Insurance Case Update: A Covid-Cloud Silver Lining for Policyholders

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22 September, 2020

The High Court has last week handed down judgment in the case of The Financial Conduct Authority and Others [2020] EWHC 2448 (Comm).

This was a test case brought by the Financial Conduct Authority against several insurance companies to clarify the scope and meaning of Business Interruption (BI) insurance policies due to Government restrictions imposed as a consequence of the Covid-19 pandemic.

The Government lockdown restrictions imposed on the 23 March 2020 meant that all businesses selling non-essential goods or providing non-essential services were required to close. Many of these businesses made claims under their insurance policies for business interruption.

The FCA Test Case

Given the growing number of claims being made under BI insurance policies, the FCA commenced the litigation in order to resolve the uncertainty surrounding BI insurance cover and Covid-19 and to ensure the fair treatment of policyholders by insurance companies and brokers.

The case sought clarity in relation to a number of common extensions to BI cover, namely:

  • Infectious diseases cover which provides cover for business interruption in circumstances where a notifiable disease has occurred at or within a given radius of the business's premises;
  • Prevention of access cover which provides cover for business interruption in some circumstances where access to the business is hindered as a result of steps taken by a public authority in light of an emergency; and
  • Hybrid policies which provides cover for business interruption where restrictions have been imposed on a business due to a notifiable disease.

The Insurer's Position

The two main issues disputed by the Defendant insurers were as follows:

  1. Coverage - the insurers believe that certain BI policies may not cover losses resulting from the COVID-19 pandemic; and
  2. Causation - the insurers dispute whether the necessary causal link to any loss suffered by policyholders can be established.

The Defendant insurance companies argued that BI cover would not be available as losses would have been sustained in any event, that some premises were not required to be closed due to the pandemic, and that global or national pandemics would not generally be covered under such policies.

Following the submission of the defences, the FCA invited policyholders, insurance intermediaries and other stakeholders the opportunity to provide comments on the Defences. These were then taken into account when the FCA were preparing their reply to defence and the trial took place over 8 days, commencing on 20 July 2020 and concluding on 30 July 2020. During the trial, the High Court considered a wide range of issues in relation to policy interpretation and causation and handed down judgment on 15 September 2020.

Decision

The Judgment can be found here: https://www.fca.org.uk/publication/corporate/bi-insurance-test-case-judgment.pdf

The High Court handed down judgment last week establishing important guidance on the proper construction of business interruption insurance policies. The judgment was in favour of the FCA on the majority of key issues and provides a silver lining to some policyholders, in deciding that most of the infectious disease clauses would provide cover to policyholders as a consequence of COVID-19.

Further, certain prevention of access clauses may provide cover depending on the wording contained therein and how the business was affected by the Government's response to the pandemic, including whether the business was required to close or not.

The test case also clarified that the COVID-19 pandemic and the Government's response to it were the single cause of loss to policyholders, which would be the key requirement for claims to be paid if these policies did indeed provide cover.

Effect of the Decision

The Judgment brings welcome news to policyholders, allowing them to rely on the wordings contained within infectious diseases and hybrid policies in order to bring claims for business interruption.

This case does not provide clarity for all possible Covid-related insurance disputes and nor does it determine how much would be payable under a BI policy, but it does resolve the contractual uncertainty and issues in relation to causation for insurers and policyholders alike.

Some insurers have indicated that they will review the decisions in relation to BI cover to ensure that they are in line with court judgments and as such, the FCA expect that policyholders with affected claims will hear from their insurers within days of the Judgment.

It may be that the decision is subject to Appeal and therefore this may not quite be the end of the matter, but for now businesses will welcome the Court's decision. It is estimated that 700 different insurance policies administered by 60 insurance companies and over 300,000 policyholders could be affected by the test case.

For more information contact Stephen McArdle in our Dispute Resolution department via email or phone on 0333 207 1142. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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