In May 2020, the FCA, acting in the public interest, decided to bring a test case to resolve any contractual uncertainty arising from selected Business Interruption (BI) policies relating to the coronavirus pandemic.
The FCA formally started the legal process on the 9th of June 2020, based upon which the court assessed sample policy wordings and fact patterns that the insurers presented to explain why they refused to provide an indemnity under BI insurance policies.
The test case considered 21 sample wordings from eight insurers but the FCA estimates that in addition to these particular wordings, some 700 types of policies across 60 different insurers and 370,000 policyholders could potentially be affected.
Financial Market Test Case Scheme and Expedited Proceedings
The FCA requested court approval to treat proceedings as a test case under the Financial Markets Test Case Scheme (‘the Scheme’). The Scheme can be used for certain claims that affect the general importance and require immediate guidance from an authoritative English Law perspective. Those claims are treated by a specialist panel of two Financial List Judges and a Justice of the Court of Appeal, thus, granting greater weight to the judgment.
Additionally, the FCA requested expedited proceedings on the basis that many small and medium-sized enterprises (SMEs) have suffered significant losses due to the coronavirus pandemic, resulting in many claims under BI policies as well as 650,000 jobs at risk due to coverage issues².
Business interruption insurance and policy wordings considered
Most SMEs only had basic property damage policies in place and, therefore, basic cover for BI because of property damage. Some policies also covered BI from other causes, including infectious or notifiable diseases (‘disease clauses’) and non-damage denial of access and public authority closures or restrictions (‘denial of access clauses’). In some cases, insurers accepted liability under these policies, but some others have disputed liability, leading to contractual ambiguity.
The FCA’s legal team summary suggested that the 21 sample wordings fall into the following three categories: disease wordings, prevention of access/public authority wordings, and hybrid wordings.
The FCA argued for policyholders that the ‘disease’ and/or ‘denial of access’ clauses in the representative sample of policy wordings provide cover in the circumstances of the Covid-19 pandemic, and that the trigger for cover caused policyholders’ losses.
Similarly, the court held that most of the ‘disease clauses’ in the sample provided cover while a number of the ‘prevention of access clauses’ should also provide cover but that will depend on the specific terms of the policy and the application of the government advice and Regulations to the policymakers’ particular business, such as whether their business was subject to a mandatory closure order or was affected by the more general “stay at home” requirements.
The outcome of the judgement and the next steps
Even though the High Court’s judgment appears to be in favour of the policyholders, each policy will need to be considered against the detailed judgment to work out what it means for that policy.
The test case has alleviated the need for policyholders to resolve several key issues individually with their insurers. This case offered a new legal route by pooling together a group of company policies and taking insurers to court through a comparatively quick and cost-effective procedure as a solution to the legal uncertainty in the business interruption insurance market. Even though the case judgment will not clarify how much policyholders would be entitled to under their individual policies, it would provide the basis for it.
Next steps for Policyholders, Action Groups and Insurance Intermediaries
The FCA and Defendant insurers are considering the judgment and what it might mean in respect of any appeal. Any applications to appeal will be heard at a consequential hearing before the High Court. The FCA is seeking to have a consequential hearing on an expedited basis given the importance of this matter to both policyholders and insurers.
Interested policyholders can find out more about the latest updates on BI insurance and the High Court test case through the FCA’s dedicated webpage.
