FCA Test Case – Business interruption insurance

Articles Ruth Keating 23rd June 2020

Overview

The COVID-19 pandemic has led to closures and widespread disruption to business – resulting in substantial financial loss. Many policyholders have made claims for these losses under their Business Interruption (BI) insurance policies. However, there is concern regarding the lack of clarity and certainty as to how these policies will be interpreted. This is the backdrop to the Financial Conduct Authority’s (FCA) test case.

The FCA’s case

Background

The FCA started the claim in the High Court on 9 June 2020. There are eight Defendants: (i) Arch Insurance (UK) Ltd; (ii) Argenta Syndicate Management Ltd; (iii) Ecclesiastical Insurance Office Plc; (iv) Hiscox Insurance Company Ltd; (v) MS Amlin Underwriting Ltd; (vi) QBE UK Ltd; (vii) Royal & Sun Alliance Insurance Plc; and (viii) Zurich Insurance Plc.

The FCA has stated that it is aware of “many customers who believe they have valid claims having these rejected by their insurer”.[1] The FCA’s view is that the complexity around BI policies has the potential to create ongoing uncertainty for both customers and firms. At [4] of the Claim Form the FCA says that this uncertainty is impacting, in particular (though not solely), SMEs. Further, the variation in the types of cover provided and wordings used in different policies means that it is difficult for a policyholder to know if they can make a valid claim.

To alleviate this uncertainty, the FCA is seeking declarations on a number of points of contractual construction and principle relating to coverage and causation.[2]  At [6] of the Claim Form the FCA’s position is as follows:

“The Claimant contends that, subject to proof of loss and individual policy points such as sub-limits, the wordings written by the Defendants which have been selected to be tested in this claim do respond to the events of COVID-19 and the Governmental action responding to it in the first half of 2020.”

To this end, a representative sample of policy wordings has been compiled by the FCA.[3] The FCA have also provided a document which summarises the questions for determination – this document is explicitly signposted as being superseded by the statements of case; however it does provide a helpful summary of the determination.[4]

Questions for determination

The questions for determination which are described the FCA as ‘central’ are as follows:

• Whether there is cover in principle under any relevant non-damage insuring clause in respect of loss arising as a result of interruption or interference with the insured’s business by the COVID-19 pandemic.
• In principle where coverage is established whether the policyholders can in principle establish the necessary causal link between assumed losses and the relevant peril, event or circumstance that is covered.

The FCA have then asked additional questions which cover: (i) the effect on business required in order for it to be interrupted or interfered. (ii) Disease cover, whether current definitions include COVID-19 and what is required for a disease to be within the ‘vicinity’ of the insured premises. There are further sub-questions on this issue of what is required in terms of proof and the meaning of specific terms in the context of the policies. (iii) Questions on what is required for denial or prevention of access cover. (iv) There are additional questions in respect of causation, i.e. the necessary causal link that must be established on a particular policy wording. (v) Finally the FCA have referred questions on potential exclusions which may arise on the wording of certain policies.

Arguments for the FCA

The FCA’s test case can be summarised as follows:

• The FCA, adopting the policyholders’ position for the purposes of testing these points, contends that, subject to proof of loss and individual policy points such as sub-limits, all relevant wordings written by the eight insurer Defendants do respond to the events of COVID-19 and the Governmental action responding to the disease in the first half of 2020.[5]
• The Government response, in the form of advice, instructions and legislation, was a single body of public authority intervention which did prevent and hinder access to and use of business premises. This caused closure of and restrictions on activities at business premises, and interruption and interference with activities at business premises, within the meaning of the wordings of the policies. The FCA’s position is that this encompasses businesses that were not ordered to close at all or in their entirety, in that the package of other measures (beyond ordering closure of premises) was sufficient to satisfy these policy ‘triggers’ on their proper construction. In particular businesses were unable to operate normally.[6]
• There is no express or implied exclusion for pandemics in the wordings of the policies in relation to the coverage clauses relied upon by the FCA (although there are such exclusions in some of the wordings in relation to other coverage clauses).[7]
• The FCA also argues that clauses which provide cover only where there was a danger, emergency, threat, disease, public authority action or other trigger within a certain distance or vicinity of the premises will usually be triggered by early/mid-March 2020, given the widespread prevalence of COVID-19 in reported cases, and even greater prevalence that was not reported but can be inferred.
• Importantly, the FCA put forward as an alternative to proving individual cases of COVID-19 in individual locations, that presence of COVID-19 can be proven by statistical evidence, especially for urban areas. The FCA has sought specific declarations in this regard. Moreover, certain triggers, such as danger and emergency, were nationwide—COVID-19 was a national emergency and danger (hence the national measures implemented)—and so automatically occurred within the vicinity, within 25 miles, etc without the need to prove any local COVID-19 event.[8]
• Where the wordings of the policies require a trigger to be within a certain distance or vicinity of the premises, that requirement does not limit cover to loss caused by disease or other trigger only where it occurred within the relevant proximity. Those wordings provide cover for losses caused by a disease or other trigger occurring over a wide area providing it was not solely remote but instead (as in the case of COVID-19) extended in its manifestation to the specified locale as well as its occurrence further afield.[9]
• The result of the test case will be legally binding on the insurers that are parties to the test case in respect of the interpretation of the representative sample of policy wordings considered by the court. It will also provide persuasive guidance for the interpretation of similar policy wordings and claims.
• The FCA adds that, the test case is not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers. It will not determine how much is payable under individual policies, but will provide the basis for doing so.

Next Steps

On 16 June the first Case Management Conference (CMC) took place. At the CMC on 16 June, Mr Justice Butcher made an order relating to how the test case would proceed, including that:

• The case will be expedited and the Financial Markets Test Case Scheme will apply.
• On 23 June insurers will file Defences.
• On 26 June a further CMC will take place, at which the court will deal with any outstanding procedural matters to ensure the case is ready for trial.
• On 3 July the FCA will file its Reply.
• In the first half of July skeleton arguments and replies will be served.
• On 20-23 July and 27-30 July an 8 day court hearing before Lord Justice Flaux and Mr Justice Butcher will take place.
• The second Case Management Conference and final hearing will be live-streamed.

Comments

The FCA has set out its expectation that, following final resolution of the test case (including any appeals), insurers should apply the judgment in (re-)assessing all outstanding or rejected claims and complaints which may be affected by the test case.[10] The FCA’s statements of case confirm that it is taking a clear position on the questions for determination from the court, rather than seeking a declaration on the matters in dispute more neutrally. If the FCA is successful, the likely exposure to relevant insurers will be considerable.

Insurers and policyholders alike will have to wait a little while longer to understand the full extent of the arguments being raised by the parties. However, the CMC on 16 June has already given a sense of some of the major points of contention arising between the parties.

• Notably, the FCA is relying on the Cambridge Analysis, which is used by the government and Public Health England in determining the R number (rate of infection), alongside a report from Imperial College scholars on estimating the number of infections. The Defendants have already raised difficulties with this approach. In particular they have criticised the FCA’s use of these sources, arguing that expert witness cross-examination would be required. The insurers argued that there is not adequate time to consider this evidence in detail, particularly given our understanding of COVID-19 is still developing.
• This difficulty extends to establishing if the policy requires that the disease must exist within a geographical limit of the premises. This raises the question of what is required by way of proof. In particular, whether the existence of COVID-19 can be satisfied on the balance of probabilities.
• A further question of fact raised at the CMC, is what the impact would have been on businesses notwithstanding the position taken by the Government. Insurers are likely to compare the economic impact of COVID-19 in England, which implemented “draconian” lockdown measures, as compared with other less-restrictive jurisdictions including Sweden. One can see the argument for the insurers developing already – that insured businesses would have suffered financial loss as a result of COVID-19 in the UK regardless of the Government mandated lockdown measures.
• A further concern is certainty and when this matter will be resolved. The possibility of an appeal to the Supreme Court had already been raised – no doubt increasing cost concerns for the FCA.

The ambitious timetable set and the possibility of an appeal in this matter, mean that the answers to the questions raised by the FCA may take longer than hoped.

[1] FCA, ‘Business interruption insurance’, <https://www.fca.org.uk/firms/business-interruption-insurance#latest-updates> accessed 20 June 2020.

[2] The claim is brought pursuant to the Financial Markets Test Case Scheme. Claim form available at: <https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-claim-form.pdf> accessed 20 June 2020 and FCA Particulars of Claim: <https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-particulars-of-claim.pdf> accessed 20 June 2020.

[3] Representative sample of policy wordings (9 June 2020), <https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-tracked-representative-sample-of-policy-wordings.pdf> accessed 20 June 2020.

[4] Questions for Determination (9 June 2020) <https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-questions-for-determination-9-june.pdf> accessed 20 June 2020.

[5] [3] of the Particulars of Claim.

[6] [4.1] of the Particulars of Claim.

[7] [4.2] and [33] of the Particulars of Claim.

[8] [4.4] of the Particulars of Claim.

[9] [4.5] of the Particulars of Claim.

[10] FCA, ‘Business interruption insurance’, <https://www.fca.org.uk/firms/business-interruption-insurance#latest-updates> accessed 20 June 2020.

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Ruth Keating