Result of FCA’s Business Interruption test case

The Court found in favour of the arguments advanced for policyholders by the FCA on the majority of the key issues. 

Christopher Woolard, Interim Chief Executive of the FCA, commented:

‘We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market.  We are pleased that the Court has substantially found in favour of the arguments we presented on the majority of the key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders. We are grateful to the court for delivering the judgment quickly and the speed with which it was reached reflects well on all parties. 

‘Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.

‘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.

‘If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process. As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this.’

Background

Many policyholders whose businesses were affected by the Covid-19 pandemic suffered significant losses, resulting in large numbers of claims under business interruption (BI) policies.

Most SME policies are focused on property damage and only have basic cover for BI as a consequence of property damage.   But some policies also cover for BI from other causes, in particular 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 have accepted liability under these policies.  In other cases, insurers have disputed liability while policyholders considered that it existed, leading to widespread concern about the lack of clarity and certainty. 

The FCA’s aim in bringing the test case was to urgently clarify key issues of contractual uncertainty for as many policyholders and insurers as possible. The FCA did this by selecting a representative sample of policy wordings issued by eight insurers. The FCA’s role was to put forward policyholders’ arguments to their best advantage in the public interest. 370,000 policyholders were identified as holding policies that may be affected by the outcome of the test case.   

What today’s judgment decides

The judgment is complex, runs to over 150 pages and deals with many issues. A summary of the key points are below. The FCA’s legal team at Herbert Smith Freehills have published a summary on their website[1], which may be referred to for further detail.

In order to establish liability under the representative sample of policy 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.

The judgment says that most, but not all, of the disease clauses in the sample provide cover.  It also says that certain denial of access clauses in the sample provide cover, but this depends on the detailed wording of the clause and how the business was affected by the Government response to the pandemic, including for example whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.

The test case has also clarified that the Covid-19 pandemic and the Government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover. 

What today’s judgment means for policyholders

Although the judgment will bring welcome news for many policyholders, the judgment did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the Court.  Each policy needs to be considered against the detailed judgment to work out what it means for that policy.  Policyholders with affected claims can expect to hear from their insurer within the next 7 days. 

The test case has removed the need for policyholders to resolve a number of the key issues individually with their insurers.  It enabled them to benefit from the expert legal team assembled by the FCA, providing a comparatively quick and cost-effective solution to the legal uncertainty in the business interruption insurance market.

The test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers. The judgment does not determine how much is payable under individual policies, but will provide much of the basis for doing so.

It is possible that the judgment will be appealed.  Any appeal does not preclude policyholders seeking to settle their claims with their insurer before the outcome of any appeal is known.

It is important that policyholders, action groups, insurance intermediaries and their legal representatives are properly engaged throughout the test case process.  The FCA has therefore arranged an opportunity for them to talk to its legal team individually on Monday 21 September or Tuesday 22 September - find out more[2]. 

Next steps

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 consequentials hearing before the High Court.  The FCA is seeking to have a consequentials hearing as early as possible.

The FCA and Defendant insurers have agreed that they will seek to have any appeal heard on an expedited basis, given the importance of the matter for so many policyholders. This includes exploring the possibility of any appeal being a ‘leapfrog’ appeal to the Supreme Court (rather than needing to be heard by the Court of Appeal first). 

The FCA will continue to keep policyholders appraised of matters as they progress, through its dedicated webpage[3].

Notes to editors

1. The test case has removed the need for policyholders to resolve many key issues of contractual uncertainty and causation individually with their insurers. It enabled them to benefit from the expert legal team assembled by the FCA, providing a comparatively quick and cost-effective solution to the legal uncertainty in the business interruption insurance market.
2. Insurers relied heavily on a previous judgment called Orient Express in their submissions on causation. But the Court ruled that the case does not reduce the liability of insurers where the policy provides cover.
3. Business interruption insurance webpage[3]
4. Judgment summary published by the FCA’s solicitors, Herbert Smith Freehills[4]
5. Business interruption insurance test case: Judgment [5](PDF)