FCA begins business interruption insurance test case

The Financial Conduct Authority has launched its High Court test case, which aims to clarify the extent to which business interruption insurance covers losses arising from the Covid-19 pandemic, and to prevent insurers from rejecting claims outright. At the outset of the eight-day remote court hearing, before Lord Justice Flaux and Mr Justice Butcher, Colin Edelman QC, representing the FCA, said that “370,000 policyholders could potentially be affected by this litigation”. Illustrating the highly complex nature of the proceedings, he said that the FCA had prepared a 300-page written opening argument for the court, while the insurers’ own written representations extended to 850 pages. The FCA has brought the test case against insurers including Hiscox, Zurich and Royal & Sun Alliance seeking a determination of a number of key points of contractual construction and principle relating to insurance coverage and causation during the pandemic. According to the FCA’s skeleton argument before the court, Covid-19 and the resulting public health controls imposed by the government are causing “substantial loss and distress to businesses”, particularly small and medium-sized enterprises and those individuals that depend on such businesses for their livelihoods. It adds: “Many are under immense financial strain to stay afloat. A large number of disputed insurance claims have been made by SMEs under policies covering business interruption losses, particularly – and relevantly in this action – under extensions or other coverage clauses that do not require property damage, instead being focused entirely on events causing an impact to the insured business. “These policyholders are generally not sophisticated or well-resourced insurance buyers in the way a large corporate would be. It is against that background that the FCA, as claimant in a claim brought under the Financial Markets Test Case Scheme, thus seeks legal certainty for the benefit of all stakeholders, and to achieve this urgently in the public interest to facilitate the continuation of businesses to the extent they have survived in the meantime or to bring some relief and opportunity for those that have not.” It says that some of the defendant insurers appear to have accepted some claims under certain forms of BI policy; however, under the specific policy wordings that are the subject of this test case – involving “non-damage” insuring provisions – claims have been rejected by the insurers outright. Claims have been denied on the basis that (a) the policy extensions do not cover pandemics, but only local events; (b) any loss was caused by matters other than the policy trigger; and (c) businesses are not prevented from accessing or using insured premises. The skeleton argument states: “The FCA’s case is that the defendants are wrong to reject policyholders’ claims and/or are wrong in the way in which they have addressed the causation of insured losses and seeks declarations to establish the basis upon which the insurance provided by such provisions under representative standard form policies issued by the defendants respond to non-damage BI losses. “The FCA is seeking by this test case to remove the general ‘road-blocks’ which have been advanced by insurers by way of general denial to claims irrespective of individual facts, so that policyholder claims can proceed to be considered and adjusted on their individual merits.” The FCA’s case is that the response of the UK government to Covid-19 was (and is) a single body of intervention which prevented and hindered access to and use of business premises, caused closure of and restrictions on activities within the premises, and interrupted and interfered with business activities. It says: “This includes (most obviously) businesses required to close by the government such as pubs, most shops and restaurants, but also businesses that were not ordered to close (whether at all or in their entirety), because the package of measures (including the “stay at home” instruction) was such that it satisfied the policy trigger.” It adds that, where insuring provisions require the presence of the disease to occur within a certain radius or vicinity of the premises, (i) the insured can prove the presence of Covid-19 at a certain date on the balance of probabilities by statistical or other means without necessarily proving that there was a medically diagnosed case; (ii) those insuring provisions do not require the event to occur only within that vicinity or radius, so that wide area events within the locale are covered; and (iii) certain events were nationwide, so automatically occurred within the relevant vicinity. Insurers Arch Insurance (UK), Argenta Syndicate Management, Ecclesiastical Insurance Office, Hiscox Insurance Company, MS Amlin Underwriting, QBE UK, Royal & Sun Alliance Insurance and Zurich Insurance are defending the action. Among other arguments put forward by the insurers, Hiscox says it does not provide insurance against loss caused by pandemics and so it ought to be self-evident that none of the Hiscox wordings in the test case provide cover for loss caused by Covid-19. The FCA says that the issues surrounding BI policies are complex and have the potential to create ongoing uncertainty for both customers and firms, due to the variation in the types of cover provided and wordings used making it difficult to determine whether customers have cover and can make a valid claim. In advance of the hearing, it said: “There are genuine doubts over the appropriate interpretation of the wording in some cases. This has led to uncertainty and disputes, with many customers who believe they have valid claims having these rejected by their insurer. “We believe the circumstances of the current coronavirus emergency, and its effect on businesses holding BI policies means this uncertainty needs to be resolved as quickly as possible. We intend to obtain court declarations as part of a test case, aimed at resolving the contractual uncertainty around the validity of many BI claims.” The court’s eventual decision 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 that can be taken into account in other court cases, including in Scotland and Northern Ireland. The hearing continues. 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