Coronavirus: FCA brings test case on business interruption insurance

Rebecca Carrera of Pinsent Masons, the law firm behind Out-Law, was commenting after the Financial Conduct Authority (FCA) published details of the test case it has lodged against eight insurers before the High Court in London in relation to BI insurance policies.

BI insurance policies traditionally cover loss of revenue or profit experienced by a business following damage to property and the cost of mitigating that disruption. Property damage, for example due to a storm or fire, is usually what acts as the trigger for the coverage. Businesses can take out extensions to BI cover, including cover for non-physical damage such as closure of premises or denial of access, or cover which explicitly related to infectious or contagious diseases. However, it is relatively uncommon for businesses to do so.

The FCA previously wrote to insurers in April explaining that it believes most BI policies do not provide cover for losses related to the Covid-19 pandemic. However, in a statement published on 10 June, the FCA said the test case can help provide clarity on the matter.

"The issues surrounding BI policies are complex and have the potential to create ongoing uncertainty for both customers and firms," the FCA said. "The variation in the types of cover provided and wordings used mean it can be difficult to determine whether customers have cover and can make a valid claim. 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," it said.

Among the documents published by the FCA include its test case claim form, the particulars of claim, which specifies its written claim in detail in the case, as well as a representative sample of policy wordings which the regulator believes address the core clauses requiring interpretation by the court.

Carrera said that the areas of dispute that have arisen between insurers and policyholders include whether the wordings of BI policies were designed to cover pandemics, and whether losses in profit or revenue can be linked to an event covered by the policy. The question of what is meant where policies say that Covid-19 must be within the ‘vicinity’ of the insured business premises is also one of the questions for determination, she said.

Carrera said that the declarations sought by the FCA from the High Court are comprehensive and "address all the key areas of dispute".

"Those issues include whether Covid-19 is a human infectious and contagious disease, whether it can be said to have ‘occurred’ in the vicinity of an insured premises, whether government advice and mandates constitute public authority action, the application of exclusions, what causation hurdles the insured needs to overcome and the legal meaning of different wording in that context," Carrera said.

"The application of ‘trends and variation’ clauses is also under the spotlight," Carrera said. "This type of clause appears in most business interruption policies and allows insurers to reduce the amounts payable under the policy where other wider factors have influenced its ability to trade. Having clarity on how this type of clause will be applied will be essential in the context of a pandemic where social distancing, fear and the economic downturn generally will have had an effect on trading conditions."

Insurance law expert Jonathan Cavill, also of Pinsent Masons, said the FCA’s position as set out in the statements of case confirm that it is taking a clear side, rather than seeking a declaration on the matters in dispute without having a particular view either way.

"The FCA sets out a number of reasons why insurers have denied cover under BI policies, and expressly states that it 'disputes' these," Cavill said. "If the FCA is correct, the exposure to relevant insurers who will have to pay claims could be considerable. This risk is obviously being balanced by the FCA against the fact that many affected policyholders will be struggling as a consequence of the pandemic and if their BI cover legitimately responds on the wording, then it should pay out."

Carrera said that the High Court will be asked to consider the meaning of each word of the insuring clauses "in forensic detail" to determine whether there is cover, but said it was "noteworthy" that the High Court is not being asked to decide issues relating to the measure of indemnity, quantum, or whether losses can be aggregated into one claim.

"This suggests that policyholders should continue to collate quantum evidence in support of their claims rather than wait for the court’s determination of coverage issues," Carrera said. "The policy wordings at issue often include low sub-limits for notifiable diseases/denial of access cover so the application of those limits will sit outside the remit of the test case, despite this having a very real impact on the amounts insureds will be able to recover, even if the test case resolves coverage issues."

Carrera said that the test case is likely to proceed beyond the High Court to the Supreme Court before a final ruling on the issue of coverage is settled, and that this is likely to take "some months".

"Given the FCA’s detailed approach to its pleadings, the test case appears to have got off to solid start and looks capable of achieving the FCA’s stated objective of achieving the 'maximum clarity for the maximum number of policyholders'," Carrera said. "The FCA’s expedited timetable envisages that the test case will be heard in the last two weeks of July. However, given the importance of the decision, an appeal looks almost certain and it is noteworthy that in the context of the framework agreement that the parties envisage that this case is a likely candidate for a leapfrog appeal to the Supreme Court."

According to the FCA's published timetable, the insurers that are party to the test case proceedings have until 23 June to file their defence, with the FCA then due to reply to their submissions by 3 July.

Carrera welcomed the fact that the FCA is seeking to agree with insurers a chronology of key events relating to Covid-19’s arrival in the UK, its impact and the public authority response in the UK in light of the myriad of government instructions, advisory statements and specific Covid-19 Regulations brought into force. She said this should help determine "how and whether insuring clauses linked to government orders for closure and denial of access covers will respond for businesses across different sectors".

"The FCA recognises that the application of the regulations differs across different business types," Carrera said.