pre-trigger losses. The Supreme Court held that these clauses should not be construed with the effect that they take away cover provided by the insuring clauses. The trends for which clauses require adjustment do not include circumstances arising out of the same underlying or originating cause as the insured peril (in other words you cannot apply the underlying trend of the COVID-19 pandemic to reduce coverage for claims resulting from that same event). Adjustments can, however, be made to reflect circumstances unconnected to the pandemic.
- Orient-Express. As a result of the decision in respect of trends clauses and causation, the Supreme Court has decided that Orient-Express Hotels Ltd v Assicurazioni Generali SpA  EWHC 1186 (Comm) was wrongly decided.
Impact of the decision
The FCA estimates that the decision will affect around 370,000 policyholders who will be able to recover losses relating to business interruption due to COVID-19. But the implications of the decision go beyond the pandemic and will impact claims that have nothing to do with the events of the past year.