Update on FCA test case of the validity of business interruption claims

Since the FCA made its last announcement on 1 May, we have approached 56 insurers and reviewed over 500 relevant policies from 40 insurers. We have identified a sample of 17 policy wordings that capture the majority of the key issues that could be in dispute.

This update gives further detail on the proposed court action, including identifying the representative sample of policy wordings to be examined in the test case, insurers that use those wordings, and which of those insurers we have invited, and have agreed, to participate in the proceedings.

This initial list of insurers[1] and the policy wordings they use is not exhaustive, and we are also now publishing a short consultation on draft guidance[2] asking all insurers to check their policy wordings against those we intend to test to see if theirs will be impacted by the outcome of the case. The FCA expects to publish a list of all the relevant insurers and policies that may have impacted wordings in early July.

The consultation on draft guidance also sets out the FCA’s expectations of all firms handling BI claims and any related complaints between now and the court decision.

Christopher Woolard, Interim Chief Executive at the FCA said:

‘The court action we are taking is aimed at providing clarity and certainty for everyone involved in these BI disputes, policyholder and insurer alike. We feel it is also the quickest route to this clarity and by covering multiple policies and insurers, it will also be of most use across the market. The identification of a representative sample of policies and the agreement of insurers who underwrite them to participate in these proceedings is a major step forward in progressing the matter to court.’

The outcome we are seeking

We want to achieve clarity for all concerned in an unprecedented situation. To do this, we are taking a representative sample of cases to court. The FCA will put forward policyholders’ arguments to their best advantage in the public interest. The FCA has retained the services of Colin Edelman QC, Leigh-Ann Mulcahy QC, Richard Coleman QC and Herbert Smith Freehills to assist it in the case.

As stated in our Dear CEO letter of 15 April[3], our view remains that most SME insurance policies are focused on property damage (and only have basic cover for BI as a consequence of property damage) so, at least in the majority of cases, insurers are not obliged to pay out in relation to the coronavirus pandemic. This case is focused on the remainder of policies that could be argued to include cover.

Policyholders should not assume that simple inclusion of their policy wording in this case will mean their policies are responsive. We are seeking a judgment that will help policyholders and insurers have a much clearer view of which business interruption policies respond to the pandemic, and those that don’t. Therefore, the court may well decide a number of these policies respond to the pandemic and others do not.

How we have chosen the representative sample of policy wordings

On 1 May 2020, our statement[4] set out our intention to seek a court declaration to resolve the contractual uncertainty around the validity of many BI claims.

Also on 1 May 2020, we asked 56 relevant insurance companies to provide us with information on their BI policies with more than 500 policyholders, and how they intended to handle claims on these policies by 15 May 2020. A number of the relevant insurers decided to accept claims from policyholders with certain policies which included particular wordings which had previously been in dispute. 

On 15 May 2020, we also invited holders of BI insurance policies who remained in dispute with their insurers over the terms of their policies to send us their arguments, related policies and relevant facts by 20 May 2020. We received over 1,200 submissions from policyholders and brokers.

Over the last 3 weeks we, supported by external counsel, have thoroughly considered the information we received to enable us to decide which selection of policy wordings would be representative of the key issues in dispute between policyholders and insurers. This process led to us deciding which insurers we should invite to participate in the High Court test case.

The representative sample of policy wordings

From all the policies we reviewed, we have selected a representative sample of 17 policy wordings[5] to give as much clarity as possible to both insurers and policyholders alike. Rather than select firms by market share, we have identified policies which are representative of the key arguable issues and invited insurers to participate on the basis of securing the maximum relevant coverage for relevant policies whilst minimising the number of parties engaged before the court in order to make the process as swift as possible for the court.

The insurers who use the representative sample of policy wordings

The following 16 insurers use at least one of the policy wordings in our representative sample which will be examined in the test case:

• Allianz Insurance plc (part of Allianz SE)
• American International Group UK Limited (part of American International Group, Inc.)
• Arch Insurance (UK) Limited (part of Arch Capital Group Limited)
• Argenta Syndicate Management Limited (part of Hannover Re)
• Aspen Insurance UK Limited (part of Aspen Insurance Holdings Limited)
• Aviva Insurance Limited (part of Aviva plc)
• Axa Insurance UK plc (part of AXA SA)
• Chubb European Group SE (part of Chubb Limited)
• Ecclesiastical Insurance Office plc
• Hiscox Insurance Company Limited (part of Hiscox Limited)
• Liberty Mutual Insurance Europe SE (part of Liberty Mutual Group)
• MS Amlin Underwriting Limited (part of MS&AD Insurance Group Holdings, Inc.)
• Protector Insurance UK (part of Protector Forsikring ASA)
• QBE UK Ltd (part of QBE Insurance Group Limited)
• Royal & Sun Alliance Insurance plc (part of RSA Insurance Group plc)
• Zurich Insurance plc (part of Zurich Insurance Group Limited)

The wordings that they use are set out in this list[1].

Following the process described above, we have asked the following insurers, who underwrite policies in the representative sample, to assist us by participating in the High Court test case:

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

These insurers have entered into a framework agreement[6] with us governing the process and timetable for the test case.

How this will affect insurers who are not participating directly in the test case

Given the representative nature of the policies and wordings we have selected, we expect the test case to provide guidance for the interpretation of many other BI policies that are not in the representative sample.

This means that other insurers will also be affected by the test case and its conclusions. In early July, we expect to publish a comprehensive list of other insurers and many other BI policies in the market that we expect the test case to affect, based on firm submissions.

Other documents we have published today

In addition to the FCA’s proposed representative sample of terms, we have also published proposed assumed facts[7] (for example, the types of business and how they responded to the pandemic), a proposed issues matrix[8] and proposed questions for determination by the court[9]. We invite comments from other insurers, policyholders and other stakeholders on these documents by 3pm on Friday 5 June.

We have also issued today a consultation on draft guidance[2] to set out our expectations of all firms handling BI claims and any related complaints during this period, including an expectation that they identify those policies where their decision to deny claims may be affected by the test case.

For all interested parties our legal team at Herbert Smith Freehills will be available on 3 and 4 June to speak directly with as many policyholders and intermediaries as possible. Further information is on our business interruption webpage[10].

Next steps

We give the principal next steps and timelines for how we envisage the test case to proceed below. There remain a number of uncertainties to the timeline including the consent of the court:

Notes to editors

1. Business interruption insurance test case: draft guidance for firms[11]
2. Business interruption insurance during the coronavirus pandemic - High Court test case[10]
3. Business interruption insurance[12]