London's High Court has delivered its ruling in the FCA (Financial Conduct Authority) v Arch Insurance business interruption litigation, offering hope to more than 370,000 claimants seeking coverage for pandemic losses under their business insurance policies.

Lord Justice Flaux and Mr Justice Butcher heard the expedited test case virtually in the Commercial Court's Financial List over two weeks in July, with the FCA acting in the public interest against eight selected insurers, including Hiscox, AIG, RSA, Arch, QBE and Zurich.

In what was a careful judgment, the court’s interpretation of some clauses in certain business interruption policies meant some policyholders were covered, while others were not. It declined to find against all the insurers, across all of the 21 different business interruption policies submitted as a representative sample, with different conclusions reached for each.

Crucially, the 167-page judgment found in favour of the FCA, including on causation grounds, on the majority of issues, in particular in respect of coverage triggers in the various policies, notably ‘disease' and ‘hybrid’ clauses, certain ‘denial of access’ and ‘public authority’ clauses and ‘trends’ clauses.

Asserting classic insurance principles, the judges assessed causation – significant under the ‘but for’ test or in ‘business trends’ clauses – from the hazard insured against (the pandemic) and then considered the interaction of the various composite clauses. Loss, said the judges, flowed from the comparison between the actual performance of a business, against how the business would have performed but for the outbreak.

They also held that, given its national incidence, Covid-19 amounted to an “occurrence” such that policyholders did not have to show that the virus was the only cause of business interruption, just that it was geographically present in their local area.

Removing roadblocks

The case, which was prepared and case managed during the pandemic at impressive speed, attracted barristers from leading sets such as Devereux Chambers, Fountain Court and 7 Kings Bench Walk among others, with the cream of the insurance Bar examining the wordings in detail – as does the judgment. Flaux LJ is lead judge on the Commercial Court and Butcher J is an experienced insurance jurist.

The FCA’s interim chief executive, Chris Woollard, said the court had “substantially found in favour of the arguments we presented on the majority of the key issues", calling it “a significant step in resolving the uncertainty faced by policyholders”.

With the FCA having come to the case to seek clarity, Woollard said: “Today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.”

Policyholders celebrate

Two representative groups of policyholders, the Hiscox Action Group and the Hospitality Insurance Group Action, intervened, represented by Mishcon de Reya; Clyde & Co acted for three insurers, while DWF and DAC Beachcroft acted for one each. Allen & Overy, which advised Hiscox, was the sole magic circle firm instructed on the defence; Herbert Smith Freehills (HSF) acted for the FCA.  

Paul Smith, the HSF lead partner in the case, said the judgment was “really significant” in offering guidance on how such policies should work during the pandemic, saying it would “bring welcome news to a significant number of policyholders”.

Smith said policyholders would “need to read the judgment carefully and see how the principles laid down by the court apply to their particular policy wording”.

Veteran Mishcon de Reya litigator Richard Leedham said the case represented “a positive outcome for most Hiscox policyholders”, saying the firm would continue to press their claims via an arbitration process underway against Hiscox, agreed earlier this summer.

Sonia Campbell, also a partner at Mishcon, leading for the hospitality interveners, said the case was “a victory for the policyholders involved”. She added: “It will also provide persuasive guidance for the interpretation of similar policy wordings and so directly impacts the resolution of many more claims underwritten by many more insurers not involved in the test case."

Market comment

Individual insurers, and their lawyers, declined detailed comment, while the Association of British Insurers welcomed the speed and clarity of the ruling, if not the result. Ravi Nayer, a partner at Brown Rudnick, which is monitoring the case, said the decision was mixed, as “not all insurers will have done as well as each other or suffered equally”.

“Not all companies with business interruption insurance policies will be paid out,” noted Nayer. "Companies that were not required to close, partially closed or closed their shops but continued to [trade] online will have difficult claims.”

One source suggested insurers would examine the “quite nuanced” judgment carefully, holding open the possibility of an expedited ‘leapfrog’ appeal to the UK Supreme Court.

For the FCA, Woollard said any appeal should “be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process”; that decision is expected in October.