On 15 September, the High Court delivered its judgement in the Financial Conduct Authority’s business interruption test case. On most issues, the Court ruled in favour of the FCA’s arguments, which the regulator had put forward in the interests of policyholders.
The Covid-19 pandemic and the unprecedented national ‘lockdown’ had a devastating effect on many businesses and many beleaguered business owners made claims under their Business Interruption (BI) policies.
Most BI policies aimed at small and medium enterprises focus on property damage and provide basic cover for business interruption as a consequence of such damage. However, some BI policies provide cover for ‘non-damage’ business interruption, including interruption caused by infectious or notifiable diseases; and non-damage denial of access or public authority closure/restrictions.
These ‘disease clauses’ and ‘denial of access’ clauses had been relied upon by policyholders to make claims in response to the Covid-19 pandemic. Whilst some insurers paid out under these clauses, liability has been disputed by others.
Policyholders (often small business owners) were naturally distressed to learn they were not covered for these events, suggesting a lack of clarity and certainty over the contracts they had entered. The FCA estimated that hundreds of thousands of policyholders could be affected and, owing to the clear public interest, brought a test case to seek the clarification over the key issues around contractual uncertainty and causation for policyholders and insurers alike.
A representative sample of 21 BI policy wordings issued by eight insurers (viz. Arch Insurance (UK) Ltd; Argenta Syndicate Management Ltd; Ecclesiastical Insurance Office Plc; MS Amlin Underwriting Ltd; Hiscox Insurance Company Ltd; QBE UK Ltd; Royal & Sun Alliance Insurance Plc; and Zurich Insurance Plc) was identified and presented by the FCA and the case was considered by the High Court.
The case was heard in July, with the judgement made last week. The Court’s judgement is long and complex and is expressed in over the 160 pages, covering a wide range of issues.
The FCA argued that the ‘disease clauses’ and ‘denial of access’ clauses meant that insurers were liable to pay out under the BI insurance.
The Court held most (but not all) of the disease clauses in the representative sample provide cover. It was also held that some of the denial of access clauses provide cover, but this varied according to the wording of the clause and the extent to which the business was affected by Government action. For instance, was the business subject to a mandatory closure?
It was held that, in cases where the policy responds, the pay-out should restore the businesses to the position they would have been had the pandemic never occurred.
The case also provided clarification that the Covid-19 pandemic and the government and public response constitutes a single cause of the covered loss. This is important because it is a key requirement for a claim to be paid, even if the policy wording provides cover.
Whilst the High Court judgement is generally positive for policyholders, it does not mean that insurers are liable against each type of policy wording in the representative sample considered by the High Court. Each policy will need to be considered against the detailed judgement to determine whether it applies. Affected policy holders are to be contacted within seven days of the judgement.
The insurers have until 28 September to lodge an appeal against the judgement. Unless a successful appeal is made, the judgement is legally binding on the eight insurers included within the test case. The judgement also provides persuasive guidance for the interpretation of similar policy wordings and claims. Indeed, the FCA estimates that some seven hundred types of policies, across sixty insurers and 370,000 policyholders may be affected by the case.
An appeal, however, does not prevent policyholders seeking to settle claims with insurers before the outcome of any such appeal.
So, what does a broker need to do?
- Identify (if not already done) which policies are impacted by this judgement
- Liaise with the relevant insurer to ensure that they are of the same view and establish that the insurer will be contacting customers who are impacted by the judgement ASAP
- Conduct an interim review of the impacted insurers’ exposure to ensure that you are satisfied with the impact this judgement could have on the insurer’s solvency status
- Consider what your future placements strategy will be for these type of risks
For any further advice, please contact your RWA Business Manager.