An update on the test case by the Financial Conduct Authority
On 16 November 2020, the FCA and six insurers involved with the High Court test case*, plus the Hiscox Action Group, commenced an appeal hearing of the Judgment handed down on 15 September 2020 by Lord Justice Flaux and Mr Justice Butcher in the FCA test case.
The Supreme Court Justices have not indicated when the Judgment from the appeal hearing is likely to be given, leaving those policyholders that were hoping to resolve many of their coverage issues arising from their claims for business interruption cover, with more uncertainty.
Background & overview of court ruling
The lockdown measures arising from the COVID-19 pandemic have resulted in a significant loss of income for many businesses, who sought to recover those losses under their business interruption insurance policies. However few have been successful. As a result of this, the FCA brought a test case in the High Court.
The FCA sought clarity on 21 business interruption policy wordings and this raised issues of causation by insurers, taking into account that policyholders would need to prove that COVID-19 has resulted in a loss that has triggered cover.
Within the policies that were considered by the High Court, COVID-19 broadly fell into three clauses:
- “disease” clauses, which provides cover for business interruption following the occurrence of a notifiable disease;
- “prevention of access” clauses, which provides cover for business interruption where there is restricted access to the Insured's business premises; and
- “hybrid” clauses, that seek to link cover to a combination of disease and prevention of access clauses.
Whilst the Judgment that was handed down on 15 September is highly detailed, spanning over 150 pages, very briefly it was held that:
- Subject to any specific policy definition and/or factual issues that need to be considered for each claim, and whether the disease wording is only triggered if the relevant disease appears in a list set out in the policy, the Court’s Judgment was more favourable to policyholders. Notably, the Court rejected a very narrow interpretation of a policy wording with regards to the ‘incident’ of the disease only occurring within a very specified distance, which means that cover under these clauses will not necessarily be limited to losses resulting from local outbreaks of COVID-19.
- Some “prevention of access” clauses may provide cover for COVID-19 losses. Cover ultimately depends on the specific wording of the clause and how the business has been affected by the Government's response to the pandemic (e.g. how it has been affected by government measures and any mandatory orders to close).
With regards to the causation related issues, the Judgment considered the impact of “trends clauses” on establishing the link between COVID-19 and the policyholders losses arising from the pandemic. For example, in respect of calculating a loss of income, “trends clauses” allow insurers to adjust profit figures, to take account of any trends and other circumstances that would have affected the business in the absence of COVID-19 .
For further information and updates on this case, please click here to visit the FCA's test case webpage.
For the full Judgment, please click here.
Broadly speaking, the Supreme Court Justices were asked to determine certain matters of construction (i.e. the interpretation of particular terms) relating to the three clauses engaged by COVID-19; “disease”, “prevention of access” and “hybrid” clauses.
"The Supreme Court was asked by the FCA and insurers to provide clarity as to the correct counterfactual scenario to be applied to this pandemic in order to calculate an Insured’s loss."
Certain policy clauses (i.e. trend clauses) allow for loss adjustments to be made by insurers. For example, assessment of claims could be based on the financial performance of the Insured’s business pre-pandemic as against its performance without the pandemic; therefore, the loss is likely to be higher and be of greater benefit to the policyholder. Conversely, the policy could be restricted to financial losses caused by the government imposed restrictions, in which case the losses would be limited.
It could take several weeks before the Supreme Court gives it's judgment, depending on the complexity of the issues to be determined.
Get in touch
The Supreme Court Judgment should provide policyholders with further clarity in relation to their business interruption insurance claims. However, like the High Court Judgment, the Supreme Court Judgment will not address all possible policy coverage disputes and it will not determine how much is payable under individual policies.
In the meantime, policyholders should review their business interruption cover policy wording carefully; please get in touch with Clare Reed if you would like our help.
Research by Salvatore Anania.
*FCA v Arch Insurance (UK) Ltd and others (Hospitality Insurance Group Action and another intervening)  EWHC 2448 (Comm)
All information in this update is accurate at the time of writing. It is meant for general information only and is not legal advice.