On 15 September 2020, the English High Court issued its judgment on an urgent test case about claims under business interruption (BI) insurance for losses suffered by businesses due to Covid-19. The decision amounts to a first-round victory for policyholders.
The Financial Conduct Authority, which as claimant effectively represented the interests of policyholders, brought the case before the High Court in July 2020. The litigation was triggered by many insurers issuing blanket denials of cover in response to claims from businesses under their BI policies.
Not all BI policies have the same wording and, as the case was based on the specific wording of only a selection of policies in the market, the detail will not be relevant to all BI policies. But, as the court did decide upon the policy wording that many insurers relied on to refuse to cover claims, the decision will be of interest to many policyholders.
The judgment in The Financial Conduct Authority v Arch and Others included a number of crucial findings, including on common policy wording on the radius of coverage; on the "but for" test of causation; and on "public authorities" clauses.
'No disease within 25 miles'
A common policy wording included in the policies was cover for business interruption "following or arising from" the occurrence of a Notifiable Disease "within a radius of 25 miles" of the insured premises. Insurers sought to argue that this wording is intended to cover only local outbreaks, verified by an actual diagnosis of Covid-19 within the defined radius.
The argument was rejected by the judges, Flaux LJ and Butcher J: no actual diagnosis of a Covid-19 case within the 25 mile radius was required. Furthermore, there would be cover in the event of a wider outbreak "and where, precisely because of the wider outbreak, it would be difficult or impossible to show that the local occurrence(s) made a difference to the response of the authorities and/or public".
Furthermore, the court rejected the insurers' argument that "following" imported a "but for" test. Insurers had sought to argue that, even if there had been no outbreak of Covid-19 within the defined radius, the policyholder would still have suffered business interruption as a result of a general reduction in demand and the government's social distancing measures. The High Court decided that "following" did not require proximate causation.
'But for' argument
Insurers relied heavily on the decision in Orient-Express v Assicurazioni Generali . This was a rare example of the English courts considering the causation requirements in a BI policy. In the Orient-Express case, the policyholder's appeal from an arbitration award was rejected. The tribunal had applied a "but for" test of causation, so that a policyholder could not recover under a policy where loss would have been sustained even in the absence of the insured peril – in that case, direct damage to the insured premises. So where the insured premises (a hotel) would have been closed in any event because of a citywide curfew, there could be no recovery under the BI policy.
However, the High Court in the present test case held that, if necessary, it would have found that Orient-Express was incorrectly decided. In the end, though, it was held that the test case could be distinguished on the basis that it involved a different type of insured peril; the decision in Orient-Express did not apply in the circumstances of the present test case relating to BI.
The chief criticism of Orient-Express in the test case is that it leads to the result (which it was felt could not have been intended) that "the worse the fortuity which befalls the insured and the vicinity of the insured's premises, the less the insurance responds".
'Public authorities' clause
A further issue decided in the case was the meaning of clauses which cover business interruption "due to restrictions imposed by a public authority following…an occurrence of a notifiable human disease within one mile of the business premises".
This issue was decided against policyholders with this policy wording: the High Court held that this type of clause is narrow and localised. Only restrictions imposed by statutory instruments (rather than government guidance) counted in order to trigger this clause. Furthermore, there must usually be an inability to use the premises, rather than simply a hindrance or disruption to normal use (although there was no requirement in the specific policies for the restrictions to be directed towards the particular insured business).