The High Court has this week (Tuesday 15 September 2020) handed down judgment in the Financial Conduct Authority's (FCA) business interruption insurance test case, which will no doubt be of high interest to insurers and insureds alike. The FCA has estimated this test case could affect some 370,000 policyholders who have been heavily impacted by the effects of the Covid-19 pandemic.
Business interruption insurance became a hot topic at the outset of the Covid-19 pandemic as some insurers refused to offer cover to their insured for losses in connection with the pandemic, citing the business interruption clauses in certain policies as not covering the particular circumstances of the unprecedented government response to the threat of the pandemic and resultant lockdowns and closures of businesses.
This caused a great deal of consternation and worry amongst commercial enterprises, some of whom feared there would be no recourse for the losses they had suffered and would undoubtedly continue to suffer, which in many cases they may have believed they were covered against.
Business interruption insurance cover & the FCA
Business interruption insurance is intended to cover the policyholder for loss of profits and expenses during periods where business cannot be conducted as usual due to damage caused by certain perils referred to in the insurance policy. Business interruption clauses are usually used in respect of physical damage, such as flood or fire. Though, often, they also include extensions for loss caused by non-physical factors. It is these extensions that the test case was concerned with.
Due to the considerable issues faced by businesses (particularly SMEs), the FCA, which regulates the insurers, announced in May 2020 that it would bring a test case to the High Court to seek clarity on the meaning and effect of certain business interruption insurance policy wordings regarding claims made as a result of the effects of the Covid-19 pandemic.
The FCA advanced the case on behalf of policyholders, where 21 sample business interruption clauses from eight insurers were analysed in expedited proceedings in the hope of giving much needed guidance to policyholders and the industry.
The court's findings in the test case
In order to consider the issues and provide its view, the court grouped together certain types of clauses and commonly used wording.
The court, on the whole, found in favour of policyholders in welcome news for many insureds. Although, there were some circumstances where the judgment was not so favourable to policyholders. Much will depend on the particular wording of a specific policy, however, in summary the court found the following:
These clauses generally provide cover for business interruption as a result of a ‘notifiable disease’ within a specific radius of the insured’s premises. The court’s view was that these should mostly provide cover.
The Court agreed with the FCA’s analysis of these clauses in that an outbreak of the magnitude of the Covid-19 pandemic is sufficient to find a causal link between the outbreak of the disease (which has been confirmed as ‘notifiable’ by UK governments) and interruption to business. In other words, it was not, as the insurers argued, that only local outbreaks would be covered, which would require distinction from the wider outbreak.
The court confirmed that any individual localised outbreaks form an indivisible part of the wider outbreak, which was the cause of the business interruption. This sought to avoid the anomaly where cover could be provided for a local outbreak, though not if it was part of a wider outbreak where it would be virtually impossible to show that the local outbreak had made a material difference to the response of the local authorities or public.
However, certain disease clause wordings were not interpreted so widely, for example where the words “in consequence of” and “events” were used which would only cover particular matters at a particular place and in a particular way. This may mean cover not being provided to policyholders with such clause wording for the ‘initial’ nationwide lockdown, but may be provided for specific localised lockdowns.
Denial of access clauses
These are intended to provide cover where access to or use of an insured’s premises has been prevented or hindered due to government or other authority action or imposed restrictions. The court’s view was that these should sometimes provide cover.
The court was generally more restrictive on the interpretation of these clauses. Where “prevention of access” is referred to on the policy, the court declared that a closure of premises was required (and a physical prevention of being able to open was not), although a complete ceasing of activity was not required (it is interruption that is required). However, whether a claim will be covered is likely to rely on whether there was a government mandated closure or the closure was simply an effect of the ‘stay at home’ guidance.
The instructions by the UK government on 16, 20 and 23 March were characterised as advice or action, and not mandatory instructions. As a result, cover would likely not be provided where clauses require action which “prevents” access – as these require the force of law. As such, the Coronavirus Regulations issued on 21 and 26 March may, however, mean that cover is provided.
The application of these clauses is therefore likely to be highly specific to (a) the particular clause wording and (b) the factual circumstances as, for example, a dine-in restaurant that also offered takeaway services that had to close its dining in provision on 26 March would not likely be covered, though a dine-in only restaurant could be (because dine-in restaurants were forcibly closed on that date, takeaways were not).
These operate, as the name suggests, as a hybrid of the above and where restrictions are imposed in respect of a premises in connection with a notifiable disease.
The court largely mirrored its interpretation of the above clauses, in a wide assessment of the disease element, though narrowly interpreting the denial of access element, requiring mandatory restrictions and any “inability to use” requiring more than simply inability to use to normal standards.
The full judgment runs to over 160 pages, but can be found here in case of interest.
The potential appeal
Whilst there is undoubtedly some pleasing reading for policyholders as a result of this judgment which is largely in favour of providing cover to policyholders, the insurers are less likely to be so pleased.
As a result, the appeals provisions of the Framework Agreement between the FCA and the eight insurers, entered into prior to the test case, are likely to be invoked. The Agreement permits the insurers to appeal the test case judgment, so long as permission to appeal is obtained. Though, subject to permission, any appeal should be on an expedited basis to be heard as soon as reasonably practicable. Further, there is agreement between the FCA and the insurers to seek a “leapfrog” appeal directly to the Supreme Court (i.e., avoiding the Court of Appeal) – which is likely to be exercised.
As referred to above, the result of the High Court test case is likely to be pleasing reading to the majority of policyholders. Using the guidance the court has now given, a review of specific policy wording may result in some policyholders having good grounds for a claim that has previously been refused. However, given the importance of the outcome of the test case to the insurance industry as a whole, a “leapfrog” appeal should be expected, where further assessment of the policy wordings and guidance would be provided by the highest court in the land.
Although, the FCA’s Interim Chief Executive Christopher Woolard said “insurers should reflect on the clarity provided here 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.”
Case: The Financial Conduct Authority v Arch Insurance (UK) Limited and Others  EWHC 2488 (Comm)
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