By Martin Croucher

Law360, London (November 17, 2020, 6:15 PM GMT ) The Financial Conduct Authority took aim on Tuesday at a controversial legal precedent that underpins an attempt by insurers to defeat claims by businesses forced to close during Britain's first pandemic lockdown, urging the Supreme Court in London to revisit the case.

Colin Edelman QC, counsel for the FCA, said insurance companies are trying to use the severity of the coronavirus crisis to avoid paying out under the causation test established in the case of Orient-Express Hotels Ltd. v. Assicurazioni Generali SpA . 

In Orient Express, the High Court held that a company's claim for business interruption can be limited if its turnover would have suffered regardless of the immediate event that forced it to close because of wider circumstances beyond the scope of the policy. 

Two High Court judges ruled in September that Orient Express had no relevance to the test case, although they said it was "wrongly decided" even if it did apply. But the insurers have pushed the decision in their appeal, and Edelman told Britain's highest court on Tuesday that Orient Express was always at the heart of the insurers' defenses.

"I appreciate members of this court were involved in that decision," Edelman said. "But it needs to be revisited."

Two of the fives justices hearing the case for the Supreme Court played a role in Orient Express. Justice George Leggatt was an arbitrator and Justice Nicholas Hamblen was the High Court judge who ruled in favor of insurer Generali in the appeal.

The 2010 ruling has provided the backbone for many insurers in their defense in the current test case, which will determine whether insurers will have to pay out on business interruption claims to an estimated 370,000 companies forced to close during the COVID-19 lockdown in March.

In that case, a New Orleans-based hotel operated by the Orient Express chain was seeking to claim against its business interruption policy after storm damage arising from Hurricane Katrina meant its premises was closed for two months in 2005.

But the initial arbitration hearing and the High Court found that the hotel would have suffered business losses even if it had not been damaged, because New Orleans was effectively forced to shut down after the hurricane. It was therefore allowed to claim only a limited amount on its policy — as if it had been an undamaged hotel in a damaged city.

Edelman said the case meant that the worse the storm, the less cover there would effectively be under a policy. "That is counter intuitive and contrary to the purpose of insurance," he added.

The Orient Express case established a principle known as a "but for" test, which has been used widely in trends clauses — which adjust how much a business can claim — and in establishing causation under insurance contracts.

Many insurance companies have geographic restrictions on disease clauses within policies. That meant that policyholders could claim only if a notifiable disease outbreak occurred within a radius of 25 miles from a business premises and the government ordered the company to close.

The two judges in the High Court test case ruled on Sept. 15 that policyholders could claim under those policies if they could determine that someone had been diagnosed with COVID-19 within that vicinity.

But the six insurance companies said on Monday in the first day of the Supreme Court appeal that the lockdown would have occurred even if those local cases had not arisen. Therefore it fails the "but for" test as a causative factor for the restrictions on opening, they claim.

But Edelman said the application of the test by insurers was "slavish and inappropriate."

"The minute the disease spreads, so it is both within and outside the locality and more extreme measures are taken either regionally or nationally, then suddenly insurers are… free of any insurance obligation, because the 'but for' test can no longer be satisfied," he added.

The FCA is represented by Colin Edelman QC of Devereux Chambers, Peter Ratcliffe and Adam Kramer of 3 Verulam Buildings, and Max Evans of Fountain Court Chambers, instructed by Herbert Smith Freehills LLP.

Arch Insurance UK is represented by John Lockey QC and Jeremy Brier of Essex Court Chambers, instructed by Clyde and Co LLP.

Argenta Syndicate Management Ltd. is represented by Simon Salzedo QC and Michael Bolding of Brick Court Chambers, instructed by Simmons & Simmons LLP.

Hiscox is represented by Jonathan Gaisman QC, Adam Fenton QC and Douglas Grant of 7 King's Bench Walk, and Miles Harris of 4 New Square, instructed by Allen & Overy LLP.

MS Amlin Underwriting Ltd. is represented by Gavin Kealey QC, Andrew Wales QC, Sushma Ananda and Henry Moore of 7 King's Bench Walk, instructed by DAC Beachcroft LLP.

QBE UK Ltd. is represented by Michael Crane QC of Fountain Court Chambers, Rachel Ansell QC and Martyn Naylor of 4 Pump Court, and Sarah Bousfield of Brick Court Chambers, instructed by Clyde and Co LLP.

RSA is represented by David Turner QC, Shail Patel, Anthony Jones and Clare Dixon of 4 New Square, instructed by DWF Law LLP.

Zurich Insurance PLC is represented by Andrew Rigney QC and Caroline McColgan of Crown Office Chambers and Craig Orr QC and Michelle Menashy of One Essex Court, instructed by Clyde and Co LLP.

The Hiscox Action Group is represented by Ben Lynch QC, Simon Paul and Nathalie Koh of Fountain Court Chambers, instructed by Mishcon de Reya LLP.

The lead case is Financial Conduct Authority (Appellant) v. Arch Insurance (UK) Ltd. and others (Respondents), case number UKSC 2020/0177, in the Supreme Court of the United Kingdom.

--Editing by Ed Harris.

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