It has been a tough pandemic for lots of businesses, especially those in the hospitality sector. So when insurers refused to pay on Business Interruption, there was always going to be legal action. Here’s the word from the FCA, and further below, comment from the ABI;
The High Court has today handed down its judgment in the Financial Conduct Authority’s (FCA)’s business interruption insurance test case.
The Court found in favour of the arguments advanced for policyholders by the FCA on the majority of the key issues.
Christopher Woolard, Interim Chief Executive of the FCA, commented:
‘We brought the test case in order to resolve the lack of clarity and certainty that existed for many policyholders making business interruption claims and the wider market. We are pleased that the Court has substantially found in favour of the arguments we presented on the majority of the key issues. Today’s judgment is a significant step in resolving the uncertainty being faced by policyholders. We are grateful to the court for delivering the judgment quickly and the speed with which it was reached reflects well on all parties.
‘Coronavirus is causing substantial loss and distress to businesses and many are under immense financial strain to stay afloat. Our aim throughout this court action has been to get clarity for as wide a range of parties as possible, as quickly as possible and today’s judgment removes a large number of those roadblocks to successful claims, as well as clarifying those that may not be successful.
‘Insurers should reflect on the clarity provided here and, irrespective of any possible appeals, consider the steps they can take now to progress claims of the type that the judgment says should be paid. They should also communicate directly and quickly with policyholders who have made claims affected by the judgment to explain next steps.
‘If any parties do appeal the judgment, we would expect that to be done in as rapid a manner as possible in line with the agreement that we made with insurers at the start of this process. As we have recognised from the start of this case, thousands of small firms and potentially hundreds of thousands of jobs are relying on this.’
Many policyholders whose businesses were affected by the Covid-19 pandemic suffered significant losses, resulting in large numbers of claims under business interruption (BI) policies.
Most SME policies are focused on property damage and only have basic cover for BI as a consequence of property damage. But some policies also cover for BI from other causes, in particular infectious or notifiable diseases (‘disease clauses’) and non-damage denial of access and public authority closures or restrictions (‘denial of access clauses’). In some cases, insurers have accepted liability under these policies. In other cases, insurers have disputed liability while policyholders considered that it existed, leading to widespread concern about the lack of clarity and certainty.
The FCA’s aim in bringing the test case was to urgently clarify key issues of contractual uncertainty for as many policyholders and insurers as possible. The FCA did this by selecting a representative sample of policy wordings issued by eight insurers. The FCA’s role was to put forward policyholders’ arguments to their best advantage in the public interest. 370,000 policyholders were identified as holding policies that may be affected by the outcome of the test case.
What today’s judgment decides
The judgment is complex, runs to over 150 pages and deals with many issues. A summary of the key points are below. The FCA’s legal team at Herbert Smith Freehills have published a summary on their website, which may be referred to for further detail.
In order to establish liability under the representative sample of policy wordings, the FCA argued for policyholders that the ‘disease’ and/or ‘denial of access’ clauses in the representative sample of policy wordings provide cover in the circumstances of the Covid-19 pandemic, and that the trigger for cover caused policyholders’ losses.
The judgment says that most, but not all, of the disease clauses in the sample provide cover. It also says that certain denial of access clauses in the sample provide cover, but this depends on the detailed wording of the clause and how the business was affected by the Government response to the pandemic, including for example whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.
The test case has also clarified that the Covid-19 pandemic and the Government and public response were a single cause of the covered loss, which is a key requirement for claims to be paid even if the policy provides cover.
What today’s judgment means for policyholders
Although the judgment will bring welcome news for many policyholders, the judgment did not say that the eight defendant insurers are liable across all of the 21 different types of policy wording in the representative sample considered by the Court. Each policy needs to be considered against the detailed judgment to work out what it means for that policy. Policyholders with affected claims can expect to hear from their insurer within the next 7 days.
The test case has removed the need for policyholders to resolve a number of the key issues individually with their insurers. It enabled them to benefit from the expert legal team assembled by the FCA, providing a comparatively quick and cost-effective solution to the legal uncertainty in the business interruption insurance market.
The test case was not intended to encompass all possible disputes, but to resolve some key contractual uncertainties and ‘causation’ issues to provide clarity for policyholders and insurers. The judgment does not determine how much is payable under individual policies, but will provide much of the basis for doing so.
It is possible that the judgment will be appealed. Any appeal does not preclude policyholders seeking to settle their claims with their insurer before the outcome of any appeal is known.
It is important that policyholders, action groups, insurance intermediaries and their legal representatives are properly engaged throughout the test case process. The FCA has therefore arranged an opportunity for them to talk to its legal team individually on Monday 21 September or Tuesday 22 September – find out more.
The FCA and Defendant insurers are considering the judgment and what it might mean in respect of any appeal. Any applications to appeal will be heard at a consequentials hearing before the High Court. The FCA is seeking to have a consequentials hearing as early as possible.
The FCA and Defendant insurers have agreed that they will seek to have any appeal heard on an expedited basis, given the importance of the matter for so many policyholders. This includes exploring the possibility of any appeal being a ‘leapfrog’ appeal to the Supreme Court (rather than needing to be heard by the Court of Appeal first).
The FCA will continue to keep policyholders appraised of matters as they progress, through its dedicated webpage.
Huw Evans, ABI Director-General, says:
“Insurers have supported this fast-track court process led by the FCA to help bring clarity for customers and we welcome the speed with which the court has delivered a ruling. The judgment divides evenly between insurers and policyholders on the main issues. The national lockdown was an unprecedented situation that posed understandable questions of interpretation for some business insurance contracts.
“Insurers always regret any contract dispute with their customers and will continue to reflect on feedback from recent events. We recognise this continues to be a difficult time for many businesses, small and large, and for society as a whole. That is why insurers have made a range of commitments to help both businesses and individual customers through the crisis and why the industry expects to pay out over £1.7bn in Covid-19 claims.
“This is a complex judgment spanning 162 pages and 19 policy wordings and it will take a little time for those involved in the court case to understand what it means and consider any appeals. Individual insurers will be analysing the judgment, engaging with the regulator, taking account of the appeal process and keeping their customers informed in the period ahead.”
Covid-19 and the application of insurance in relation to Business Interruption insurance created a complex situation requiring legal consideration of the many different issues of proximate causation and wording interpretations. That is why, from the outset, we welcomed the FCA intervention in bringing this test case and the ultimate clarity the judgement will bring (once any appeal process is complete).
We recognise how important this case is for customers and the insurance industry alike and we will study the judgement in detail over the coming days while waiting to see if any of the parties appeal.
Meanwhile, the outcomes do not prevent individual policyholders from pursuing issues through the courts, or eligible complainants from taking a complaint to the Financial Ombudsman Service.
Looking forwards, it is important that we have a solution so that customers can be protected in the event of another pandemic. It Is our belief that that a public-private partnership would be the best means.
Already in the UK we have been looking at a model called Pandemic Re and many other nations are also considering these types of shared risk models.
Pool Re, which is the UK’s answer to terrorism risk, provides a working example of how such a partnership could work in practice.