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FCA business interruption test case: Appeal to the Supreme Court

Pamela Freeland and Sarah Irwin are following the highly anticipated hearing and provide daily summaries.

FCA business interruption test case: Day 1

The FCA business interruption test case resumed on 16 November 2020 with the first day of oral submissions on the parties’ appeals to the Supreme Court as insurers and policyholders look for clarity and certainty in respect of the construction of business interruption policies in light of the Covid-19 pandemic. The appeal is being heard remotely before Lords Reed, Hodge, Briggs, Hamblen and Leggatt with the first day of oral submissions dedicated to arguments on behalf of insurers relating to the construction of disease clauses, the correct test of causation, and the application of appropriate counterfactuals.

It is evident that the parties and the court are contending with a tight timetable for oral submissions to ensure that all parties have the opportunity to address the court on their appeals and respondent submissions. The scarcity of time means that all parties rely heavily on written submissions, copies of which are available on the FCA website, and insurers have each adopted submissions made by others on broad topics such as causation, trends clauses and the treatment of pre-trigger losses.

Below we have highlighted some of the key submissions advanced on behalf of insurers.

Identification of the insured peril

  • Insurers submitted that the Divisional Court was wrong to conclude that the peril insured against in the disease clause representative policy wordings was the national outbreak of Covid-19 and the national Government’s response to it.
  • Insurers argue that cover under the disease clauses only extends to business interruption losses arising from the relevant insured peril depending on the specific wording, e.g. the occurrence of Covid-19 within a radius of 25 miles of the insured premises.
  • The geographical limits imposed in the insuring clauses, such as the 25-mile radius requirements, were intended to circumscribe the risk and limit the insured peril. The Divisional Court’s approach interpreted this geographical requirement as merely a ‘tick box exercise’ which would be satisfied as long as there had been just one case of Covid-19 within the relevant area. Such approach was incorrect and there was no reason that the radius limit should not be treated in the same way as any other territorial limit in an insuring clause.
  • Once the correct insured peril has been identified, i.e. the occurrence of Covid-19 within the relevant radius area, the court should not look for the broader cause of the insured peril, i.e. the international Covid-19 pandemic and attempt to extend the insuring clause to cover these wider effects. The Divisional Court’s approach reduces the proper insured event to a mere proviso to cover for a much broader insured peril which was not what was intended by the parties.
  • When considering the intentions of the parties, counsel for the insurers emphasised the importance of only considering information which was reasonably available to the parties at the time of contracting. It was submitted on behalf of insurers that the court should take care to avoid applying hindsight to the construction of insurance policies in light of the Covid-19 pandemic and the effects which we have seen this year. Whilst it would be tempting to read an insuring clause to accommodate facts which have occurred since policy inception, it would not be appropriate to construe the clause with the knowledge we have now of a crisis of unprecedented proportions.

Distinction between QBE 2 / 3 and other disease clauses

  • The distinction drawn between the QBE 2 and 3 clauses, and other disease clauses has been the subject of much discussion from both insurers and the FCA.
  • Insurers argue that there is no reason for the court to distinguish between the cover provided by QBE 2 and 3, and cover under other disease wordings. Such arguments were based on the fact that ‘occurrence’ is synonymous with the word ‘event’ as found in the QBE 2 and 3 wordings and that there was therefore no foundation for such a clear distinction between the different disease wordings.
  • It was submitted that, if ‘event’ and ‘incident’ are indeed the ‘magic words’ to defining a more localised and limited cover, this should apply to other disease clauses and should not be limited to just QBE 2 and 3.

Indivisible cause / separate effective causes

  • A further point of appeal on behalf of insurers was founded on the Divisional Court’s assessment that the occurrences of Covid-19 across the country all formed part of an indivisible cause of the business interruption suffered by policyholders. It was submitted that this novel concept was not supported by any authority anywhere in the world and that there was no basis for such a conclusion which overrode all concepts of legal causation.
  • Insurers further rejected the FCA’s description of each individual case of Covid-19 as pieces of a jigsaw which, when put together, formulated one complete picture of the national Covid-19 outbreak. It was argued that the FCA’s own illustration of the indivisible cause concept – a jigsaw – was not compatible with this conclusion as a jigsaw is clearly divisible and even if one piece of the jigsaw is covered under a policy, it does not follow that the whole picture, and every piece, is insured.
  • In the Divisional Court’s judgment, it was held that an alternative construction to the ‘indivisible cause’ theory was that each and every case of Covid-19 within the UK was a separate but equally effective cause of the business interruption losses suffered. Insurers submitted that this conclusion was also incorrect as each individual cause did not satisfy the ‘but for’ test and so none of the cases on their own could be said to be a proximate cause of the business interruption losses suffered.

Causation / trends clauses / counterfactuals

  • Insurers argued that there is nothing within the wordings of the representative policies to indicate that anything other than orthodox principles of causation were intended to be applied by the parties and therefore the policies should be construed against the established legal background of the ‘but for’ test.
  • The correct approach to causation should be a two stage test: first, to identify the range of candidates for the cause of the loss suffered using the ‘but for’ test of factual causation, before then considering whether such potential factual causes also pass the threshold of legal causation, i.e. whether such cause was a proximate cause as is required within a contract of insurance.
  • When considering the correct application of the ‘but for’ factual test of causation, the parties must consider whether the policyholder would have been in the exact same position ‘but for’ the insured peril, i.e. would the policyholder have still suffered the same loss ‘but for’ the occurrence of Covid-19 within the relevant radius area. If the policyholder would still have suffered the same loss, then cover would not be triggered.
  • Once potential factual causes have been identified, established insurance law states that an insurer is only liable for any loss proximately caused by the insured peril. Insurers submitted that the test of proximate cause also required the application of the ‘but for’ test and argued that there was no authority which held that a cause could be considered ‘proximate’ to the loss without passing the ‘but for’ test. The decision of Lord Hamblen (then Hamblen J) in Orient Express was, it was submitted, correctly decided and should be applied to the present case.
  • Insurers rejected the FCA’s attempt to create a new ‘intermediate category of interlinked concurrent causes’ which it says should apply to individual cases of Covid-19 on the basis that such concept was not founded in law and was not coherent.
  • The correct construction of the counterfactual was to only strip out the occurrence of Covid-19 within the relevant radius area. Any approach which reverses more than the insured peril would impermissibly expand the scope of the insuring clause. It was not accepted by insurers that the resulting counterfactual has to be realistic, indeed it was submitted that even the FCA’s own counterfactual (that there is no Covid-19 in the UK) is unrealistic itself.
  • In summary, it was submitted that only business interruption losses proximately caused by the occurrence of Covid-19 within the relevant radius area could be covered by the representative disease clause wordings and the court was asked to uphold the bargain reached between the parties.

So far, questions from the bench have been raised predominantly by Lords Hamblen and Leggatt who each boast backgrounds in commercial law and were involved in the decisions of the Commercial Court and arbitral tribunal respectively in Orient Express. The questions from both Lords Hamblen and Leggatt focussed primarily on the operation of effective, concurrent causes.

Brief submissions were made at the end of the day in respect of hybrid clauses, with further submissions expected on Tuesday 17 November from insurers on their points of appeal relating to hybrid clauses and prevention of access clauses before the focus turns to the FCA and Hiscox Action Group when they will present their submissions in response and on their own appeals.

We will continue to keep you updated in respect of the developments and submissions made in this key test case.

FCA business interruption test case: Day 2

The FCA business interruption test case continued on 17 November 2020 with the second day of oral submissions on the parties’ appeals to the Supreme Court heard remotely by Lords Reed, Hodge, Briggs, Hamblen and Leggatt. On day two we heard oral submissions on behalf of insurers relating to hybrid clauses and prevention of access clauses before the FCA responded to insurers’ appeals on causation and trends clauses.

We comment on the key aspects of the hearing as follows:


Further submissions were made on behalf of insurers relating to the much-debated principles of causation and their applicability to insurance law, including:

  • Submissions by David Turner QC on behalf of RSA that the words “solely as a result of” within an insuring hybrid clause require the parties not just to consider whether the disease was the proximate cause of the closure of or restrictions imposed on the insured premises, but also whether the insured event was the sole cause of such loss. The existence of any concurrent cause would mean a failure to meet the appropriate test of causation.
  • Lord Leggatt suggested that such an assertion would be slightly counterintuitive as it would mean that, even if cases within the radius were sufficient on their own to cause the restrictions, the fact that they would have occurred anyway (and the ‘but for’ test would therefore not be satisfied) meant that cover would be defeated.
  • It was submitted that whether the word “following” imported ‘but for’ causation or proximate causation would not be determinative of the question of coverage as neither causative test would be satisfied unless a policyholder could establish that the loss claimed would not have been suffered but for the occurrence of the disease within the radius.

Counterfactuals and trends clauses

  • Insurers submitted that the correct counterfactual must mirror the insured peril and only remove the composite peril, no more, no less (Orient Express). Insurers rejected the FCA’s argument that a counterfactual which removed only the occurrence of Covid-19 within a specified area could not be accepted on the basis that it was artificial. There is no rule to reject a counterfactual just because it is “unreal”. Counterfactuals by their very nature are a “purely hypothetical construct”.
  • Insurers did not accept the FCA’s argument that such construction of the counterfactual would render cover “illusory” and there was no evidence for this assertion. Further, it was not right to say that it would be impossible to assess what loss was caused by Government restrictions, and what loss was caused by the wider Covid-19 pandemic. On the FCA’s case, a restaurant could earn 30% of last year’s profits in March and 25% of last year’s profits in July either side of the national lockdown, but seek to recover 100% of normal profits when closed.
  • The nature of the composite peril is that all elements must be present for cover to be triggered which created a particular causal combination. Insurers submitted that there can only be a failure to hold the policyholder harmless in respect of loss caused by all of those elements acting in conjunction.
  • It cannot be right, insurers argued, to indemnify a policyholder for all losses flowing from any one single element of the composite peril. It is not correct to identify Covid-19 itself as the insured peril and insurers never promised to indemnify policyholders in respect of all losses caused by this one element of the causal chain.
  • Importantly, for prevention of access and hybrid policies, it is only the relevant regulation which enforced closure which should be stripped out for the purpose of the counterfactual. For example, a beauty salon forced to close under Regulation 4 of the 26 March Regulations would be assessed using a counterfactual which removes Regulation 4 but leaves in any further regulations enforcing restrictions on movement.
  • The court’s decision at first instance incorrectly prevents insurers from seeking to adjust claims on the basis that policyholders would not have realised some of their usual profits even if the insured event had not occurred, e.g. even if the premises had not been ordered to close. It was submitted that businesses would have suffered some loss in any event because of the economic effects of the pandemic, the stay at home order, social distancing requirements and the lack of consumer confidence.
  • Unless such an adjustment for trends or circumstances is made, the policyholder may well receive an amount greater than or less than the true measure of the insured loss.

Occurrence v event/incident

  • Arguments were again raised in relation to the distinction the Divisional Court found between policies which referred to an “occurrence” and the more localised, narrow cover attached to QBE 2 and 3 due to the use of “event” and “incident”.
  • It was argued by Hiscox that the same analysis should attach to its prevention of access clause on the basis that “occurrence” should bear the same dictionary definition as “event”.
  • It was submitted that the Divisional Court’s wide interpretation of “occurrence” was influenced by hindsight and that the court had tried to “squeeze in” the unprecedented events of this year to the representative wordings.
  • Arguments were also heard as to the applicability of a general exclusion in RSA’s disease policy which stated that it excluded loss “due to … epidemic” and whether this exclusion precluded cover even if such epidemics came within the relevant area.

FCA submissions

The FCA commenced its oral submissions in response to insurers’ appeals on the nature of the insured peril, causation and trends clauses and made the following key points:

  • Colin Edelman QC for the FCA repeated the FCA’s position that the Government response to Covid-19 and the national restrictions imposed were introduced as a result of the combined effect of the occurrence of Covid-19 nationwide and this supported the court’s finding of an indivisible cause. Insurers’ arguments to the contrary were an attempt to “escape”
  • The FCA submitted that Orient Express was wrongly decided for a number of reasons, including the application of the ‘but for’ test of causation. The FCA does not accept insurers’ submissions that causation requires a two stage test, or anything other than the test of proximate causation as established by statute.
  • The commercial purpose of trends clauses was to deal with extraneous factors in the world which would have affected the business separately from the insured event, e.g. the restaurant which suffered a flood but which would have experienced a downturn in business in any event as it had just lost a world-renowned chef. The parties must consider what profits would have been had it been open under normal circumstances.
  • The correct counterfactual therefore strips out all of the components of the insured peril including the occurrence of Covid-19 more generally. The purpose of a trends clause should not be to revisit questions of causation which have already been answered.
  • Lord Leggatt commented that the fact that a counterfactual is “unreal” would not of itself be a bar to its use. However, he suggested that it may be necessary to consider whether the interpretation of the trends clause aligns with the effects of the insuring clause.
  • Lord Briggs considered that, perhaps, this case could be an illustration of a wider point that legal tests may be “good servants but occasionally poor masters”.

Submissions will continue on Wednesday 18 November on behalf of the FCA in response to insurers’ appeals before focus will turn to the FCA and Hiscox Action Group in opening their own appeals.

We will continue to keep you updated in respect of the developments and submissions made in this key test case.

FCA business interruption test case: Day 3

The FCA business interruption test case continued on 18 November 2020 with the third day of oral submissions on the parties’ appeals to the Supreme Court, heard remotely by Lords Reed, Hodge, Briggs, Hamblen and Leggatt. During the jam-packed hearing, we heard oral submissions on behalf of the FCA in response to insurers’ appeals on the disease policies, composite insured perils, trends clauses and counterfactuals. The FCA also began presenting its appeal points relating to pre-trigger losses and the construction of prevention of access clauses.

We comment on the key aspects of the hearing as follows:


Mr Edelman QC, on behalf of the FCA, continued to develop his submissions on causation, including the nature of the insured peril.

  • In relation to disease clauses Mr Edelman QC submitted that it must have been contemplated by insurers that cover would be triggered by an outbreak of an infectious disease which extended beyond the relevant policy area (typically a one-mile or 25-mile radius from the insured premises). He said that there was no predictability or regularity by which a disease might spread but that they do not typically spread in “neat circles” and that although the Government measures taken in response to COVID-19 are unprecedented in the UK, there is precedent in other countries – for example in Beijing following the SARS outbreak and in Mexico following a Swine Flu outbreak in 2009. Had insurers wanted to restrict cover for outbreaks that only affected the specified policy area, they would have been expected to specify that within the policies.
  • He submitted that the commercial purpose of a policy area was to ensure that cover only attached where the disease was actually present in that area. For example, places like the Scilly Isles may not have had any cases of COVID-19 but were affected by the Government restrictions. Affected businesses would not, in his submission, be entitled to cover unless they could show that the disease was actually present in the relevant area.
  • Mr Edelman likened the COVID-19 pandemic to the Great Storm of 1984 which affected large parts of the South East. Many insurers were liable for a far greater risk than expected but he submitted that this was the nature of insurance. He submitted that the COVID-19 pandemic was similar in that it was a far greater risk than insurers anticipated but that this was no reason to deny cover to policyholders.
  • Mr Edelman submitted that the consequence of applying insurers’ approach to the construction of disease wordings is that it would produce arbitrary and anomalous results, which are inconsistent with the nature of the risk being insured (as summarised above). He also queried why a policy should respond differently to a disease that spreads slowly resulting in local lockdowns as opposed to a disease such as COVID-19 which spreads quickly and required a national response.

Trends clauses

Mr Edelman QC also made submissions in relation to trends clauses.

  • He emphasised that trends clauses were only intended to strip out purely extraneous causes from the loss calculation. Where there was a composite peril (as was the case for hybrid clauses and prevention of access clauses in particular), you could not pick and choose which parts of the composite peril should be stripped out.
  • He submitted that insurers’ approach during the test case as to what elements of the composite peril could be included within the analysis of trends had been inconsistent and he identified a number of arguments made by insurers which he stated had changed during the proceedings. He said that such changes were indicative of the incomprehensibility of insurers’ position and demonstrated that such arguments did not reflect the parties’ intentions at the time the contracts of insurance were entered into.
  • In terms of the counterfactual, he emphasised that it was always a hypothetical situation but it contemplated what would happen in the normal real world, not in a world that could never exist.
  • This aspect of the submissions drew significant intervention from the Supreme Court Justices, which resulted in a lively exchange and which indicates that it is one of the most difficult and contentious issues within the appeals.

Pre-trigger downturn

At first instance, the High Court held that a general downturn in the business before the actual triggering event took place could be taken into account when assessing the loss. Mr Edelman QC indicated that the FCA was not trying to argue that those losses should be covered. However, the FCA was appealing the decision that those losses could be taken into account at the adjustment stage.

  • He submitted that if all elements of the composite peril should be taken out when considering a trends clause, disease should also be removed from the equation for the purposes of a pre-trigger downturn. He criticised the High Court’s decision as inconsistent on this point.
  • Lord Reed observed that if a pre-trigger downturn was to be taken into account, it would effectively reward the businesses that did not act in a socially responsible way and remained open when Government advice may have been to close. Mr Edelman QC agreed with that observation and said that it could lead to some extraordinary outcomes in other cases. For example, where premises were ordered to close on health grounds but it later transpired that the order closing the premises was invalid. It would be anomalous if the period between the original (invalid) order being issued and a valid order being issued were to be taken into account when assessing the loss to the business as this would dramatically understate the loss to the policyholder.
  • This submission needed to be taken into account jointly with Mr Edelman’s QC’s submissions on the meaning of “restrictions imposed” or “restrictions placed” on insured premises. The High Court held that these phrases required some mandatory, legally enforceable intervention by a competent authority. Mr Edelman QC submitted that this was too narrow and that it should also include advice which an ordinary member of the public would regard themselves as being expected to comply with.
  • He invited the court to find that all of the statements made by the Prime Minister which the FCA had identified were mandatory restrictions of the Government. He said that this would prevent any “irresponsible” policyholders from making a windfall gain and would level the playing field for those who did shut their premises. He also emphasised that a key feature of our democracy in the UK was the public’s willingness to act responsibly rather than doing the bare minimum to comply with the law.
  • These submissions drew a number of interventions. Lord Leggatt observed that this would significantly broaden the scope of many policies and asked, for example, whether advice not to go to a pub amounted to a restriction on the use of the premises. Mr Edelman submitted that it did.

Prevention of access

  • Mr Edelman also briefly made submissions on the meaning of “prevention of access”. He submitted that the High Court was too restrictive in holding that access for all purposes was required in order for cover to be triggered. He submitted that partial prevention of access would suffice. He illustrated the point using the example of the closure of a through road to all traffic except for residents or visitors. If there was a shop at the end of that road that depended on the custom of through traffic, he submitted that access to the shop would have been prevented.

Submissions will continue on Thursday 19 November, the last day of the hearing, when we will hear more on the FCA’s appeals.

We will continue to keep you updated in respect of the developments and submissions made in this key test case.

FCA business interruption test case: Day 4

The FCA business interruption test case continued on 19 November 2020 with the fourth and final day of oral submissions on the parties’ appeals to the Supreme Court, heard remotely by Lords Reed, Hodge, Briggs, Hamblen and Leggatt.

Turning firstly to what many may have been looking out for as submissions drew to a close – an indication as to when we will know the outcome of the appeal. Unfortunately, the court was unable to say whether the decision would be handed down this side of Christmas, or sometime in January 2021. The court did however note the parties’ concerns regarding the importance of the test case and the need for certainty and endeavoured to issue judgment as soon as possible.

Now to the submissions, which were a continuation of the FCA’s submissions on its points of appeal and insurers’ arguments in reply. There were no new or unexpected arguments raised and several points that had already been ventilated in the appeal were reiterated: a final push to persuade the court to accept each side’s submissions on prevention of access clauses, composite insured perils, pre-trigger losses and causation.

We comment on the key aspects of the hearing as follows:

Prevention of access

  • The FCA reiterated that the Divisional Court’s interpretation of the term “inability to use” was construed too narrowly. Mr Edelman QC used the example of a restaurant that had been required to close but was able to provide takeaway services. He submitted that any decision which led to a different coverage outcome for businesses with and without a pre-existing takeaway service would “defy common sense construction of these policies and undermine their commercial purpose”. He submitted that either a complete or partial prevention of access could trigger policy coverage.
  • Mr Lynch QC built on these submissions, arguing that the word “inability” did not denote the extent of use of the premises. He referred to one of the representative sample policy wordings that specifies the need for “total inability” to access the premises. He questioned the need for the word “total” in this policy if “inability to use” denoted such a narrow application.
  • In respect of the term “restrictions imposed”, Mr Lynch QC submitted that the court of first instance had erred in their judgment that this only meant something that had the “force of law”. It was submitted that the majority of policyholders were SMEs, not sophisticated users of insurance policies. The policies’ “off-the-shelf” format only further highlighted that policyholders expected the policies to use ordinary, everyday interpretations of the wordings within the clauses. The wording here does not, in everyday meaning, imply that a restriction must have the force or law. It would be unreasonable, it was submitted, to interpret the policy of insurance to their detriment simply because of the niceties of the wording; the commercial use of the contract was more important in the present case.
  • In reply submissions on behalf of insurers it was argued that prevention of access clauses should be interpreted in accordance with their ordinary meaning, (a different spin on the same argument used by the FCA as detailed above) which was to make something impossible. Nothing short of an action or advice that wholly prevented access to the property would trigger the policy and Government advice, which did not have the force of law, did not meet this standard.
  • Further, in respect of the FCA’s appeal of the decision regarding the prevention of access clauses (and indeed its other appeal points relating to the construction of the policy wordings), insurers highlighted that the FCA had not identified any relevant principles of construction that had been misapplied by the court at first instance. As a result, it was submitted that the Lord Justices should be slow to interfere with the first instance decisions relating to policy construction.

Identification of the insured peril

  • The FCA rejected insurers’ submissions that the words “solely as a result of” within a disease clause denotes that the disease had to be the sole cause of the loss incurred by the business. It is the FCA’s case that the disease forms part of an indivisible cause of loss, and Mr Edelman QC invited the court to agree with the judgment of the Divisional Court on this issue.
  • There was a further and final push by the FCA on the argument that if a business suffered loss from one insured peril and one uninsured peril concurrently, it was covered under the policy unless expressly excluded. Mr Edelman QC submitted that it was the purpose of insurance to protect against risks that manifested in a way that was unforeseeable.

In reply submissions, counsel for insurers:

  • Repeated earlier submissions that the Divisional Court was wrong to conclude the insured peril in the disease clause was the national outbreak of Covid-19. This was particularly relevant in policies where there was a geographical restriction, because the instances of Covid-19 within, for example, a one-mile radius of the premises were not causative of the governmental response to the virus.
  • Submitted that the insured peril is the aggregate impact of the insured occurrence within the perimeter of the policy area. It was then a question of whether this caused the business interruption, and to compare the same with the causative impact of the disease generally.

Pre-trigger losses

  • Mr Edelman QC reiterated that the court of first instance had correctly decided that when applying the trends clauses, the loss should be considered but for the insured peril or the interlinked concurrent cases (i.e. as one indivisible outbreak). However, he invited the court to depart from the first instance decision to the extent that it permitted insurers to account for a general downturn in turnover in the run up to the trigger event. To permit such action would be to reduce policyholders’ insured losses to zero.
  • In reply to this point, counsel for insurers stated that the argument that pre-trigger losses would be used to adjust an insured loss down to zero amounted to “unjustified scaremongering”. Contrary to the FCA’s position, it was submitted on behalf of insurers that disregarding pre-trigger losses would “offend common sense” because the adjustment process would then be based only on the level of turnover a business had achieved in the same period in 2019; a very different period to the reality that businesses have experienced this year.


  • Insurers were given the opportunity to respond to arguments made earlier in the appeal hearing by the FCA on causation. The contention that the case law supported the FCA’s argument that the ‘but for’ test could be dispensed with was rejected. To do so, it was submitted, would disregard the need for a causal link between the insured peril and the business interruption which would be “dangerous”. The parties had clearly contracted in accordance with ordinary contract law, which “shouldn’t be re-written because of a difficult case”. Strong words of warning as to the potentially wide-ranging impact such a decision could have on insurance law generally.
  • It was also submitted that the proximate cause was a further requirement, as opposed to something separate from ‘but for’ causation.

We will update you further on the much anticipated outcome of this important case when the decision is handed down.

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