Many policyholders hit hard by the impact of COVID-19 will be pleased to hear that the High Court has found in favour of the FCA on the majority of key issues in the FCA's business interruption insurance test case. But is this the final word on the matter?
The High Court has handed down judgment in the FCA test case which sought to provide legal clarity to business interruption policy wording in the context of COVID-19 and resolve doubts for businesses facing uncertainty on their claims. The Court found in favour of the FCA on many of the key issues but given the potential impact on the industry it seems almost inevitable that the defendant insurers involved will seek permission to appeal the decision.
The FCA advanced the case on behalf of policyholders impacted by COVID-19 with the aim being "to resolve a selected number of key issues causing uncertainty as promptly as possible and to provide greater clarity for all parties, both insured and insurers" (Christopher Woolard, Interim Chief Executive at the FCA).
Proceedings were commenced in June 2020 and were heard on an expedited basis over the course of an 8 day trial at the end of July 2020. In addition to 21 sample wordings specifically considered, the FCA estimates that some 700 types of policies across 60 different insurers and 370,000 policyholders could potentially be affected by the test case.
The provisions considered fell into three categories:
- Disease wordings: provisions which provide cover for business interruption in consequence of/following/arising from the occurrence of a notifiable disease within a specified radius of the insured premises.
- Prevention of access/public authority wordings: provisions which provide cover where there has been a prevention or hindrance of access to or use of the premises as a consequence of government or other authority action or restrictions.
- Hybrid wordings: provisions which are engaged by restrictions imposed on the premises in relation to a notifiable disease.
While the lengthy judgment makes specific and nuanced findings in relation to certain policy wordings, overall the judgment favoured arguments put forward by the FCA on behalf of policyholders. In particular, the findings in respect of 'disease' clauses mean that in most cases claims engaging that type of clause are likely to be met.
In respect of prevention of access/public authority clauses the Court concluded that, generally speaking, these were to be construed more restrictively than the majority of the disease clauses (albeit the Court's findings provide for cover for some insureds under some wordings). Whether cover is available to an insured under a prevention of access clause will turn very closely upon the precise terms of the policy and the application of government advice and regulations to the insured’s particular business. For example, whether the business was subject to a mandatory closure order and whether the business was ordered to close completely.
It is clear that the wording of each policy needs to be considered carefully against the judgment and then applied to the specific circumstances of the policyholder's claim. The FCA has confirmed that policyholders with affected claims should expect to hear from their insurer within the next 7 days.
If left to stand, the judgment would provide much needed assistance for many businesses including those in the retail and leisure sectors. However, a significant increase in the number of successful claims will in turn impact upon insurers' reserves and result in policies being rewritten and inevitable price rises.
If, as expected, the decision is appealed, the wait for the legal certainty needed to settle valid COVID-19 related business interruption claims will continue, with a knock on effect on business interruption claims advanced in other forums, such as the Financial Ombudsman Service, arbitration or separate actions in the Courts.
It is understood that any applications to appeal will be heard at a consequentials hearing before the High Court and that the FCA is seeking to have that consequentials hearing as early as possible.
This is very much a case of 'watch this space'…