Highly anticipated High Court judgment in the Financial Conduct Authority's business interruption test case

This article is a follow-up to our previous discussion on the case here.

Following the COVID-19 pandemic and the Government’s restrictions imposed as a result, a host of businesses have suffered a significant level of financial loss and closure of premises, particularly small and medium-sized enterprises (SMEs). A large number of businesses have looked to insurers to cover their losses under business interruption insurance policies. Many insurance companies have, however disputed the claims, contending the policies do not cover these unprecedented restrictions.

In May 2020, the Financial Conduct Authority (FCA) announced in a statement its intention to bring a test case in the High Court of England and Wales with a view to seeking legal clarity about the meaning and effect of the business interruption insurance policy wordings concerning COVID-19 claims.

The FCA acknowledges that the issues surrounding business interruption policies are complex and have the potential to create ongoing ambiguity for both policyholders and insurers for a long time. Most SME policies only have basic cover for business interruption as a consequence of property damage. However, some policies also provide cover for business interruption from other causes (particularly infectious or notifiable diseases – ‘disease clauses’ – and non-damage denial of access and public authority closures of restrictions) so may provide cover for COVID-19 related business interruption. It is this non-damage business interruption cover that was in question.

The eight defendants who had agreed to be part of the test case were:

  • Arch Insurance (UK) Ltd
  • Argenta Syndicate Management Ltd
  • Ecclesiastical Insurance Office Plc
  • MS Amlin Underwriting Ltd
  • Hiscox Insurance Company Ltd
  • QBE UK Ltd
  • Royal & Sun Alliance Insurance Plc
  • Zurich Insurance Plc
Why a test case?

The intention of the urgent test case was not to cover all possible disputes but to resolve some key contractual uncertainties and causation issues and provide clarity for policyholders and insurers. It was not to determine how much is payable under individual business interruption policies but would effectively provide the basis for doing so.

The FCA decided to take action in the public interest to advance its consumer protection and market integrity objectives. By obtaining legal guidance through this means, it is ultimately quicker and cost-effective for policyholders compared to each policyholder commencing a separate court action.

Judgment

On 15 September 2020, the High Court handed down its judgment with a decision that was embraced by policyholders. The judgment is complex, runs to over 150 pages and deals with many issues.

A total of 21 lead policies were considered. The relevant provisions in the policies fell into three categories:

  • Disease wordings: provisions which provide cover for business interruption in consequence of, or following, or arising from the occurrence of notifiable disease within a specified radius of the insured premises.
  • Prevention of access/public authority wordings: provisions which provide cover where there has been a prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restrictions.
  • Hybrid wordings: provisions which are engaged by restrictions imposed on the premises in relation to a notifiable disease.

The judgment ruled that disease clauses in some business interruption policies intended to cover businesses in the circumstances of the COVID-19 pandemic. It also states that certain denial of access clauses in the sample provide cover, but this is dependent on the detailed wording of the clause. It is also subject to the way in which the business was affected by the Government’s response to the pandemic i.e. whether the business was subject to a mandatory closure order and whether the business was required to close completely.

The Court found in the FCA’s favour on questions of causation, the proper construction of counterfactuals, the interpretation of “trends” clauses and significantly on the correct understanding of the nature of the insured peril.

The judgment is a significant step in resolving the uncertainty faced by policyholders.

The full judgment can be found here.

Impact

This opens up an avenue for small business to review their insurance policies and consider getting in contact with their insurers to determine if their policy could be re-considered.

According to the FCA’s estimates, the case’s outcome is likely to affect approximately 370,000 policyholders nationwide. Hospitality Insurance Group Action (Higa), one of the campaign groups backing the FCA’s case, stated thousands of UK hospitality businesses should now be able to receive pay-outs as a result of the judgment.

Policyholders and insures should bear in mind that whether losses are covered under a policy will depend on the particular wording of the policy and the facts of each case.

The judgment has provided binding authority in England and Wales on how a number of clauses will be interpreted. The Court was clear that every policy will need to be interpreted separately and on its own wording.

What next?

Policyholders

For policyholders, there is now progress towards the pay-out they may be entitled to. Policyholders with affected claims were expected to hear from their insurer within seven days of the judgment.

Insurers

The insurance industry is expected to pay out £1.7bn in COVID-19 claims.

For some insurers, they may not be paying out as much as they could have been in their worst-case scenario.

Christopher Woolard, Interim Chief Executive of the FCA, commented:

“Insurers should reflect on the clarity provided and irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid. They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.”

Appeals

It is possible that the judgment will be appealed to the Supreme Court – the highest court in the UK. The FCA and Defendant insurers have agreed that they will seek to have any appeal heard on an expedited basis, given the importance of the matter for so many policyholders. It is recognised that thousands of small firms and potentially hundreds of thousands of jobs are relying on this.

Association of British Insurers (ABI) have stated: “This is a complex judgment spanning 162 pages and 19 policy wordings and it will take a little time for those involved in the court case to understand what it means and consider any appeals.” The FCA have confirmed that any appeal does not preclude policyholders seeking to settle their claims with their insurer before the outcome of any appeal is known.

The FCA and Defendant insurers must wait for a consequentials hearing before the High Court, at which time the Judges will make certain declarations in respect of their judgment and any applications to appeal will be heard. The FCA is seeking to have a consequentials hearing as early as possible.

How can we help?

If you have any queries in relation to business interruption insurance losses arising from COVID-19 or the effects of the judgment on your policy, please contact our Commercial Dispute Resolution team.

This article was co-written by Nikita Sandhu.

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