The FCA fired a broadside yesterday at a landmark insurance legal decision which – if successful – could dramatically escalate UK insurers’ Covid-19 business interruption losses.


  • FCA argues for new approach to “but for” causation and BI loss assessment
  • If successful, will significantly extend insurers’ potential quantum
  • Defendant UK insurers to respond next week

Representing the FCA, Colin Edelman QC of Devereux Chambers, argued yesterday there was “flaw in the reasoning” of the Orient-Express Hotels v Generali decision which led to “commercially absurd consequences”.

Addressing the court, he sought to dismantle the impact of the insurer-friendly ruling which imposes tough requirements on policyholders to prove causation and insured BI losses.

Colin Edelman QC of Devereux Chambers

“Reversing Orient-Express would in fact restore sanity rather than creating mayhem. It would restore these policies to function in exactly the way a policyholder would expect them to operate,” Edelman told the presiding judges Lord Justice Flaux and Mr Justice Butcher.

Leigh-Ann Mulcahy of Fountain Court Chambers, also representing the FCA, told the court that while Orient-Express Hotels represents a “key decision” being relied on by the defending insurers, it fails to sufficiently take into account the need to construe party intention, fails to take in to account “realistic” counterfactuals, produces an unintended windfall problem and doesn’t take into account the issue of concurrent causes of loss.

Mulcahy argued that there was a “real prospect of success” in challenging the 2010 decision by Mr Justice Hamblen and noted the ruling has been criticised by commentators and attracted “academic criticism”.

“We say in summary that the Orient Express rule is wrong,” Mulcahy added.

An “absurdity’ of the ruling is that the more widespread the damage is – and thus the higher the risk of depopulation – the less the prospect of recovery by the insured as it can be argued with “more force” that the loss would have arisen anyway, Mulcahy said.

Leigh-Ann Mulcahy QC of Fountain Court Chambers

The “but for” test was a central issue in Orient-Express Hotels which effectively ruled that a hotel damaged by hurricane could only claim for BI losses directly related to the physical damage and loss of attraction/denial of access and not for losses as a result of the general downturn from tourists no longer wishing to visit New Orleans in the aftermath of Katrina.

Damian Cleary of DCThree Services, the lawyer who successfully acted for insurers in the Orient Express Hotels case, explains: “What was stripped out was the loss as a result of the general downturn effects of the hurricane, which were not insured”.

The FCA also argued yesterday for the Court to agree a third way of addressing multiple causation factors when they are so “inextricably linked” that they cannot be sensibly divorced from one another.

Damian Cleary of DCThree Services

In this case, the existence of Covid-19 (not insured) and the subsequent lock down measures (insured).

Cleary described the FCA approach as “essentially a hybrid of interdependent and independent causes”.

He continued: “Its effect would be to trigger insurance cover for Covid-19 AND the Government lockdown together as a single cause that satisfies all elements of a multi-conditional BI extension (i.e. (A) the occurrence of a disease in the vicinity of insured premises, which (B) causes a competent authority to impose restrictions, which (C) causes an interference with the business and which (D) causes financial loss).”

According to Cleary, the FCA’s approach “would effectively conflate (A) and (B) as a single, indivisible proximate cause of loss, rather than being in a position where (A) is one cause and (B) is another and which causes could cancel each other out (which is what concurrent independent proximate causes can result in)”.

He concludes: “this does assume that each pound of lost revenue is proximately caused by both causes at the same time, and I am not convinced that this is the case here. Can you imagine a customer of a restaurant saying ‘I am not going to go to the restaurant both because of my fear of contracting Covid-19 and because it is closed, and I cannot say which over the other is preventing me’? That doesn’t seem likely to me, and so I question whether there really are concurrent proximate causes operating.”

UK commercial insurers participating in the High Court test case...

Relying on Orient Express, the eight UK insurers participating in the test case (see table) argue that the Covid-19 pandemic and the government-mandated lockdown are independent causes of loss.

The FCA is also challenging the application of the Orient Express Hotels decision when it comes to measuring the BI loss – a move which, if successful, would significantly increase the loss impact.

Insurers argue that – if they are held to be liable – the loss should be calculated by measuring the turnover in the absence of a business being closed under the lock down restrictions.

But Edelman argued yesterday that the Orient Express Hotels’ “but for” test should not be the “white knight charging over the hill to the rescue of insurers”.

Instead, the Court should determine the loss based on turnover that would have occurred “but for” the “inextricably linked disease and subsequent lockdown”.

The hearing continues today…

The Insurer Comment:

If the FCA is successful with these twin arguments, it will change the English Law’s current approach to causation. It is also no exaggeration to say it could also have a debilitating effect on some carriers’ balance sheets.

After all, on Monday the FCA told the Court that 370,000 policies could be ultimately impacted by the test case. With typical sub-limits ranging from £10,000 to £100,000 – and in some cases much more – that is billions and billions of pounds

It will be soon be the insurers’ turn to address the FCA’s attempted dismantling of the Orient Express decision. The stakes are high…