Pinning COVID-19 and the Consequences of a National Response on the Insurance Industry.
As the COVID-19 pandemic grips every corner of the Earth, in some places more tightly than others, government responses of varying effectiveness have been rolled out causing, in many instances, inevitable business interruption losses.
Businesses lucky to hold ‘business interruption’ insurance have looked to their insurers to indemnify them against those losses. Insurers caught off guard by the swiftness and impact of this pandemic, have pushed back.
Intervention of the Courts
In the UK, the Financial Conduct Authority (‘FCA’) and some of the most significant insurers in the international Insurance Industry have asked the British Courts for guidance as to how the insurers and their various insuring clauses should respond, if at all, to this tsunami of claims.
On 15 September 2020, the High Court of Justice in England found the insurers liable to indemnify their business insured against losses suffered by those insured because of the British Government’s response to the COVID-19 pandemic.
The Insurers appealed. On 15 January 2021, the UK Supreme Court unanimously upheld the High Court’s finding. In so doing, it joined the High Court in drawing a line from one or more cases of COVID-19 through the consequences of a National Response to COVID-19, to the Insurance Industry (Fig 1).
Causation in Insurance Law
What is the principal which enables a court to draw such a line?
It is the principal of causation. But it is not causation in the sense of causing a loss. It is causation in the sense of triggering a policy term or terms where the term or terms triggered dictate how the policy responds.
The Starting Point - the Terms of the Policy
It is obviously fundamental to understand what the policy’s terms are. At this point there was a significant divergence between the views of the High Court and the Supreme Court.
The High Court found that the insured peril was COVID-19. The Supreme Court found it to be COVID-19 within the specified radius of the insured premises. The difference is significant because it means that the starting point in linking the insured peril to the policy is not COVID-19 at large. It is the case or cases of COVID-19 within the specified radius.
Causation – Drawing the Line
Identifying the cause for a policy’s response has been traditionally characterised as the application of common sense. It is possible for there to be more than one cause. Furthermore, the terms triggered can conflict.
The COVID-19 pandemic presents the relatively rare situation where consideration of the potential causes is not limited to one or two separate events. Here there were hundreds of thousands of events. Even so, it comes down to one question,
‘did the insured peril (COVID-19 within the specified radius of the insured premises) cause the business interruption losses sustained by the policyholder within the meaning of the causal requirements specified in the policy?’
The insurers put forward two main arguments why the answer to this question is no.
Firstly, they relied upon the ‘but for’ test to argue that it was up to the insured to establish that ‘but for’ a case or cases of COVID-19 inside the 25km radius, there would have been no National Response and, therefore, no business interruption (Fig 2).
Secondly, they argued, in the alternative, that the courts had to aggregate the losses inside the 25km radius and determine whether those cases had the same or similar impact to the aggregate of cases outside the 25km radius (Fig 3).
Neither argument appealed to the Supreme Court. These arguments failed to recognise the common-sense approach to causation, the policy’s terms, and the parties’ intentions. The Supreme Court preferred to view all cases whether they fell inside or outside the 25km radius, as separate and equally effective causes of the National Response and its consequences.
Like the High Court, the Supreme Court was adamant that there had to be a case within the specified radius. The difference between the two lies in the characterisation of what the policy was responding to.
For the High Court, it was the consequence of every case provided at least one case fell within the radius (Fig 4).
For the Supreme Court it was the specific case or cases inside the radius recognising that each such case is a separate and equally effective cause of the loss (Fig 5).
The line connecting COVID-19 to the Insurance Industry through the National Response and its consequences, was drawn.
The practical effect of this decision is that all the insuring clauses which were an issue on the appeal provide cover for business interruption cause by COVID-19 pandemic.
Furthermore, the trend clauses will not cut down in the calculation of the amounts payable.
The Supreme Court’s judgment highlights the fundamental importance of causation in determining these types of business interruption cases and the approach to determining that causation. While decisions of the Supreme Court are not binding on Australian courts, they are influential.
Insurance policies in the Australian market seek to limit their scope to occurrences within a geographical radius of the insured business. While time will tell, it is difficult to see Australian courts following a different path from the Supreme Court when the opportunity presents itself.
The names of the cases are: -
The Financial Conduct Authority (Appellant) v Arch Insurance (UK) Ltd and others (Respondents) Hiscox Action Group (Appellant) v Arch Insurance (UK) Ltd and others (Respondents) Argenta Syndicate Management Ltd (Appellant) v The Financial Conduct Authority and others (Respondents) Royal & Sun Alliance Insurance Plc (Appellant) v The Financial Conduct Authority and others (Respondents) MS Amlin Underwriting Ltd (Appellant) v The Financial Conduct Authority and others (Respondents) Hiscox Insurance Company Ltd (Appellant) v The Financial Conduct Authority and others (Respondents) QBE UK Ltd (Appellant) v The Financial Conduct Authority and others (Respondents) Arch Insurance (UK) Ltd (Appellant) v The Financial Conduct Authority and others (Respondents) UKSC 1
__________________________  In seeking the courts’ guidance, the FCA and the insurers put before the courts different types of insuring clauses which they asked the courts to use as the context for that guidance. For the context only this note limits itself to ‘disease clauses’ (which cover business interruption losses resulting from any occurrence of a notifiable disease within a specified distance from insured premises). It recognises that there are other types of clauses which were put before the courts. Those clauses too attracted debate about their meaning and how the principals discussed in this note applied to them. That debate did not change the ultimate outcome.
 Lord Hamblen and Leggatt (with whom Lord Reed agreed) at paragraph 161. Lord Briggs (with whom Lord Hodge agreed) at paragraph 321.
 See footnote 2