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FCA Test Case Update: Effects on the Manufacturer

The COVID-19 pandemic has presented the manufacturing industry with significant operational challenges, as some manufacturers and suppliers have had to close down or scale back operations in response to falling demand and as a result of Government restrictions. The manufacturing sector will most likely have suffered significant interruption to their business.

As a result of the rising number of Business Interruption (BI) Insurance claims being refused by insurers, the FCA brought a test case in the High Court to clarify the scope and meaning of BI insurance policies due to Government restrictions imposed in light of the COVID-19 pandemic.

The FCA Test Case

Growing concerns surrounding the lack of a positive response from insurance companies prompted the FCA to commence proceedings against several insurance companies in order to resolve the uncertainty surrounding BI insurance cover and ensure the fair treatment of policyholders by insurance companies and brokers.

The FCA commenced proceedings in the High Court in June 2020 and applied for the case to be heard urgently, given the growing number of claims being made under BI insurance policies. Upon approving the FCA's claim and application, the High Court listed the trial to be heard over the course of 8 days in July 2020.

Amongst other things, the FCA sought clarity in relation to two common extensions to BI cover, namely:

1. 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;
2. 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
3. Hybrid policies which are provide cover for business interruption where restrictions have been imposed on a business due to a notifiable disease.

The Defendants' Case

The two issues disputed by the Defendant insurers are 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.

In addition to this, most of the Defendant insurance companies argue 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 stakeholder 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 High Court has handed down judgment in this case today, bringing highly anticipated 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.

Effects of the Decision

The judgment in this case has provided a legally binding decision in respect of the interpretation of BI policies and persuasive guidance as to the interpretation of similar policies.

The resolution of this test case in the High Court brings welcome news to policyholders and affected manufacturers, 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 disputes nor does it determine how much would be payable under a BI policy, which is a big consideration for manufacturers considering the large losses suffered by manufacturers due to the pandemic. However, the case does resolve some contractual uncertainty and issues in relation to causation for insurers and policyholders alike.

Following this decision, some insurers have obtained permission to appeal the High Court's decision directly to the Supreme Court. As such, affected manufacturers may have to wait to receive a binding resolution to this case and indeed the settlement or otherwise of their BI claims. This will inevitably lead to further losses being sustained as manufacturers suffer with supply chain issues and reduced demand, due to increased local restrictions.

For more information contact Michael Chambers in our Manufacturing & Engineering department via email or phone on 0333 207 0740. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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