Covid-19 Business Interruption Insurance – Takeaways from the UK Financial Conduct Authority Test Case

Throughout 2020, the COVID-19 pandemic has laid waste to human lives, economies, businesses and livelihoods across the globe. Whilst we have since adapted to the new norm, the consensus is that the initial adjustment period between February to May 2020 at least has seen many uncertainties manifest. Governments in countries such as Malaysia, Singapore, China and Australia adopted drastic measures in their respective attempts to prevent the spread of the coronavirus, the main of which is commonly known as the “lockdown”, characterised by a series of restrictions in movements, closure of non-essential premises and businesses and social distancing practices.
Adverse consequences naturally followed such as the loss of income and jobs and closure of many businesses. Business owners who have purchased business interruption insurance (“BII”) would have attempted to avail themselves of coverage or relief thereunder.
BII are usually included as part of property all risk insurance or commercial risk insurance. In this regard, BII clauses are generally worded in a manner where the clause will be triggered if there is occurrence of damage which interrupts the physical business. Such clauses commonly cover, amongst others, loss of income until the business is restored to usual. 
The English High Court on 15 September 2020 delivered its much-anticipated judgment in The Financial Conduct Authority v Arch Insurance (UK) Limited and Others [2020] EWHC 2446 (Comm), commonly referred to as the “UK Test Case”. The UK Test Case was an action brought in the interest of policyholders (many of whom were small to medium sized enterprises) by the Financial Conduct Authority (“FCA”), the regulator of financial services (including insurers) in the UK, against eight major insurance companies.
The objective of the UK Test Case was to provide clarity to both policyholders and insurers in respect of BII coverage against the effects of COVID-19 on businesses. Some 21 sample policies with varied wordings were considered by the High Court, and the case was estimated to potentially impact some 700 types of policies issued by 60 different insurers and 370,000 policyholders, the value of which has been reported to be estimated at £1.2 billion.
The English High Court’s analysis can be broken down broadly as follows:
  1. Construction of “Disease Clauses”, “Hybrid Clauses” and “Prevention of Access Clauses”; and
  1. Prevalence.
General Rules Apply
At the outset, the High Court had clarified that the ordinary principles of contractual construction apply, i.e. the court must ascertain how a reasonable person, having all the background knowledge which would have been reasonably available at the time of contract, would have understood the meaning of the language in the respective policies. This would mean that subjective intentions of the parties are not considered. Where there are rival constructions, the court may consider which construction is more consistent with business common sense (Wood v Capita Insurance Services Ltd [2017] UKSC 24).
The High Court added that the contra proferentum rule (which provides that where there is ambiguity in the words of the contract, the words will be construed against the person who drafted them) would only apply if there is genuine ambiguity which cannot otherwise be resolved by applying the ordinary rules of construction. It should not be relied on to create ambiguity where there is none. The recent trend in English cases is to not automatically apply the contra preferentum approach, but to consider first the approach of evaluating which of the rival constructions make commercial sense.
Another general principle is that both contracting parties can be taken to know that both statute and common law develop over time, so they can be taken as having accepted that their contract would be interpreted in light of the general law from time to time.
Disease Clauses
The “Disease Clauses” comprised clauses where the elements are that (i) business is interrupted or interfered (ii) following or arising from (iii) any notifiable disease occurred or manifested (iv) within a specific radius of the insured premises.
The insurers argued that coverage was intended only for a local occurrence of the disease (i.e. within the specified radius), which imported a “but-for” causation requirement. It was submitted that had there been no occurrence of COVID-19 within the specified radius, the businesses would still have suffered from a general reduction and from the impact of the government’s measures because such measures would have been introduced anyway by reason of occurrence of the disease in other areas other than the specified radius. The insurers also argued that if there is a local outbreak of a disease occurring more widely, then only the effects occurring locally are covered – this is the purpose of the “specified radius” requirement which would otherwise be rendered redundant.
The FCA submitted that the insureds’ losses were sufficiently connected with the business interruption which “followed” the occurrence of COVID-19. The occurrence of COVID-19 was an effective cause of the government’s measures and interference with the businesses. COVID-19 was one cause of which all the outbreaks form a part of, or that there were many different concurrent effective causes.
The High Court disagreed with the insurers. It favoured the FCA’s argument and held that the proximate cause of the business interruption is the notifiable disease of which the individual outbreak form indivisible parts or alternatively, each of the individual occurrences was a separate but effective cause. In coming to this conclusion, the High Court also decided that:
  1. There will have been an “occurrence” of COVID-19 in an area when at least one person was infected. It is not necessary for the case to be diagnosed for it to constitute “occurrence”, as “occurrence” simply means that the disease is suffered or sustained by the person;
  1. The word “follow” indicated that the disease should have a causal connection to the business interruption but not necessarily one of proximate causation. It denotes a “looser form of link” and covers indirect causes of interruption or interference with the business; and
  1. In respect of “occurrences” of a notifiable disease up to a specified radius, for example SARS which has been expressly defined as one, the High Court was of the opinion that the parties must have contemplated actions being taken by public authorities on a higher level which covers an area wider than the specified radius of which the “occurrence” took place, to contain the disease as a whole, as opposed to being confined to a locality. Thus, the Court took the construction which avoids the result that there will be no effective cover if the local occurrence was part of a wider outbreak and where it would be difficult or impossible to show to that the local occurrence made a difference to the authorities’ response.
One of the policy wordings defined “Vicinity” as “area surrounding or adjacent to an Insured Location in which events that occur within such area would be reasonably expected to have an impact on an Insured or the Insured’s Business”. The High Court took a wide approach in reading this definition of “Vicinity”, and admitted that while it would not be normal parlance to refer to the whole of England and Wales as within the “vicinity” of any part therein, however, in relation to a disease such as COVID-19, an extensive area, possibly embracing the whole country, can be regarded as the relevant Vicinity. Further, the definition of “Vicinity” must “surround” or be “adjacent” to the insured location but there is nothing to denote the size of the area.
Hybrid Clauses
The “Hybrid Clauses” comprised clauses similar to the “Disease Clauses” but also had an additional element of “restrictions imposed on the premises”.
In contrast to “occurrence of disease”, the High Court took a narrow approach in respect of “restrictions imposed”. The word “imposed” denoted something which is mandatory and has the force of law, especially against the context that the restrictions imposed will deprive the insureds from using their premises. This meant that government guidance, advice and exhortation, including that by the Prime Minister, which were not reduced to statute or regulations, do not constitute “restrictions imposed” by public authority.
The High Court then turned to the phrase “inability to use”, which it also constructed narrowly. It held that there will not be an “inability to use” premises merely because the insured cannot use all of them or by reason that it is a departure from their normal use. In other words, a mere “hindrance or disruption” to normal use is insufficient.
It was also argued by the insurers that “interruption” must necessarily mean a cessation or stop of the business. The High Court thought it clear that “interruption” is intended to mean “business interruption” generally, including disruption or interference, and not just complete cessation.
Prevention of Access Clauses
The High Court observed that a number of the BII clauses require a prevention or hindrance of access to or use of the premises as a consequence of restrictions imposed by authorities. It was noted that the wordings were varied in that some of them were of a narrower or wider scope.
In construing the word “prevention”, the High Court drew a distinction between “prevention” and “hindrance”. While “prevention” connotes “rendering impossible”, “hindering” means “rendering something more or less difficult, but not impossible”, or “interposing obstacles which it would be really difficult to overcome. The distinction between these words had been discussed and applied previously by the English Court of Appeal. The FCA submitted that such strict definitions should not be adopted as the previous cases in question concerned force majeure or other forms of exclusion clause, but the High Court did not find merit in that argument.
The High Court agreed with the insurers’ contention that restrictions on free movement imposed by the government through regulations did not in themselves prevent access to premises which remained open. Insofar as the reduced footfall is concerned, this could be said to be a hindrance in the use of the business premises only. The prevention of access to premises required complete closure of premises.
Restaurant businesses were discussed in the analysis. If a restaurant business had set up a takeaway or delivery service which it had not carried on before, there was a prevention of access since the takeaway or delivery business was fundamentally different from the business described in the policy schedule. However, if the business already had an existing takeaway or delivery service as part of its original business model which it continued to operate from the premises, then there is no prevention of access.
Lastly, the High Court discussed the issues on burden and standard of proof in respect of the occurrence or manifestation of COVID-19 within a specified geographical area which includes the insured premises.
Initially, the calling of expert evidence to testify on the actual prevalence of COVID-19 across the UK was mooted during the case management of the action. Subsequently, the FCA and the insurers agreed that the issues to be decided by the Court were on (i) the type(s) of proof which could be sufficient to discharge the burden of proof upon insureds; and (ii) whether the best evidence as pleaded by the FCA was sufficient to discharge the burden of proof.
The FCA submitted that there are four types of evidence which are sufficient in principle to discharge the burden of proof on an insured, which are specific evidence, NHS Death Data, Office of National Statistics (ONS) Death Data and reported cases. It was discussed that in some cases, the insured may not be able to prove the occurrence of death or cases in a relevant policy area based on the aforesaid types of evidence, as there may be gaps in between. To this the FCA further submitted on certain methodologies which could be used to prove the prevalence of the disease, such as the averaging methodology (i.e. average number of cases or deaths per square mile in a region qualified by population weighting) and undercounting (since the actual presence of COVID-19 would have been understated in reports).
As the High Court did not receive any expert evidence on this issue, it declined to give its decision on the same and did not provide any general guidance on what evidence may prove actual prevalence against various factual matrix and policies. Ultimately, it depends on a case-to-case basis, but the insurers do not suggest that absolute precision is required and that otherwise the claims will fail. The High Court then expressed its hope and expectation that the insurers will be able to agree on any issues of prevalence which actually arise and are relevant to the particular cases
The High Court in the UK Test Case examined the BII clauses against each respective policy and context holistically. The submissions by both the FCA and insurers, particularly on the practical implications of and possible anomalies arising from the rival constructions were well canvassed. It must be emphasised that the construction by the High Court as discussed depended on the language of and the entirety of the relevant policies, and the above represent the key takeaways in one of the first signpost cases on COVID-19 BII claims. The FCA and seven of the eight insurers have since been granted permission to appeal directly to the Supreme Court for clarification of certain aspects of the High Court’s decision. The appeal is expected to be heard in December 2020.
Similar test cases have also taken root in Australia and Canada, though the approach taken by the Australian and Canadian courts remains to be seen. We have yet to hear of COVID-19 BII claims being disputed in Malaysian courts, in which we anticipate the arguments put forth against the Malaysian background where closures and suspension of operations and business were strictly ordered and enforced against both the public and private sectors during the Movement Control Order save for essential services. The Movement Control Order has since been relaxed by way of the Conditional Movement Control Order and Recovery Movement Control Order, the latter of which remains in force until 31 December 2020.
Case summary by Loo Peh Fern (Partner) and Siew Ka Yan (Associate) of the Insurance and Reinsurance Practice Group of Skrine