The business interruption insurance test case: some points to note for general commercial practitioners

05.02.2021

Introduction

On 15 January, the Supreme Court handed down judgment in Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1, which has become known as the business interruption insurance test case. The implications for insurance law are significant and have been analysed in detail elsewhere. But the implications of the case go beyond insurance law. Having worked as part of the FCA’s internal team from the pre-action stage through to the hearing at the Supreme Court, Daniel Webb considers some key dicta for general commercial practitioners. For the avoidance of doubt, the views expressed here are the author’s own and not those of the FCA.

 

Background

In June 2020, the FCA brought proceedings against eight insurers in order to resolve the genuine uncertainty surrounding many business interruption insurance policies. The FCA made arguments on behalf of policyholders, many of them SMEs, in relation to a sample of business interruption policies where cover had been denied. After the FCA was substantially successful in an expedited hearing in the High Court, there was a leapfrog appeal to the Supreme Court. The insurers’ appeal was unsuccessful, and the Supreme Court’s reasoning (which differed from that of the High Court) even expanded the availability of cover for policyholders.

Both judgments are complex, addressing the construction of numerous policy wordings and the correct test for causation in insurance contracts of this nature. As noted, analysis for insurance specialists can be found elsewhere. Please also see the links below for resources provided by the FCA. In this article, I highlight two areas of the Supreme Court judgment that have more general application.

 

Primacy of the ordinary policyholder over the pedantic lawyer

 As one would except, the Supreme Court reminded us early on that an insurance contract was just like any other contract, and “like any other contract, must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean” (at [47]). However, the application of this core principle to the policies in question bears scrutiny.

In one sense, the court’s application was not unusual. For example, the Supreme Court simply did not agree that the RSA 3 policy wording could be read as the High Court had it. The Supreme Court said that there was no ambiguity in the wording, as “no reasonable reader” would understand the words “any…occurrence of a Notifiable disease within a radius of 25 miles” to include any occurrence outside that radius (at [61]). This was held to be “a matter of plain language” (at [71]).

But at times, the court brought the nature and characteristics of the contracting party to the fore. The same RSA 3 policy contained a general exclusion for epidemic and disease, which was said to apply to all sections of the policy unless stated otherwise. RSA relied on the principle that a court, when confronted with two seemingly inconsistent contractual provisions, should start from the premise that the parties intended that effect should be given to each of the provisions and reconcile them if that can conscientiously and fairly be achieved (at [76]). On that basis it was argued that occurrences of a notifiable disease were covered by the RSA 3 policy only if not part of an epidemic.

The Supreme Court rejected this argument. It said that the principle relied upon was only a sound starting point where the parties would reasonably be expected to have had both clauses simultaneously in mind. “But sometimes that is not a reasonable assumption – for example in the case of complex contractual documents which themselves contemplate and provide for the possibility of inconsistency”. Reference was again made to the reasonable person, before stating: “In the case of an insurance policy of the present kind, sole principally to SMEs, the person to whom the document should be taken to be addressed is not a pedantic lawyer who will subject the entire policy wording to a minute textual analysis. It is an ordinary policyholder […]” (at [77]).

The primacy of the “ordinary policyholder” over the “pedantic lawyer” was notable. The court said that it was unreasonable to expect that such a policyholder would have got to page 93 of a 93-page policy and understood the exclusion to remove the cover that was ostensibly conferred on page 38. Had such an exclusion been intended, it would have been done transparently and not “buried away” at the back.

In a sense, this policyholder-focused (or anti-lawyer) approach ran throughout the Supreme Court judgment, and was a striking difference from the High Court judgment. Lord Briggs stressed that what counted was what the hypothetical person would think the parties meant by the words used, “rather than an insurance lawyer” (at [322]). Even when it came to causation (where the arguments were complex and no attempt is made to summarise them here) a key concern of the court was “the presumed intention of the parties to an insurance product sold principally to SMEs often with relatively low financial limits”, where he said the correct approach would therefore need to be rational, clear and simple to apply (at [206]).

This focus on the “ordinary” policyholder may prove useful for practitioners in commercial disputes more generally. This would especially be the case when representing SMEs or less legally sophisticated parties, faced with complex and lengthy contracts. It is also something to bear in mind when drafting SME or consumer contracts, where the language should be readily understandable, predictable and easy to apply, with exclusions set out transparently in an appropriate place (for example, immediately following the clause conferring general liability on that subject matter).

 

Multiple “true” constructions?

Another area in which the case may be of interest to general commercial practitioners is in respect of Lord Briggs’ minority judgment. Although he agreed with the majority on outcome and most of their reasoning, he made an interesting observation on how a court chooses between rival contractual constructions which have the same result. He noted that the Supreme Court majority had rejected the primary analysis preferred by the court below (which also led to there being cover), but had in substance accepted and applied the alternative analysis which the High Court had considered (at [319]).

While analysing the rival constructions, Lord Briggs stated that “since they both lead to the same conclusion, it is not necessary to prefer one over the other” (at [321]). He said that whilst it is often said that there can only ever be one “true” construction of any contractual provision, where the practical outcome of different constructions is the same, there was in his view no such necessity.

This was an interesting stance for a Supreme Court justice to take. Looking forward, one might hope that Lord Briggs’ challenge to received notions of there only ever being one true construction might lead to more flexibility in contract claims, and perhaps a more outcome-driven approach.

 

Conclusion

It can perhaps be said that in both of the areas discussed above the Supreme Court showed itself to be eminently pragmatic in matters of construction. In these areas at least, the judgment appears to move away from an academic, lawyerly approach and towards one more recognisable to an “ordinary” contractual party. This is surely to be welcomed.

 

Useful links

 

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