In January 2021 the highest court in Britain finished reading twenty-one insurance policy wordings and told the insurers that most of the denials did not hold.
About 370,000 policyholders were waiting on the answer. The regulator’s press release described tens of thousands of small firms relying on the outcome, businesses ordered shut by a government they did not argue with, then told by their insurers that the shutdown was not the kind of loss the policy paid for.
The case is Financial Conduct Authority v Arch Insurance (UK) Ltd and others. Its citation is [2021] UKSC 1. Judgment came down on 15 January 2021.
The regulator took the insurers to court itself
The Financial Conduct Authority is Britain’s financial regulator, the body that supervises insurers and banks.
It did not write a strongly worded letter. It filed a claim in the High Court against eight insurers, Arch, Argenta, Ecclesiastical, MS Amlin, Hiscox, QBE, Royal & Sun Alliance and Zurich, and named itself as the party arguing the policyholder side.
The claimant on the front of the case is the regulator, not a business. Small firms with a few thousand pounds of monthly income could never have funded a run at the Supreme Court, so the regulator ran it for them and asked the courts to move fast.
The court did move fast. The regulator started proceedings in the High Court on 10 June 2020. The High Court heard the case from 20 to 30 July and gave judgment on 15 September. The appeal jumped the Court of Appeal entirely, on a leapfrog certificate, and the Supreme Court heard it from 16 to 19 November and ruled on 15 January 2021. Seven months, start of proceedings to final judgment.
What the policies actually said
The denials turned on a narrow family of clauses.
Most business interruption cover, which is the part of a commercial policy that replaces lost income, only pays after physical damage to the building. A fire, a flood, a collapsed roof. No damage, no payment.
But many policies carry extensions that pay without any damage at all. Three kinds mattered here.
Disease clauses paid when a notifiable disease, meaning one that must be reported to authorities, appeared within a set radius of the premises.
Prevention of access clauses paid when a public authority action stopped customers reaching the door.
Hybrid clauses stitched both ideas together and were argued both ways.
The insurers’ position was that these extensions were written for a local problem. One restaurant, one outbreak, one street closed. A national lockdown, they argued, was so large that the clause was never meant to reach it.
The trends clause, and the strange arithmetic it produced
There was a second argument, and it was the one that could have made a win worthless.
Business interruption policies contain a trends clause. It adjusts the payout so the figure reflects what the business would have earned if the insured event had not happened.
Insurers argued that even where a clause was triggered, the counterfactual should still include the pandemic. In plain terms: yes the policy responds, but the lost turnover gets compared to a version of the world where the pandemic still emptied the dining room. The gap shrinks toward nothing.
They had authority for it. A 2010 decision, Orient-Express Hotels v Assicurazioni Generali, had reasoned that way over a claim for business interruption loss after hurricane damage to a hotel, where the surrounding area was damaged too.
So the fight was not only about whether the policies covered the shutdown. It was about whether a covered claim could still be argued down to a small number.
The ruling
The Supreme Court substantially allowed the regulator’s appeals and dismissed the insurers’ appeals.
On the disease clauses, the court held that the cover was not confined to the local outbreak. Each case of the disease inside the radius was treated as a separate and equally effective cause of the government response, so the policyholder did not have to prove that a particular local case caused the national lockdown.
On the trends clause, the court held that the counterfactual could not be loaded with the very circumstances that made up the insured peril. The insurers’ arithmetic was rejected.
And Orient-Express, the precedent underneath that arithmetic, was overruled. The court said in terms that it had been wrongly decided.
The regulator’s press release records the tally. At the High Court, 12 of the 21 policy types were held to provide cover. Six insurers appealed on 11 of those and lost, and the Supreme Court held that two more types, issued by QBE, provide cover as well. The judgment, the regulator wrote, “brings to an end legal arguments under 14 types of policy issued by six insurers.”
The ones that did not
Fourteen of twenty-one is not all of them.
Some businesses read the same headlines and learned, in the same week, that their particular clause was one of the ones that failed. That is what a test case is. It gives an answer, and the answer is not always yes.
The regulator’s response was to publish, rather than leave firms guessing. It set out the affected wordings, the insurers involved, and guidance on how claims and interim payments were to be handled after the judgment. The regulator’s own press release on the judgment put the reach at 700 types of policy issued by 60 insurers, held by the approximately 370,000 policyholders it had identified in July 2020. By March 2021 its published list of affected policies covered over 200,000 of them.
The paper trail is complete and public
Because it is the rare case where the paper trail is complete and public.
The wordings are published. The judgment is published. The regulator’s list of which policies were caught is published. A business owner in Britain could, and can, look up whether the denial letter on the kitchen table survived contact with the Supreme Court.
One case answered the same question for hundreds of thousands of firms at once, and the answer was written down where anyone can check it.
The full judgment is published on the UK Supreme Court website as [2021] UKSC 1.