Financial Conduct Authority v Arch Insurance (UK) Ltd & others

The Financial Conduct Authority v Arch Insurance (UK) Ltd & others [2021] UKSC 1 is a United Kingdom Supreme Court case determining whether commercial insurance policies for business interruption cover claims due to the COVID-19 pandemic and consequent lockdowns.[1][2][3] The case has implications on disputed business interruption claims worth at least £1.2 billion and affecting 370,000 businesses, primarily in the hospitality and entertainment sectors.[4][5] On 15 January 2021, the Supreme Court found in favour of the claimants.[3][6]

Financial Conduct Authority v Arch Insurance (UK) Ltd & others
CourtSupreme Court of the United Kingdom
Decided15 January 2021
Citation(s)[2021] UKSC 1
Case history
Prior action(s)[2020] EWHC 2448 (Comm)
Court membership
Judge(s) sittingRobert Reed, Patrick Hodge, Michael Briggs, Nicholas Hamblen, George Leggatt

Background

To prevent the spread of COVID-19, the UK government locked down the country in March 2020, causing businesses to temporarily close, particularly in the hospitality and entertainment sectors.[7][8] This lockdown resulted in heavy financial losses to businesses. Thousands of businesses submitted claims under insurance policies that covered interruption of business, but insurers denied paying out, saying their policies did not cover the pandemic.[8]

Around 400 companies had submitted complaints to the Financial Ombudsman, claiming that they had been wrongfully denied payouts.[9] Figures from the Association of British Insurers during the first lockdown in March 2020 estimated that the total cost of business interruption claims to be £900 million.[3] Insurance cover varies between providers, with different policy wordings; some insurers stated that they don't cover diseases not explicitly named in the policy, other insurers stated that only local outbreaks were covered.[10]

A test case was brought by the Financial Conduct Authority with the support of eight insurance companies, to test policy wordings in court and to determine what wordings could constitute a valid claim.[6][11] The case was the first time the Financial Markets Test Case Scheme has been used,[12] which allows bringing a test case to provide legal clarity on issues of general importance.[13]

High Court

The case was initially heard at the Commercial division of the High Court of Justice.[1][9] The trial took place over 8 days, between 20 and 30 July 2020 by a court of two judges.[14] The 162-page ruling was given on 15 September 2020.[14] Analysing 21 different types of policy wording, the High Court found substantially in favour of the FCA.[15][12] The ruling did not find the insurers were automatically liable for all the tested policy wording claims. Instead, the regulator stated that each policy would have to be tested against the judgement to determine coverage.[9]

In response to the judgement, the FCA said the ruling had "substantially found in favour of the arguments we presented on the majority of the key issues".[15] The Association of British Insurers stated in response that business interruption policies "are not generally designed, priced or sold to cover unspecified global pandemics".[16]

Case

The High Court's decision was appealed directly to the Supreme Court, bypassing the Court of Appeal in a rare process known as a leapfrog appeal.[2][17][18] The Supreme Court gave permission to an appeal on 2 November 2020.[14]

Arguments

The Supreme Court heard four days of arguments, from 16 to 19 November 2020,[6][19] considering 13 of the 21 types of policy wording considered by the High Court.[16] The parties sought to clarify the interpretation of clauses which cover for business losses in cases of: a "notifiable disease" at or near the business premises; prevention of access to business premises due to public authority intervention; an estimation of business performance had the disruptive event not occurred.[20]

On the disease clauses, the court held that while there was a variation across policies in the wording of these clauses, none of these differences materially altered their interpretation.[21] Insurers argued that business interruption cover only covered local outbreaks of COVID-19. The High Court held that whether the outbreaks were local was relevant because business disruption had been caused locally, as a result of the broader pandemic.[15] The Supreme Court found that the clause covers only occurrences of the effects of the disease, inside the specified geographical area.[22]

Insurers argued that their business interruption policies did not cover unprecedented events or restrictions, such as the March lockdown in the United Kingdom,[6][23] adding that payouts should be denied in line with strict interpretations of the policy wording.[3] A lawyer for MS Amlin told the court only business loss claims as a result of COVID infections within a local, 25-mile radius of the insured property were covered, specifically excluding claims as a result of a nationwide lockdown.[11]

Decision

The Supreme Court unanimously found in favour of the claimants on 15 January 2021.[3][6] Nicholas Hamblen, handing down the decision, said "the FCA's appeal is substantially allowed and the insurers' appeals are dismissed."[3] Michael Briggs, another Supreme Court Justice, said that the insurers' claims seemed, to him, to be "clearly contrary to the spirit and intent of the relevant provisions of the policies in issue", adding "it is clear from the use of the definition of a 'notifiable disease' in most of the relevant clauses[] that Covid-19 [when it appeared] fell squarely within the types of disease for which all the relevant disease and hybrid clauses provided cover."[16][23]

Although only eight insurers were named parties in the case – including Hiscox, MS Amlin, QBE, Arch, Zurich, and Royal & Sun Alliance – the ruling provides guidance for as many as 700 policies from 60 insurers selling similar products, affecting up to 370,000 businesses.[3][6] Labelled a "complex ruling", the decision is expected to guide decisions by the Financial Conduct Authority, the Financial Ombudsman, and the insurance sector, on similar insurance claims involving disease clauses, business access to properties, and lost earnings.[6][24]

Reception

Since the issue was originally raised, insurance policies have been amended to explicitly state whether cover is provided for lockdown measures.[6]

In reaction to the Supreme Court's ruling, Huw Evans, director general of the Association of British Insurers, stated that "the insurance industry expects to pay out over £1.8bn in COVID-19 related claims".[23] Hiscox stated that only a third of its policies would have to pay out, at an extra cost of $48 million (equivalent to £35 million) to the company.[3][16][5] The law firm Reed Smith declared the judgement "a catastrophic outcome for insurers".[16]

References
  1. Peachey, Kevin (15 January 2021). "Small businesses await Covid insurance case ruling". BBC News.
  2. Mackie, Rachel (15 January 2021). "Supreme court to rule on £1.2bn battle over coronavirus insurance claims". The Scotsman.
  3. Vincent, Matthew; Croft, Jane (15 January 2021). "UK businesses win right to insurance payouts for Covid losses". The Financial Times.
  4. Thomas, Daniel (20 July 2020). "Coronavirus: 'We've spent £10,000 on invalid insurance'". BBC News.
  5. Ridley, Kirstin; Cohn, Carolyn (15 January 2021). "UK top court clears way for COVID-19 business insurance payments". Reuters.
  6. Peachey, Kevin (15 January 2021). "Insurers must pay small firms for Covid lockdown losses". BBC News.
  7. "Coronavirus: Strict new curbs on life in UK announced by PM". BBC News. 2020-03-24. Retrieved 2021-01-25.
  8. The Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2021] UKSC 1 at [1], [16]–[22], [29]–[31]
  9. "Small firms thrown lifeline in insurance test case ruling". BBC News. 15 September 2020.
  10. Ascher, Dan (14 April 2020). "Coronavirus: 'My business could go bust if insurers don't pay'". BBC News.
  11. Carolyn, Cohn; Ridley, Kirstin (16 November 2020). "UK businesses not covered for pandemic, insurers tell Supreme Court". Reuters.
  12. Kollewe, Julia (15 September 2020). "UK small companies win victory in Covid insurance test case". The Guardian.
  13. The Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2021] UKSC 1 at [2]
  14. The Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2021] UKSC 1 at [41]–[42]
  15. Rojas, John-Paul Ford (15 September 2020). "Coronavirus: Small firms welcome insurance judgment - but some could lose out". Sky News.
  16. Jones, Rupert (15 January 2021). "Small businesses win Covid insurance payouts after UK supreme court victory". The Guardian.
  17. Burton, Lucy (15 January 2021). "Insurers must pay small businesses for lockdown losses, court rules". The Telegraph.
  18. "UK regulator files 'precautionary' BI test case appeal". www.insurancenews.com.au. Retrieved 2021-01-20.
  19. "Financial Conduct Authority (Appellant) v Arch Insurance (UK) Ltd and others (Respondents)". The Supreme Court of the United Kingdom. Retrieved 2021-01-15.
  20. The Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2021] UKSC 1 at [4]
  21. The Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2021] UKSC 1 at [48]
  22. The Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2021] UKSC 1 at [54]–[58], [95]
  23. Sillars, James (15 January 2021). "COVID-19: Supreme Court backs small firms over business interruption insurance claims". Sky News.
  24. "UK Supreme Court hands businesses victory in COVID-19 insurance ruling". Financial Post.
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