On 15 January 2021, the United Kingdom Supreme Court handed down its highly anticipated judgment in the COVID-19 Business Interruption (BI) Insurance Test Case.1 A copy of the decision can be found here. We previously reported on the test case in the August 2020 edition of Navigate and in our 23 September 2020 Briefcase.

The FCA, who is the regulator of the Defendant insurers, brought the test case.2 The aim was to resolve issues concerning the scope of BI cover for the benefit of policyholders, many of whom are small and medium enterprises. The Defendants were eight insurers. Declarations were sought based on a representative sample of standard form BI policies in the light of agreed and assumed facts. The policies concerned were described as non-damage BI policies. Twenty-one sample policy wordings were considered. The FCA estimated that, in addition to those particular wordings, some 700 types of policies held by 370,000 policyholders across 60 different insurers could potentially be affected by the test case.

The High Court delivered its judgment on 15 September 2020.3 The parties were given permission to “leap-frog” the Court of Appeal and appeal straight to the Supreme Court.

The Supreme Court unanimously allowed all four of the FCA’s appeals (subject to certain qualifications) and dismissed the insurers’ appeals. The judgment is likely to have serious repercussions for the insurance industry as a vast number of policyholders who have insuring clauses which were in issue on the appeal will now have BI cover arising from the COVID-19 pandemic.

The five Justices agreed on the conclusions reached in the majority judgment.4  The minority judgment5 disagreed with the reasoning in two respects.

The Supreme Court addressed the issues raised by the appeals under the following headings:

    1. Disease clauses.
    2. Prevention of access and hybrid clauses.
    3. Causation.
    4. Trends clauses.
    5. Pre-trigger losses.
    6. The Orient-Express Hotels decision

Disease Clauses

These clauses generally provide cover for BI loss caused by the occurrence of a notifiable disease6 at or within a specified distance of the policyholder’s business premises (e.g. 1 mile or 25 miles).

The insurers’ position was that the disease clauses only covered the BI consequences of any cases of a notifiable disease which occurred within the relevant radius of the premises. In other words, losses were only covered to the extent that it could be shown that they resulted from the occurrence of the disease within the radius. The insurers argued that any cases of disease which occurred outside the specified radius did not form part of the insured peril. Therefore, there was no cover for the consequences of those cases.

On the other hand, the FCA’s position was that these clauses should be read as covering the BI consequences of a notifiable disease (e.g. here COVID-19) wherever the disease occurs, providing there is at least one case of illness caused by the disease occurring within the specified radius.

The High Court interpreted the disease clauses as covering BI losses resulting from COVID-19 provided there had been at least one occurrence of the disease within the specified radius. On the High Court’s construction of the policies, it did not make sense for the cover to be confined only to the effects of the local occurrence of the disease.

Although the Supreme Court ultimately reached a similar conclusion about the scope of the cover (because of its analysis of causation – see further below), the majority did not accept the High Court’s finding that the clauses covered BI caused by cases of illness resulting from COVID-19 occurring outside of the specified area. It preferred the insurers’ argument that:

  1. Each case of illness sustained by a person as a result of COVID-19 is a separate “occurrence”; and
  2. The disease clause only covers BI losses resulting from cases of disease which occur at or within the specified radius of the insured premises.

Prevention of Access/Public Authority Wordings

A prevention of access clause generally provides cover for BI losses resulting from the prevention or hindering of access or use of the insured premises due to public authority action.

A “hybrid” clause combines the disease element requirement occurring or manifesting within a certain radius of the insured premises together with a prevention of access due to public authority action.

The High Court had generally adopted a restrictive approach to the prevention of access/public authority wordings.

Some of the clauses apply only where there are “restrictions imposed” by a public authority following an occurrence of a notifiable disease. The Supreme Court rejected the High Court’s view that this requirement is only satisfied by measures expressed in mandatory terms which have the force of law. It held that an instruction given by a public authority may amount to a “restriction imposed” if it were reasonably understood that compliance would be required without the need to recourse to legal powers.

The Hiscox wordings provide cover only where the BI losses are caused by the policyholder’s “inability to use” the insured premises. The High Court held this meant complete (not partial) inability to use the premises. The Supreme Court agreed with Hiscox and the High Court that an inability of use rather than a hinderance of use must be established. However, it held that this requirement may be satisfied where a policyholder is unable to use the premises for a discrete part of its business activities, or if it is unable to use a discrete part of the premises for its business activities. The Supreme Court interpreted the “prevention of access” wording in a similar manner. It gave the example of a restaurant. If the restaurant was forced to close for dining but operates a takeaway service, there has been a prevention of access and inability to use a discrete part of the premises (i.e. the dining room), and prevention of access to and inability to use the premises for the discrete business activity of providing a dining in service. The distinction accepted in the court below between continuing to operate a takeaway service and starting a new takeaway service was described as an unsatisfactory and arbitrary distinction which was also illogical.


The High Court found that questions of causation largely answered themselves based on its construction of the policies. In contrast, the Supreme Court considered that questions of causation were of crucial importance.

The insurers argued that it was necessary for a policyholder to establish, at a minimum, that the loss would not have been sustained “but for” the occurrence of the insured peril. They contended that, because of the widespread nature of the pandemic, policyholders would have suffered the same or similar BI losses even if the insured risk or peril had not occurred. As such, the policies did not respond.

The Supreme Court rejected the argument that policyholders would have incurred COVID-19 BI losses even if there was not an individual case of illness from COVID-19.

The insurers argued, as a central plank of their case on the appeals, that whatever the exact nature of the causal link required by each sample policy wording, it is a minimum requirement of any causation test that the occurrence of the insured peril made a difference to the occurrence of loss. In other words, it is necessary to show, at a minimum, that the loss would not have occurred but for the occurrence of the insured peril. The insurers argued that it cannot be said that but for any individual cases of illness resulting from COVID-19, the Government measures would not have been taken.

The Supreme Court rejected the insurers’ arguments. In its view, the “but for” test is not determinative in ascertaining whether causation is satisfied. The causal connection required had to take account of the nature of the cover provided in the particular policies.

The Supreme Court referred to it being well established that where there are two proximate causes of loss, neither of which is excluded but only one of which is insured, insurers are liable for the loss. Where there are two proximate causes of loss, one of which is an insured peril but the other is expressly excluded, the exclusion would generally prevail (although it is always a question of interpretation of the policy). In both categories, the combination of the two causes together made the loss inevitable. Neither would have caused the loss without the other.

The Supreme Court concluded at [190] – [191]:

190. Whether an event which is one of very many that combine to cause loss should be regarded as a cause of the loss is not a question to which any general answer can be given. It must always depend on the context in which the question is asked. Where the context is a claim under an insurance policy, judgements of fault or responsibility are not relevant. All that matters is what risks the insurers have agreed to cover. We have already indicated that this is a question of contractual interpretation which must accordingly be answered by identifying (objectively) the intended effect of the policy as applied to the relevant factual situation.

191. For these reasons there is nothing in principle or in the concept of causation which precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause – indeed as a proximate cause – of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself. It seems incontrovertible that in the examples we have given there is a causal connection between the event and the loss. Whether that causal connection is sufficient to trigger the insurer’s obligation to indemnify the policyholder depends on what has been agreed between them.

Trends Clauses

All of the sample policy wordings in the test case contained “trend clauses”. These provide for BI losses to be calculated by adjusting business results in the previous year to take account of trends or other circumstances affecting the business in order to estimate as closely as possible what results would have been achieved if the insured peril had not occurred.

The Supreme Court held that these clauses should be construed consistently so as to not remove the cover provided by the insuring clauses. That meant they should be construed as meaning trends and circumstances unrelated to the insured peril. The trends and circumstances for which the clauses required adjustments to be made should only be adjusted to reflect circumstances unconnected with the insured peril. In this case, that was the effects of the COVID-19 pandemic.

Pre-Trigger Losses

The High Court had permitted adjustments to be made under the trends clauses to reflect the downturn caused by the other effects on the business due to COVID-19 before the occurrence of the insured peril. The Supreme Court rejected that approach. It held adjustment should only be made to reflect circumstances affecting the business which are unconnected with COVID-19. The Supreme Court said that to reduce the indemnity to reflect a downturn caused by other effects of the pandemic, whenever they began, would be to deny indemnity to the policyholder for loss proximately caused by the insured peril on the basis that the loss was also proximately caused by uninsured (but non-excluded) perils with the same originating cause. That was not permissible.


Insurers’ case on causation and the trends clauses relied heavily on a 2010 decision of the High Court of England and Wales in Orient-Express Hotels Ltd v Assicurazioni General SpA.7The Orient-Express case concerns a claim for BI losses resulting from damage to a hotel in New Orleans from wind and water as a result of Hurricanes Katrina and Rita in 2005. The policy was governed by English law. It contained a trends clause similar to the policies considered by the appeals. That policy provided cover for physical damage to the hotel caused by the hurricane. Insurers argued that the policy only covered physical damage, and there was no BI cover because the hotel would have suffered the loss of business because of the general effects of the hurricane on the city.

The Supreme Court concluded that the Orient-Express case was wrongly decided and should be over-ruled. In Orient-Express, BI losses arose because both the hotel was damaged, and due to the damage suffered to the surrounding area and other parts of the city, which were not covered. The Supreme Court said there were two concurrent causes each of which was by itself sufficient to cause the BI, but neither of which satisfied the “but for” test because of the existence of the other. In such a case where the insured peril (physical damage to the hotel) and the uninsured peril (damage to the rest of the city) operate concurrently and arise from the same fortuity (i.e. the hurricane), then provided that damage proximately caused by the uninsured peril is not excluded, loss resulting from both causes operating concurrently is covered.

Concluding Comments

The High Court judgment was widely heralded as a success for the FCA and the policyholders. This has been bolstered by the Supreme Court’s judgment as even more policyholders will now have valid claims and/or some pay-outs will be higher. Valid claims will not be reduced because the loss would have resulted in any event from the pandemic. The FCA’s expectation is that the insurers will reassess and settle claims quickly in light of the Supreme Court judgment. The combined total of the claims will be huge.8 No doubt the insurers will be looking to their reinsurers for recoveries. There may be ongoing litigation where policies differ from the test case, although the Supreme Court’s judgment is likely to provide guidance for the interpretation of policies outside of the scope of the test case.

The judgment is clearly of significant interest to the New Zealand insurance market given the potential for BI claims to be made here and more generally in relation to insurance law. Whilst thankfully New Zealand businesses (at least in many sectors) have to a large extent been shielded from the significant losses suffered by UK businesses as a result of the COVID-19 pandemic, that position could change in the future.

Please contact Darren Turnbull for more information about this case.

  1. The Financial Conduct Authority v Arch Insurance (UK) Ltd & Ors [2021] UKSC 1.
  2. Under the Financial Markets Test Case Scheme. This scheme enables a claim raising issues of general importance to financial markets to be determined in a test case without the need for a specific dispute between the parties where immediate relevant and authoritative English law guidance is needed.
  3. The Financial Conduct Authority v Arch Insurance (UK) Ltd & Ors [2020] EWHC 2448. The High Court judgment ran to 580 paragraphs.
  4. The joint judgment of Lord Hamblen and Lord Leggatt (with Lord Reed agreeing).
  5. Lord Briggs (with Lord Hodge agreeing).
  6. It was accepted COVID-19 had become a notifiable disease on 6 March 2020 in the United Kingdom.
  7. Orient-Express Hotels Ltd v Assicurazioni General SpA [2010] EWHC 1186 (Comm); [2010] Lloyd’s Rep IR 531.
  8. An online article in Insurance Business quoted a Deutsche Bank AG analysts that the total cost could stretch to more than £7 billion.

This publication is intended as a general overview and discussion of the content dealt with. It should not be used in any specific situation, in which case you should seek specific legal advice.