The FCA test case and business interruption

A recent judgment on business interruption resulting from the pandemic has implications for landlords and tenants as well as insurers


  • Emma Pinkerton
  • Sarah Moore

19 February 2021

The Supreme Court has given its judgment in a test case on non-damage business interruption (BI) cover for losses arising from the COVID-19 pandemic, Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1

This is a significant decision for both landlords and tenants of premises forced to close following the government's instructions to do so in March 2020. In the light of this legal decision, insurers will also have to review and revisit many claims from landlords and tenants that had previously been rejected. 

Pandemic problem for insurers

Early in the pandemic, uncertainty was caused by the different BI policy wordings in the market. In May, the Financial Conduct Authority (FCA) asked the High Court to consider 21 sample BI policies and give a declaration on their meaning. 

The wordings fell into three categories:
  • disease extensions – which generally provide insurance cover for business interruption caused by the occurrence of a notifiable disease within a specified distance from the relevant premises
  • prevention of access and public authority extensions – which generally provide insurance from public authority intervention preventing access/use of the relevant premises
  • hybrid clauses – these clauses generally combine the main elements of both of the above extensions.
This piece concentrates on the second of these.

Focusing on arguments over the interpretation of the relevant policy provisions, the High Court found that, while each policy had to be looked at individually, extensions for disease and hybrid clauses generally did provide cover, but that extension cover for denial of access was more limited. The FCA and some of the insurers involved in the case then appealed to the Supreme Court. 

We will look at each element in more detail below, but in essence the Supreme Court disagreed with the High Court on the disease extensions, construing them more narrowly. Despite this, the Supreme Court found that the cover was available as a result of its analysis on causation issues. 

This is potentially of crucial importance, with the Supreme Court dismissing the insurers' arguments as to the strict application of the traditional "but for" test in causation, i.e. that a basic requirement to succeed in recovery under the policy was to show that the loss would not have been sustained but for the occurrence of the insured risk. It held that, in some instances, it is possible for a series of events (some insured and some not insured) to combine to cause a particular result, even if none of them individually were sufficient to do so themselves.

While we consider this is likely to result in further disputes to test the boundaries of this divergence from a previously well-understood legal principle, we also consider that it may be difficult to persuade any court to widen those boundaries any further. 

Prevention of access clauses

Prevention of access clauses cover BI losses resulting from interventions by public authorities that prohibit entry to the insured premises.  

The High Court had found that "restrictions imposed" by a public authority had to be expressed in mandatory terms and have the force of law. However, the Supreme Court rejected this interpretation as too narrow, and found that restrictions imposed could include instructions given by a public authority, provided these carry the imminent threat of legal compulsion or are expressed in mandatory or clear terms. 

The Supreme Court did not decide precisely which of the government's instructions of March 2020 would fall into this category, although it did comment that the argument would be stronger in relation to instructions requiring businesses to close than to those requiring people to stay at home or socially distance. 

However, the overall effect is to broaden the range of government measures that may trigger cover; although the lack of express guidance also leaves the potential for further dispute, in different circumstances, over the scope of any such wording.

An insurance policy might also provide cover where BI loss is caused by the policyholder's inability to use the insured premises. The Supreme Court interpreted "inability to use" widely, and certainly more widely than the High Court. It held that this criterion could be satisfied if the policyholder could not use a discrete part of the premises or any part of the premises for a discrete business activity, rather than being prevented from using the whole premises. The same analysis was applied to prevention of access so that if the insured were prevented from accessing a discrete part of the premises and/or prevention of access for the purpose of carrying out a discrete part of the business undertaken at the premises. By way of example a restaurant that provided take-away services might be able to recover for the loss of diners who would have stayed in. 

Implications for insurers and landlords

Insurers must reassess all claims and complaints they have previously rejected that would, if still open, be affected by the outcome of the test case. However, they need not reassess claims or complaints that have been settled, or those due to be considered by the Financial Ombudsman Service.

The Supreme Court's judgment has broadened the range of government measures that may trigger cover for policyholders, who may now be able to claim successfully for BI-related losses due to COVID-19 where these had previously been refused by insurers.  

The BBC has reported that the judgment will potentially affect 370,000 small businesses, although not all will be able to recover money. However, it is important to remember that each case will turn on the policy wording in question and, where relevant, the provisions of the lease.  

Of potential concern for landlords is whether and to what extent the outcome might trigger a reassessment of the rent cesser clause in a lease, whereby the tenant may be temporarily released from the obligation to pay rent and other sums under the lease where the premises is unusable as a result of an insured risk. In our view, as rent cesser provisions usually only apply if a property sustains physical damage the case is not, per se, relevant. However, there is clearly scope for challenge as a result of the Supreme Court's findings, particularly where the wording in the lease may include reference to "losses" – specifically with regard to judgment providing for the recovery of non-damage economic loss as a result of the inability to use any part of the property for any part of the business undertaken there and the widening of the application of government imposed restrictions. 

Given the sustained disruption to the businesses of both landlord and tenants – particularly in the retail, hospitality and leisure sectors – we think this area may be subject to further consideration and potentially dispute. 

In particular, landlords may now seek to test the extent of their BI cover where tenants are not paying or have not paid rent.  That will involve detailed consideration of their policies and any extensions. 

Landlords will also wish to understand whether tenants have received payment under their own BI policies, especially where there remain arrears for the same period.   

Meanwhile, tenants may want to test the scope of the rent cesser provisions on the basis they extend beyond physical to economic damage and, in the right circumstances, potentially litigate the point.  

"Of potential concern for landlords is whether and to what extent the outcome might trigger a reassessment of the rent cesser clause in a lease"

Looking to the future

This judgment focuses on the first wave of COVID-19 BI claims, and there were many elements it did not cover. The implications for the insurance sector are of course huge, and will no doubt result in a narrowing of cover in the future. 

There are also lessons to be learned for landlords, and we are already seeing drafting within leases that seeks to protect them where tenants are either covered by BI insurance or have the benefit of financial support from government-backed schemes intended to help them meet their ongoing financial obligations.

Related competencies include: Landlord and tenant

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