Business interruption insurance – test case - update

In April 2020, we issued our top tips for dealing with insurers when claiming losses under business interruption (BI) policies arising from the COVID-19 pandemic. With many businesses starting to think about reopening and getting back on track, the issue of recovering losses under available insurance may be under review. Not entirely unexpectedly, faced with a deluge of BI loss claims, many insurers have refused to pay out.

In May 2020, the Financial Conduct Authority (FCA), which regulates this area, announced its intention to bring a test case in the High Court of England and Wales seeking a declaration about the meaning and effect of selected BI insurance policy wordings in the context of COVID-19 pandemic claims. The FCA stated that it is looking for a ‘timely, transparent and authoritative judgment’ on the issue. It wants to resolve the uncertainty over BI insurance cover and ensure that policyholders are treated fairly by insurers and insurance intermediaries.

The FCA recognises that the issues surrounding BI policies are complex and have the potential to create ongoing uncertainty for both policyholders and insurers for a long time, which is not in the interests of the insured parties. Whether a policy provides cover for BI related to the COVID-19 pandemic will depend on a number of factors, including the policy’s wording. The focus of the policy wordings identified by the FCA is on the coverage provided by ‘non-damage’ extensions to business interruption policies. For example, this includes non-damage denial of access, infectious disease and public authority clauses.

Test case - progress to date

The FCA commenced the proceedings on 9 June 2020. The first case management conference took place on 16 June 2020. A second case management conference took place on 26 June 2020 and the final hearing of the matter has been listed for eight days from 20 - 30 July 2020. The hearings are to be live-streamed via this link. All parties are aware of the need for this matter to be resolved quickly and definitively, this is reflected in the very short timetable to the final hearing.

The FCA will issue an invitation to policyholders and other stakeholders to provide it with comments shortly after 23 June 2020, when the insurer parties to the test case file their defences. This will help to ensure that stakeholder comments are reflected in the FCA’s reply and skeleton arguments prepared for the final hearing.

The FCA will publish an updated, consolidated list of the insurers and BI policies that will be affected by the test case in early July 2020.

It has been reported that up to early May 2020, the FCA was informed of around 8,500 claims under BI policy wordings likely to be affected by the test case with the value of the claims being approximately £1.2 billion.

Issues in dispute

The FCA seeks clarity in respect of two main issues:

1. Coverage – Insurers are claiming that certain BI policies that provide cover for BI Losses without the need for physical/property damage do not cover losses arising from the pandemic.
2. Causation – Insurers dispute whether the necessary causal link to any loss suffered by insureds that is the subject of claims under the policies can be established.

The FCA’s position is that the BI policies do cover the events of the COVID-19 pandemic and the corresponding government action imposing lockdown.

Which insurers are involved?

The following insurers have agreed to participate in the proceedings:

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

Conclusion

The FCA test case will not cover all possible disputes but the aim is to resolve some of the key contractual and causation issues and to provide a degree of clarity for insureds and insurers. Pending the decision, the tips we outlined in our earlier note remain valid, and the proper collection of documentation may speed any claim made up once the clarity sought in the test case has been provided. The test case does not affect insureds from dealing with any claims by negotiated settlement or other proceedings as a private party or pursuing claims under the Financial Ombudsman Scheme.

We will update you further on this case when the judgment is available.

For further information on BI claims, please contact Fiona Parry or Iain Campbell.