The FCA business interruption test case is Financial Conduct Authority v Arch Insurance (UK) Ltd and others [2021] UKSC 1, decided by the UK Supreme Court on 15 January 2021. The regulator brought it to settle, quickly and for everyone at once, whether standard business interruption policy wordings covered COVID-19 lockdown losses. The court found substantially in policyholders’ favour, and its reading of “disease” and “prevention of access” clauses now governs how those wordings are interpreted.
It was the first case run under the Financial Markets Test Case Scheme, a mechanism for resolving a point of legal uncertainty that affects many parties simultaneously. The FCA estimated the judgment gave guidance on around 700 policy types from 60 insurers, affecting some 370,000 policyholders, mostly small businesses in hospitality and leisure.
Why the FCA brought the case
When the first COVID-19 lockdown closed businesses in March 2020, many held business interruption cover but found their claims declined. Insurers argued the standard wordings were never meant to respond to a national pandemic. Rather than leave thousands of small firms to litigate individually against their insurers, the FCA used its test-case powers to put a representative sample of wordings before the court, with eight insurers agreeing to argue the opposing side.
What clauses did the test case decide?
Two families of extension were central. Disease clauses cover interruption caused by a notifiable disease occurring within a set distance of the premises. Prevention of access and public authority clauses cover interruption caused by action of a public authority that stops or hinders access to the premises. The court also addressed trends clauses, which adjust the payout to what the business would otherwise have earned but for the insured event.
What did the Supreme Court decide?
The court allowed the FCA’s appeal substantially and dismissed the insurers’ appeals. On disease clauses, it held that each individual case of the disease was a separate, equally effective cause of the loss, so an insurer could not escape liability by arguing the national lockdown rather than the local outbreak caused the closure. On causation, it rejected the insurers’ narrow approach and treated the pandemic and the public response to it as a single indivisible cause. On trends clauses, it held the payout should not be reduced to reflect the wider effects of the pandemic that the cover was meant to protect against.
Did every business interruption policy pay out?
No. The judgment resolved the meaning of the tested wordings; it did not make every policy respond. Cover still depends on the exact wording, and many policies exclude disease altogether or require physical damage before they pay. Whether a given policy responds is read against that policy, using the interpretation the court laid down.
Why the wording is everything
The lesson of the test case is that business interruption cover turns on precise clause wording, not on the general label. Two policies both sold as business interruption can respond completely differently to the same event. Reviewing the wording before you need it, with a broker who can read it against your actual exposures, is how you avoid discovering a gap at claim time. To review your commercial cover, get a quote or speak to the team.